FINC203: Topic 1 - Financial Institutions

Financial intermediation:

When financial institutions convert financial instruments with one set of characteristics into instruments with another set of characteristics.

Financial intermediation is intertwined with…

indirect financing

what are the benefits of Financial intermediation?

Denomination divisibility, currency transformation, maturity flexibility, credit risk diversification and liquidity

what is credit risk diversification?

A strategy to reduce potential losses by spreading loans across different industries, regions, borrowers and loan types.

what requirements do NZ banks have ?

a license, credit rating and must publish a disclosure statement twice a year.

what is a disclosure statement ?

it is a report published by the bank containing a wide range of financial and other information. It is aimed at providing a broad and reasonably up-to-date view of the bank.

what must all insurance companies have in NZ?

a license and a credit rating

what is a non-bank deposit taker ?

not a bank, they are smaller. They collect deposits and give mortgages but they are more risky - they have a lower credit rating than banks.

what is a superannuation fund?

called NZ super fund, it borrows money, invests and grows it, and use it for superannuation of retired people. It’s purpose is to ensure people have money when they retire.

What are investment funds?

sell shares (piece of fund) to investors and use the funds to purchase a wide variety of direct and indirect financial instruments

what do finance companies do?

Sell short-term debt, called commercial paper, to investors in direct credit markets

why are short term loans also called short-term debt ?

because money is borrowed (debt) for a short period

what do financial planning practices do?

Financial planning helps people and businesses reach long-term goals by assessing their finances and creating a plan.

what is credit risk ?

The possibility that the borrower will fail to make either interest or principal payments in the amount and at the time promised.

Interest rate risk:

the chance that a security's value or investment returns will change due to market interest rate shifts.

Liquidity risk:

The risk that a financial institution will be unable to generate sufficient cash inflow to meet required cash outflows.

exchange rate risk:

the chance that a financial institution’s earnings or value will change due to currency exchange rate shifts.

Political risk:

risk of fluctuation in the value of a financial institution resulting from the actions of local or foreign governments.

Reputational risk:

The potential for negative publicity regarding an institution’s business practices to cause a decline in the customer base, costly litigation or revenue reduction.

Environmental risk:

Issues, such as climate change and environmental litigation, are increasingly being recognised as key risk factors for financial institutions and their clients.

Operational risk:

Complexity and scale of large businesses create a risk of loss due to the failure or inadequacy of internal systems, people and processes that should ensure the effective and efficient operation of a financial institution.

Contagion risk:

The risk of financial difficulties in one
organisation spreading to others due to the complex interrelationships between institutions and the nature of the exchange settlement systems.