1.

Compare and contrast the nature of the assets and liabilities, and by extension
the major sources of risk, for four financial intermediaries of your choice.

Role of financial intermediaries: To facilitate…surplus deficit together.

What are the 4 broad categories of financial intermediaries: Depository institutions,

investment banks, insurance companies, mutual funds.

What are the two major assets and two major liabilities of these broad category of
financial institutions: Sir has financial statements posted of CIBC, credit union,
fortress mutual fund, bear sterns etc.

City Bridgetown (credit union): Assets: Loans, investments Liabiltiies: deposits,

regulatory capital

Republic bank (depository): Major assets: Advances (loans), investments Liabilities:

deposits, other liabilities (comprise of borrowed funds)

For depository instutions and credit union, they differ as you can see.

For Guardian life (insurance company): Major assets: Bonds (investments), mortgage
loans (loans)
Major liabilities: reserves for policy holders benefits (policy liabilities to provide for
adverse risks)

For fortress (mutual fund): Major assets: Financial assets ( you will see in notes this is
investments ) Major liabilities: Major assets attributable to holders

So difference between assets and liabilities of all these:

Similarities between all : investments (but not depository institutions, for depository
major is loans).

Different in liabilities: banks is deposit but mutual fund and insurance is policy
holders. Note will that in banks, liabilities is short term and their assets are long term.
They are mismatched. So Matury mismatching

For insurance companies assets are long term and liabilities is also long term. So long
term assets are matched with long term liabilities.

For mutual fund its long term assets and liabilities are also long term.

So there is a difference between maturity periods of the liabilities of depository

institutions and insurance and mutual funds and because of this RISKS arise.

Now, what are the risks associated with the assets and liabilities of the insitutions?

So for a commercial bank, what is the risk with their short term assets and long term
liabilities? Liquidity risk – not enough assets on board to finance if many people
decide to withdraw money (large amount).
Another risk is credit risk – Because if you extending loans, naturally you are taking
on credit risk. But, by giving out loans, you are facing a risk of default..

There is also credit risk with investments because when you are buying stocks and
bonds but not as much as with loans, since loans are in larger amounts.

Another risk is interest rate risk – Banks are lending long term, so they are locking in
the interest rate for a long period of time. So lets say 8% for a period of 5 years. They
also have short term deposits, lets say they are 1 year (2%). So what if interest rates
rise? Deposits go to 4%. There is a risk between interest rate on asset and liabilities
since liabilities is locked in, but not assets. So banks pay a higher rate on deposits than
they are receiving with their loans.

Now, with insurance policy, both liabilities and assets are long term so if interest rate
change, it will go up for both assets and liabilities by approximately the same amount.
So the level of interest rate risk, while there is much less.
Also, not the same level of liquidity risk, since you can only get the surrender value of
the policy and not the full amount since there is a section specifying that.

But there are exceptions. For e.g. clico, they did not have anough assets to meet that
occurance of many people wanting to cash in, but this is rare.

There is still one other risk. Market risk: The risk that arises due to changes in asset
prices and interest rate changes. More significant in insurance companies and mutual
funds than depository since it changes the asset price so less profit and more losss and
stuff like that.

Also operational risks affects all of them.

Liquidity risk is for depository institutions for when people want to cash in.

Also, bonds and other investments have credit risk.

Interest rate risk – When maturity mismatching, this is more prevalent, so more
prevalent in depository instutions.