Financial Institutions

And Markets
ACCT 622
 CHAPTER ONE

OVERVIEW OF
FINANCIAL SYSTEM
Financial system :
 A set of interrelated ………………………connected to
financial aspects of an economy

 Provides for efficient flow of funds from saving to investment

by bringing savers and borrowers together via financial markets
and financial institutions.
 GOALS OF FS

1. To Facilitate The Flow Of Funds

I. Direct financing
II. Indirect financing
Transfer of Funds

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2. To Allow Economic Agents To Share Risks

3. To Generate Liquidity
I. Market liquidity
II. Funding liquidity
• Financial Markets

• Financial Institutions

• Financial instruments
 Overview Of
Financial Markets
And Instruments
 Why financial markets ?????????
• Decide which markets to use to achieve our investment
goals or financing needs

• Decide which markets to use as part of your job

• Avoid common mistakes in investing and borrowing

 Functions Of Financial Markets
• ………channeling funds, thereby promoting economic
efficiency.
• Activities in financial markets have direct effects on:
• …….personal wealth
• …….the behavior of businesses and consumers
• …………the cyclical performance of the economy
 Classification (Structure) Of FM
• ……………….can be classified on the basis of different ways

and

• ………….are distinguished by the maturity structure and

trading structure of its securities
Nature of the claim: Debt Vs Equity Markets

Maturity of the claims: Money Vs Capital Markets

Timing of issue: Primary Vs Secondary Markets

Transaction: Cash (spot) Vs derivative (future)

Organizational structure: exchange Vs OTC

Information on issuance: Private Vs public markets

 FINANCIAL ASSETS
…………….Security traded in the financial markets

 …....claims of periodical payments of certain sum of money by

way of payment of principle, interest or dividend.

The valuation of a security is measured as the present value of

its expected cash flows, discounted at a rate that reflects the
uncertainty of the cash flows (Risk).
 Basic features of financial assets are:

Currency

Terms of maturity

Tax status
Risk
predictabi
lity Convertibility

Cash flow and return predictability

 AN OVERVIEW OF FINANCIAL INSTITUTIONS

• Financial institutions…………are intermediaries that channels

the savings of individuals, b/s, government… into loans and/or
investments.
• …………….. intermediate between lenders and borrowers in the
economy
ROLE OF FINANCIAL INSTITUTIONS

Risk reduction through diversification

Maturity intermediation
Reduce the cost of contracting
Information Production
Providing payment mechanism
Insurance
 Risks of Financial Institutions
Credit or default risk………….. risk that a DSU may not pay as agreed

Interest rate risk…………fluctuations in a security's price or reinvestment

income caused by changes in market interest rates

Liquidity risk………. risk that a financial institution may be unable to

disburse required cash outflows, even if essentially profitable

Foreign exchange risk…….exchange rate fluctuations on their profit

Political risk………….risk of government or regulatory action harmful to

interests of financial institution.
 TYPES OF FIs

A. Depository Financial Institutions……………accept deposits

from surplus units and provide credit to deficit units

E.g.
 Commercial Banks:

…………..Offer a wide variety of deposit accounts

…………Transfer deposited funds by providing direct loans or

purchasing debt securities
• Savings Institutions:
Include savings and loan associations (S&Ls) and savings banks
Are mostly owned by depositors (mutual)
Concentrate on residential mortgage loans

• Credit Unions:
Are nonprofit organizations
Restrict their business to credit union members
Tend to be much smaller than other depository institutions
• B. Non-Depository Contractual Savings
Institutions

• …………… are financial intermediaries that acquire funds at

periodic intervals on a Contractual basis..

E.g.
• Insurance Companies:

Provide insurance policies to individuals and firms for death, illness,

and damage to property
Charge premiums
Invest in stocks or bonds issued by corporations
• Pension Funds:

Offered by most corporations and government agencies

Manage funds until they are withdrawn from the retirement account
Invest in stocks or bonds issued by corporations or in bonds issued by
the government
C. Securities (Investment) firms:

Broker function
Investment banking function (Underwrite )
Dealer function
• Finance companies
• Obtain funds by issuing securities
• Lend funds to individuals and small businesses.

• Mutual Funds:
 Sell shares to surplus units
 Use funds to purchase a portfolio of securities

Money market mutual funds concentrate on money market securities

Comparison of Roles among Financial
Institutions
Deposits
Depository
Institutions

Purchase
Individual Finance
Surplus Units Securities Companies

Purchase Shares
Mutual Funds Deficit Units

Premiums Insurance
Policyholders
Companies

Employee
Employers Contributions
Pension Funds
Employees