Finmar FINANCIAL INTERMEDIARIES AND OTHER PARTICIPANTS

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Financial intermediaries

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

Financial intermediation

is the process of indirect financing using financial intermediaries as the main route to transfer funds from lenders to borrowers

Brokering arrangements

Enable trading of financial assets for the customers of the financial intermediary through _______

Consultation

Financial intermediaries provide investment advice and __ services to customers.

Merchants

Financial Intermediaries facilitate payment mechanism between _____ and customers.

Accelaration of flow of funds between entities.

Fund providers use financial intermediaries to transfer funds to fund demanders. In the absence of financial intermediaries, most savings of fund providers may not be easily available to fund demanders Fund providers may opt to keep their money at home rather than in banks disrupting the flow of money.

Financial intermediaries

also serve as savings and wealth storage function, allowing parties with excess funds to store their funds in risk free/low risk financial instruments.

Efficient allocation of funds

Financial intermediaries possess the expertise to make sure that funds will flow in the economy in the most efficient manner. manage asymmetric information

Asymmetric information

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

Adverse Selection and moral hazard

Asymmetric information may lead to two further problems: ___ and ____

Adverse selection

means that high risk borrowers that would tend to default is more likely to be more active in borrowing funds than low risk borrowers who pay on time. usually occurs before a transaction takes place. Since ___ is a known fact, potential direct lenders may opt not to extend loans despite good payers in the market.

Moral hazard

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 happens after the loan is granted. reduces the probability of the loan to be repaid.

Creation of money

Through its depositary function, financial intermediaries, specifically banks, allow creation of money through its bank loan services.

Banks

acts as the conduit that lessen the constraint of limited income over spending, permitting consumers to spend while expecting future income and businesses to get physical capital.

Price discovery

is a process of setting a price which is acceptable for the buyer and the seller. financial intermediaries actively engage in trading financial securities, they play a significant role in price discovery.

Banking sector

The financial system, specifically the _____, also significantly influences discovery of interest rates. Consequently, this interest rates are factored in fair market valuation of financial instruments.

Improved liquidity for lenders.

Liquidity of ultimate lenders is enhanced through the presence of financial intermediaries. Financial intermediaries can manage cash from different lenders (i.e. depositors) through immediately encashable products such as current and savings deposit accounts and at the same time offer non-marketable financial products such as mortgages, leases and credit contracts.

Price risk

means that prices of financial instruments may vary over time.

Reduced price risk for lenders

Financial intermediaries offer very low-risk financial products such as deposits to ultimate lenders and at the same time offer financial products with high price risk

Risk Sharing

lenders enjoy mitigated price risks as they course the transfer of funds with very low risk to financial intermediaries which in turn bear the bigger risk when lending to other entities. This process can be called as ___. 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 as ___, since in essence, risky assets are converted into safer assets for the investors.

Diversification

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

Economies of scale

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 transactions increases.

Financial system

The ___ serves as the main structure for making payments for any goods, service or securities that are purchased.

bank notes, coins and bank deposits

Most common financial assets that are accepted as payment are ___, ___, and ___

Risk

may also pertain to the uncertainty that something untoward or damaging may occur to a person or entity

Risk mitigation

Some types of financial intermediaries offer protection to individuals and organizations against adverse incidents that may occur. Consequently, the financial system allows people and companies to protect and build their wealth through having insurance against threats to their life, income and properties.

Depository institutions and Investment intermediaries

Financial intermediaries can be classified into two: ___ and ___

Depository institutions

are firms that accept cash deposits from individuals, companies and entities

Interest earned from loans

are the main source of revenue for depository institutions.

Investment intermediaries

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

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; receive deposits; buy and sell foreign exchange and gold or silver bullion; and lend money against securities consisting of personal property or first mortgages on improved real estates and the insured improvement thereon.

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 Bank

These are organized for the purpose of accumulating savings deposits and investing them for specified purposes

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 ear interest at a level below market interest rates, can be withdrawn upon demand and do not have a specific maturity.

Money market demand account

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

Time deposits (or certificates of deposits)

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

Insurance companies

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

Asset Management Firms

are companies that manage funds owned by individuals, companies or the government through buying and selling of financial instruments. are compensated for the management service fees paid by their clients

Investment Banks

are highly leveraged institutions that have significant influence on how primary and secondary markets work. assist entities (individual, corporate, government) in raising money to fund their initiatives.

Household Sector

is composed of individuals and families, including families serving charitable, religious and non-profit organizations. This sector also includes unincorporated businesses such as retailers, farmers and professional partnerships since the business transactions cannot be specifically segregated from the owner's personal transactions.

Government

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

Bureau of Treasury

Normally, the national government raises funds through the _______

Financial corporations

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

Non-financial corporations

issue financial instruments to raise funds for their business requirements and trade financial instruments in the money market (for short-term) or capital market (for long-term) as investment in 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.

Non-profit organizations

are business that exist to respond to specific causes like humanitarian aid, socio-civic causes, environment, arts and many more. These do not necessarily operate to generate profit or monetary for its investors.