MAS (Financial Intermediaries)

Financial Intermediaries

They were formed during the time when market conditions make it hard for lenders of funds to transact directly with borrowers of funds.

Financial Intermediation

The process of indirect financing using financial intermediaries as main route to transfer funds from lenders and borrowers.

Asymmetric Information

It occurs when potential borrowers have more information about the transaction compared to the bank.

Adverse Selection

This means that high risk borrowers that would tend to default is more likely active in borrowing of funds than low risk borrowers who pay on time.

Moral Hazard

This occurs when borrowers have the tendency to take undesirable or immoral risks (for the lender) with the money, once they receive it, not disclosed during the loan granting process.

Price Discovery

A process of setting a price which is acceptable for the buyer and the seller.

Price Risk

It means that prices of financial instruments may vary over time.

Risk Sharing

This happens when financial intermediaries create and sell financial assets with risk profile that their clients are comfortable to invest on.

Asset Transformation

Risk sharing can also be called _______ since in essence, risky assets are converted into safer assets for the investors.

Diversification

It is the process of investing funds in a portfolio of assets that have individual returns that do not move at the same direction together.

Low

______ transaction cost allow financial intermediaries to offer diversification opportunities by organizing a collection of assets into a new product and then selling it to interested invertors.

Economies of Scale

This occurs when fixed costs are optimized per unit as a result of sheer volume of transactions.

Cost per Transaction

__________ is reduced as the number of transaction increases.

Transaction Cost

This cost pertain to cost associated with trading or managing funds and investment transactions.

Research Cost

This refer to cost incurred to monitor performance of potential companies to be invested through economic, industry and financial analysis and look for other investment opportunities that will pay off in the long run.

Maturity Intermediation

By using its own liabilities, banks essentially convert long term assets into short term assets by extending loans to borrowers based on the time they need it and giving financial assets to depositors for their desired investment prospect.

Diversification

It is the economic function exercised by financial intermediaries which converts more risky assets to less risky assets through sharing of risks.

Information Processing Cost

This refers to the cost of acquiring and processing information needed to evaluate purchase or subsequent sale of financial instrument.

Contracting Cost

This refers to the cost incurred for writing loan agreements and enforcing terms of agreements to the concerned parties.

Liquidity Risk

This refers to the risk that liability holders may require cash in exchange of the financial claims they have from the institution.

Depository Institutions

These are firms that accept cash deposits from individuals. companies and entities.

Loans

The biggest portion of the asset base of a depositary institutions is _______.

Loans

They are the main revenue-generating assets for banks.

Commercial Banks

These banks are authorized to accept drafts/checks and issue letters of credit; discount and negotiate promissory notes, drafts, bills of exchange and other evidences of debts.

Commercial Banks

These banks raise their funds through offering check deposit accounts, savings deposit accounts and time deposits.

Universal Banks

Banks who operate as a commercial bank and also offer other investment banking services are known as _______.

Thrift Banks

These banks are primarily mobilized small savings and provide loans at generally longer and easier terms than do commercial banks as they cater to the lower income groups.

Savings Banks

These banks are organized for the purpose of accumulating savings deposits and invest them for specified purposes.

Individual Banking

This primarily focuses on financial requirements of individuals and include services such as consumer lending, installment loans, and etc.

Institutional Banking

They often caters to needs of financial and non financial corporations and government entities in activities such as commercial real estate financing and leasing.

Global Banking

It is the sector wherein commercial banks contend with investment banks by offering broad range of service offerings revolving around corporate financing .

Demand Deposits or Checking Accounts

Deposits that can be withdrawn upon demand through checks and offer very minimal interest since this can be withdrawn easily.

Savings Deposits

Deposits that earn interest at a level below market interest rates, can be withdrawn upon demand and don't have specific maturity.

Money Market Demand Accounts

Deposits that are placed on money markets that have slightly higher interest rates compared to savings deposits but can be withdrawn only after a short period of time.

Time Deposits

These are deposits that have fixed maturity date and depositors may earn interest at a fixed or floating interest rate.

Rediscounting

It is a standing credit facility offered by BSP to avoid banks to meet temporary liquidity needs through refinancing the loans that banks extend to their clients.

Overdraft

This refers to the deficit in a deposit account resulting from withdrawing more money than what is deposited from the account.

Contractual Savings

These are financial intermediaries that obtain funds at periodic intervals based on an existing contract.

Insurance Company
Corporate Bonds

Give two examples of contractual savings institutions.

Insurance Companies

They offer services to assume risk or become underwriters of the risk associated with various insurable occurrences.

Contract of Insurance

It is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.

Investment Intermediaries

These are organizations whose primary objective is to maximize return from investments in various financial instruments to add value for the investors.

Asset Management Firms

These are companies that manage funds owned by individuals, companies or government through buying and selling financial instruments.

Open-end Funds

This type of funds do not have fixed number of shares.

Mutual Funds

What is the other term for open-end funds?

Close-end Funds

This type of funds have a fixed number of shares upon its inception and do not issue additional or redeem shares.

Exchange Traded Funds

These are like mutual funds, but the shares of the portfolio funds trade in an exchange like a regular share offered by a company.

Exchange Traded Funds

These funds possess characteristics of both open-ended and close-ended funds.

Hedge Funds

These funds are developed to cater to sophisticated investors and are usually not subject to same regulations covering mutual funds.

Hedge Funds

They are usually organized as a private investment partnership of offshore investment corporation which uses various trading strategies to gain better position in different markets.

Leverage

It is the use of borrowed money to invest.

Short Selling

It is a sale of a security not owned with the expectation that price of the security will eventually decline.

Absolute Return

It refers to the peso amount realized from the investment.

Relative Return

It refers to the difference between realized return and the return shown in a benchmark index.

Separately Managed Accounts or Individually Managed Accounts

These are distinct funds solely dedicated to an individual or institutional investor.

Investment Banks

These are highly leveraged institutions that have significant influence on how primary and secondary market works.

Investment Banks

These assist entities in raising money to fund their initiatives.

Red Herring

It is a preliminary prospectus shared to potential investors.

Underwriting

________ occurs when an investment bank purchases the securities from the issuing company and then offers these securities in the market on behalf of the latter.

Merchant Banking

In ___________ , investment banks use its own money to lend money as a creditor or buy shares as an investor.

Household Sector

It is composed of individual families, including families serving charitable, religious and non-profit organizations.

Government

_____________ role is focused more on regulating all participants and the market in general.

Financial Corporations

These include depositary institutions, investments banks, asset management companies and insurance companies.

Non-Financial Corporations

They issue financial instruments to raise funds for their business requirements and trade financial instruments in the money market or capital market as investments in case they case they have excess funds.

Foreign Sector

Consists of all entities, individuals, assets and organizations that are situated outside of the jurisdiction of a certain country.

Supranational Institutions

This refer to an international entity formed by two or more central government via international treaties.

Non-profit Organizations

These are businesses that exist to respond to specific causes like humanitarian aid, socio-civic causes, environment, arts and many more.