Unit 2 financialinstitutions

DISCUSSION

1. What is "financial intermediation"?

2. What types of banks do you know? Who are their customers?

READING

Financial institutions

Financial institutions are financial intermediaries, which connect ulti­mate borrowers and ultimate lenders. Financial institutions can be classi­fied as either bank financial intermediaries (BFIs) or non-bank financial intermediaries (NBFIs).

Bank financial intermediaries in the UK are commercial or retail banks such as:

• the high street banks (Barclays, Lloyds, Midland, National Westmin­ster, TSB, Co-operative Bank, Yorkshire Bank and Abbey National);

• Girobank;

• a number of smaller retail banks.

BFIs also include other (wholesale) banks such as merchant banks, foreign banks and discount houses.

Non-bank financial intermediaries in the UK include:

• National Savings Bank;

• finance houses;

• insurance companies;

• pension funds;

• unit trust companies;

• investment trust companies.

The building societies were traditionally seen as NBFIs but are now so like banks (since the Building Societies Act 1986 has allowed them to widen the scope of their activities) that some people would now classify them as BFIs.

The Bank of England has a distinct role in the business of banking in UK, and is not generally included in the BFI/NBFI classification.

The table below shows the most important kinds of financial institutions in the USA that perform a common function, ranked by asset size and with respect to the types of assets and liabilities they acquire.

Financial Intermediary	Liabilities	Assets
Commercial banks	Demand deposits, savings deposits, various other time deposits, NOW accounts, money market deposit accounts	Car loans and other consumers debt, business loans, government securities, home mortgages
Savings associations	Savings and loan shares, transaction accounts, various time deposits, money market deposit accounts	Home mortgages, some consumer and business debt '' •• •/.^ '.:.;
Mutual savings banks	NOW accounts, savings accounts, various time deposits, money market deposit accounts	Home mortgages, some consumer and business debt
Credit unions	Credit union-shares and transaction accounts	Consumer debt, long-term, mortgage loans
Insurance companies	Insurance contracts, annuities, pension plans	Mortgages, stocks, bonds, real estate
Pension and retirement funds	Pension plans	Stocks, bonds, mortgages, time deposits
Money market mutual funds	Fund shares that have limited checking privileges	Short-term credit instruments such as large-size bank CDs, Treasury bills, and high-grade a commercial paper

Commercial banks are the most important of all the financial institu­tions. They are ranked number one in the asset size and they are the most diversified with respect to both assets and liabilities. Nowadays commer­cial banks have become important lenders in the real estate market, tradi­tionally the province Of S&Ls.

Savings Associations were previously known as savings and loans asso­ciations (S&Ls) or building and loan associations. These associations are incorporated, and their deposits can be insured or uninsured. They are either state or federally charted.

The traditional distinctions between savings associations and banks are blurring. S&Ls can now borrow from the Fed, most of their liabilities are insured by a federal agency (the Federal Savings and Loan Insurance Cor­poration), and they are subject to liquidity ratios (comparable to the reserve ratios imposed on commercial banks). In the past one could distin­guish easily among financial institutions merely by examining the structure of their assets and liabilities. This is becoming less possible every month. In recent years commercial banks have been permitted to purchase failing S&Ls.

Mutual Savings Banks are very similar to S&Ls with respect to func­tions. One difference is that all mutual savings banks are owned by their depositors, who are shareholders. Deregulation also has permitted these 'mutuals' to broaden somewhat their liabilities and assets.

Credit Unions first appeared in the United States in 1909. They are organized as cooperatives for members. Who share a common interest – such as employees of a company, unions, a fraternal order, or a church. Members buy shares that make them eligible to borrow from the credit union. Until recently, credit unions wore only able to offer savings deposits and purchase consumer debt; deregulation now permits them to offer transactions accounts and to purchase long-term mortgage loans. Along with S&Ls and mutual savings banks, credit unions comprise the category of thrift institutions – or, simply, 'thrifts'.

Money Market Mutual Funds sprang up in the mid-1970s. People buy shares in a fund and have limited checking privileges on these shares.

Insurance Companies include life insurance (assurance) and property and casualty insurance companies. Life insurance companies receive funds (premiums) that insure people against the financial consequences of death. Actuarial tables permit them to predict with great accuracy the annual number of deaths (and therefore the amount of money they must pay to policy beneficiaries) for long periods of time. They consequently purchase long-term assets (e.g. long-term corporate bonds and long-term commer­cial or nonresidential mortgages. Property and casualty insurance compa­nies insure car owners against theft and collision and homeowners against fire and burglary. They are not as certain of what their annual payments to policyholders will be; consequently, they purchase highly liquid, short-term assets and high-grade bonds.

Pension and Retirement Funds are akin to life insurance companies; they can predict with high accuracy what their annual payouts (pension annuities) will be for long periods in the future.