Unit 7. Financial Institutions

Financial intermediation

the process of transferring sums of money from economic agents with surplus funds to economic agents that would like to utilize those funds.

Financial intermediary

A financial firm, such as a bank, that borrows funds from savers and lends them to borrowers.

Mortgage

loan backed by real property in the form of buildings and houses

Mortgage-backed security

debt security created by pooling together a group of mortgage loans

Depository institutions

the institutions accept deposits from individuals and then lend pooled deposits to firms, governments, and individuals

Contractual savings organizations

savings institutions that obtain funds through long-term contractual arrangements and invest these funds on the capital markets.

Securities firms

financial insitutions that faciliate financial market trades between buyers and sellers for a fee.

Brokerage firms

assist individuals to purchase new or existing securities issues or to sell previously purchased securities

Finance companies

organizations that make loans to individuals and businesses.

Commercial banks

A financial firm that serves as a financial intermediary by taking in deposits and using them to make loans.

Thrift institutions

depository institutions that specialize in taking deposits and make home mortgages.

Savings banks

accept the savings of individuals and lend pooled savings to individuals primarily in the form of mortgage loans

Savings and loan associations (S&Ls)

accept individual savings and lend pooled savings to individuals, primarily in the form of mortgage loans.

Credit unions

Non-profit cooperative financial institution that provides credit to its members.Investment companies

Mutual funds

open-end investment companies that can issue an unlimited number of their shares to their investors and use the pooled proceeds to purchase corporate and government securities

Investment bank

sell or market new securities issued by businesses to individual and institutional investors

Financial Services

a broad range of more specific activities such as banking, investing, and insurance. Financial services are limited to the activity of financial services firms and their professionals while financial products are the actual goods, accounts, or investments they provide.

Bank risk management

Risk management is important for a bank to ensure its profitability and soundness. It is also a concern of regulators to maintain the safety and soundness of the financial system. Bank risk management has become the major concern of banking regulators and policy makers.

economies of scales

the reduction in transaction costs per dollar of transactions as the size (or scale) of transactions increases

transaction costs

the time and money spent in carrying out financial transactions

liquidity services

services that make it easier for customers to conduct transactions

depository institutions

financial intermediaries that accept deposits from individuals and institutions and make loans

thrift institutions (thrifts)

services that make it easier for customers to conduct transactions

financial panic

the widespread collapse of financial intermediaries

credit risk

the risk arising because borrowers may default

interest-rate risk

the riskiness of earnings and returns on bank assets caused by interest-rate changes