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Financial Institutions - Coggle Diagram
Financial Institutions
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Commercial Banks
Deposit taking
(Attract the saving of depositors = on-demand deposit and term deposit accounts)
Functions
Core Business
Control a significant proportion of financial assets within the financial system and provide a full range of financial services.
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Definition
Commercial Banks are the largest group (hold the largest share of assets) of financial institutions within a financial system.
Characteristics of Commercial Banking
- before the 1980s
Asset Management: Loan portfolio is tailored to match the available deposit base.
- 1980s onwards
Liability management: Deposit base and other funding sources are managed to meet loan demand: Borrow directly from domestic and international capital markets; Provision of other financial services; Off-balance-sheet (OBS) business.
Commercial Banks
Uses of funds
Commercial Lending
- Involves bank assets invested in the business sector and lending to other financial institutions.
- Fixed-term loan
A loan with negotiated terms and conditions: Period of the loan, interest rates.
Fixed or variable rates set to a specified reference rate (BBSW): Timing of interest payments, repayment of principal
Commercial lending
- Overdraft (A facility allowing a business to take its operating account into debt up to an agreed limit).
- Bills of exchange:
Bank bills held (Bills of exchange accepted and discounted by a bank and held as assets).
Commercial bills (Bills of exchange issued directly by business to raise finance).
Rollover facility (Bank agrees to discount new bills over a specified period as existing bills mature).
- Leasing
Personal and housing finance
- Investment property, Fixed-term loan, Credit card, Housing finance (Mortgage, Amortised loan)
Lending to Government
- Treasury notes (Short-term discount securities issued by the Commonwealth Government)
- Treasury bonds (Medium - to longer- term securities issued by Commonwealth Government that pay a specified interest coupon stream)
- State Government debt securities
- Low risk and low return
Other bank assets
Include electronic network infrastructure and shares in controlled entities
Main Sources of Funds
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By attracting the savings of surplus entities
Offering a range of deposit and investment products with different mixes of liquidity, return, maturity and cash flow structure.
Current account deposits:
Withdraw anytime u want
- Funds held in a cheque account
- Highly Liquid
- Maybe interest or non-interest bearing
Call or demand deposits
Withdraw anytime u want
- Funds held in savings accounts that can be withdrawn on demand: Passbook account, electronic statement account with ATM and EFTPOS
Term deposits
- Funds lodged in an account for a predetermined period at a specified interest rate:
Term: 1 month to 5 years
Loss of liquidity owing to fixed maturity
Higher interest rate than current or call accounts
Generally fixed interest rate
Negotiable certificates of deposit (CDs)
- Paper issued by a bank in its own name
- Issued at a discount to face value
- Specifies repayment of the face value of the CD at maturity
- Highly negotiable security
- Short term (30 - 180 days)
Bill acceptance liabilities
- Bill of exchange:
A security issued into the money market at a discount to the face value.
The face value is repaid to the holder at maturity.
- Acceptance:
Bank accepts primary liability to repay face value of bill to holder.
Issuer of bill agrees to pay bank face value of bill, plus a fee, at maturity date.
Acceptance by bank guarantees flows of funds to its customers without using its own funds.
Debt liabilities
- Medium - to longer - term debt instruments issued by a bank:
Debenture : A bond supported by a form of security, being a charge over the assets of the issuer (collateralised floating charge)
Unsecured note : A bond issued with no supporting security.
Loan Capital and Shareholders' Equity
- Sources of funds that have characteristics of both debt and equity (subordinated debentures and subordinated notes)
Subordinated means the holder of the security has a claim on interest payments or the assets of issuer after all other creditors have been paid (excluding ordinary shareholders)
Foreign currency liabilities
- Debt instruments issued into the international capital markets that are denominated in a foreign currency:
Allows diversification of funding sources into international markets.
Facilitates matching of foreign exchange denominated assets.
Meets demand of corporate customers for foreign exchange products.
Non-bank Financial Institutions
Non-deposit taking & Lower fixed asset amount
( - manage funds under contractual arrangements
- provide a wide range of financial services)
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Investment Bank & Merchant banks (MM Corp)
- = Innovators at the cutting edge of developments in the financial system, often using the latest theoretical work produced by finance scholars.
- Organisation of an investment bank: front office, middle office and back office.
In Australia, investment banks or money market corporations do not control a large share of the total assets of financial institutions.
However, they remain important as innovators and deal-markers.
- Mainly provide off-balance-sheet (OBS) advisory services to support corporate and government clients (advice on mergers and acquisitions, portfolio restructuring, finance and risk management)
May also provide some loans to clients but are more likely to advise on raising funds directly in capital markets.
They also execute FX transactions
Source of funds
- Mainly securities issued into international money markets and capital markets.
Uses of funds
- Limited lending to clients, usually on short-term basis
- These loans tend to be sold into the secondary market
- Primarily focused on off-balance sheet advisory services
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Managed Funds
- Attract the savings from individual investors and invest in both money and capital market.
- Funds normally managed by professional investment managers with extensive investment knowledge and skills.
- Managers seeks to maximise the return on investment portfolios at given level of risk.
- Provide access to wholesale markets (not an intermediary)
- Investors in the fund obtain a right to the assets of the fund or the income derived from those assets.
George Soros and the Quantum Fund
Main types
- Cash management trusts, public unit trusts, superannuation funds (also a contractual institution), statutory funds of life offices, common funds and friendly societies.
- The large pool of funds is then used to purchase both primary and secondary market securities.
- Management funds may be categorised by their investment risk profile, being capital guaranteed funds, capital stable funds, balanced growth funds, managed or capital growth funds.
Insurers and Funds
Life & General Insurance Offices
- The liabilities of these institutions are contractual. They provide a contract that require, in return for periodic payments to the institution, the institution to make payments to the contract holders if a specified event occurs.
- Life and general insurance companies:
The large pool of funds is then used to purchase both primary and secondary market securities.
Payouts are made for insurance claims and to retirees.
Life Insurance Offices
Uses of funds
- Outflow of funds quite predictable and stable and therefore invest mainly in long-term securities
- Statutory funds invested in: Equities and unit trusts, long-term securities, cash and short-term securities, Overseas.
- Regulation:
Supervised by APRA, which applies the same capital and liquidity management requirements as for banks.
Life Insurance Act 1995 (Cwlth) -- Licensing and control.
General Insurance Offices
Sources of funds
- Insurer pays the insured a predetermined amount if some prespecified event occurs
Contractual Premiums paid in advance for: House and contents, co-insurance, public liability insurance, motor vehicle insurance, comprehensive, third party, fire and theft, third party, compulsory third party
Inflow of funds not as stable as life offices
Uses of funds
- Generally shorter term, highly marketable securities, owing to the less predictable nature of the risks underwritten
ex: Money market securities, such as bills of exchange, commercial paper and certificates of deposit.
Share of total assets declined from 4.4% in 1990 to 3% in 2018.
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