Nonbank Operations

Finance Company Operations

TYPES OF FINANCE COMPANIES

Consumer Finance Companies: Consumer finance companies provide financing for customers of retail stores or
wholesalers. For example, a consumer finance company can sponsor a credit card for a retailer so that the retailer
can offer its own credit card for its customers. The customers can purchase products there on credit, which is
provided by the finance company.

Business Finance Companies : Business finance companies offer loans to small businesses. For example, they
may provide loans to finance inventory. The business uses the loan to purchase materials that are used in the
production process. Once the products are manufactured and sold, the business uses the revenue to pay off the loan.

Captive Finance Subsidiaries : A captive finance subsidiary (CFS) is a wholly owned subsidiary whose primary
purpose is to finance sales of the parent company’s products and services, provide wholesale financing to
distributors of the parent company’s products, and purchase receivables of the parent company.
SOURCES OF FUNDS

 Loans from banks

 Commercial paper
 Deposits
 Bonds
 Capital
Uses of Finance Company Funds

 Consumer loans
 Business loans and leasing
 Real estate loan
EXPOSURE OF FINANCE COMPANIES
TO RISK
 Liquidity risk : Finance companies generally do not hold assets that could be easily sold in the
secondary market. Thus, if they are in need of funds, they have to borrow. However, their balance
sheet structure does not call for much liquidity.
 Interest rate risk : Both liability and asset maturities of finance companies are short or
intermediate term. Therefore, they are not as susceptible to increasing interest rates as are savings
institutions.
 Credit risk: Because the majority of a finance company’s funds are allocated as loans to
consumers and businesses, credit risk is a major concern. Customers who borrow from finance
companies usually exhibit a moderate degree of risk. The loan delinquency rate of finance
companies is typically higher than that of other lending financial institutions.
 Mutual Fund Operations
A mutual fund is an investment company that sells shares and uses the proceeds to manage a portfolio of
securities. Mutual funds have grown substantially in recent years, and they serve as major suppliers of funds
in financial markets.
 Mutual Fund Categories
 Equity funds: Equity mutual funds buy stocks of a collection of publicly traded companies. Most
mutual funds on the market (55%) are some type of equity fund, according to the Investment Company
Institute. Equity funds have a higher potential for growth but more potential volatility in value.
 Bond funds: Bond funds are the most common type of fixed-income mutual funds, where (as the name
suggests) investors are paid a fixed amount back on their initial investment. Bond funds are the second
most popular mutual fund type.
 Money market funds: Money market mutual funds are fixed-income mutual funds that invest in high-
quality, short-term debt from governments, banks or corporations. Examples of assets held by these
funds include U.S. Treasury's, certificates of deposit and commercial paper.
 Balanced funds: These funds invest in a mix of equities and fixed income securities. They try to balance
the aim of achieving higher returns against the risk of losing money.
 Securities Operations
 Facilitating Stock Offerings
 Origination
1. Depository Services
 Underwriting 2. Trading Services
 Distribution of stock 3. Client Services
4. Margin facility
 Advising 5. Client IPO Application Management
 Private placement of stock 6. OTC
7. Online Trading
 Facilitating Bond Offerings
 Securitizing Mortgages
 Advising Corporations
 Financing for Corporations
 Providing Brokerage Services
 Operating Mutual Funds
 EXPOSURE OF SECURITIES FIRMS TO RISK
 Market Risk : Securities firms offer many services that are linked to stock market conditions. When stock
prices are rising, there is normally a greater volume of stock offerings and secondary market transactions.

 Interest Rate Risk: The performance of securities firms can be sensitive to interest rate movements for
the. following reasons. First, lower interest rates can encourage corporations or government . Second, the
market values of bonds held as investments by securities firms increase as interest rates decline.
 Credit Risk : The probability of default tends to increase during periods when economic conditions
deteriorate. Securities firms that invest in mortgages and other types of debt securities may be more
exposed to credit risk
 Exchange Rate Risk: Many securities firms have operations in foreign countries. The earnings remitted
by foreign subsidiaries are reduced when the foreign currencies weaken against the parent firm’s home
currency
Categories of company in security operations:
Insurance Operations:
Sources of Funds:

 Annuity Plans
 Investment Income
 Health Insurance Premium
 Life Insurance Premium
 Other Income
Uses of Fund of Insurance Companies:

 Government Securities
 Corporate Securities
 Mortgages
 Real Estate
 Policy Loans
Other type of Insurance Operations:

 Property and Casualty Insurance

 Health Care Insurance
 Business Insurance
 Bond Insurance
 Mortgage Insurance
EXPOSURE OF INSURANCE
COMPANIES TO RISK
 Interest Rate Risk
 Credit Risk
 Market Risk
 Liquidity Risk
 Exposure to Risk during the Credit Crisis
Pension Fund Operations
Pension plans provide a savings plan for employees that can be used for
retirement. They commonly increase the amount of money in the fund in
four ways:
 (1) new contributions by the employee sponsored by the pension plan,
 (2) new contributions by the employer sponsored by the pension plan on
behalf of the employee,
 (3) dividends or interest earned by the fund that is due to its investment in
equity or debt securities,
 (4) appreciation in the values (capital gains) of the securities in which the
fund has invested. In aggregate, most of the contributions come from the
employer.

Pension
Fund Operations