CHAP3.

FINANCIAL INSTITUTIONS

Introduction

In chapter 1, we learnt about financial management within a firm -> Inside finance.

In chapter 2, we learnt about the financial system -> Outside finance. The financial system
has 2 main components: financial market and financial institutions.

- Financial market: Where securities are traded (not necessarily a physical location)

Types of market

Securities traded in each type

- Financial institutions: Organizations that facilitate securities trading

One financial institution we learnt in chapter 2 is Financial intermediary

Types of financial intermediary

Now, in chapter 3, we dive deeper into Financial Institutions. Let’s see if what the other
types of financial institutions are and how they help perform the liquidity function of the
financial system in the financial market (?? if that makes sense ??)

Explain financial intermediation and the role of financial intitutions

A. What is financial intermediation

` A. FUNDS

F
Surplus Deficit
Institu
1. SECURITIES

3. Purchase 2. Pool
(savings (combin
accounts, e) funds
checking received
accounts, then
life purchas
insurance e
B. Why surplus and deficit need Financial intermediary. Its role Claims
 1. Denomination matching

Surplus: have a small amount of funds

Deficit: need a large amount of funds

 Financial instiution (as intermediary) takes in small amount of funds from many
individuals to form large pool of funds, then purchase securities

1. Maturity matching

Surplus: want to get money back soon. Want short-term (inve)

Deficit: need to use the money borrowed for a long time. Want long-term (secu)

 FI has many surplus eco units buying. Hardly run out of funds to invest in long-term.
Not like everybody is going to withdraw all funds at the same time

3.Absorbing credit risk

- better at predicting who will pay and who wont

- have better financial resources to OCCASIONALLY absorb a loss when some asshole fails to
pay

Define commercial banks and expl how Reserve Requirements influence their operations

A. Commercial bank

Is COMMERCIAL BANK a financial intermediary/institution? Yes, what are the others? Is it

the most typical or whattt?????

1. Its role

Receive funds from (basically any thing) in the form of DEPOSITS

Lend funds to businesses (mostly), individuals, govts, other entities

 ITS OPERATIONS??

Goal: Maximize wealth of its owners (common goal)

2. Income: higher interest rate on lend > interest rate on borrow

 Lend – Borrow = Interest rate spread

B. Requirement: Govt controls its ENTRY and REGULATE commercial banks

Must have a CHARTER

CHAP3. FINANCIAL INSTITUTIONS Page 2 of 3

 Because: the bank is a busness intimately involved in the payment system and MS in the
eco.

FED: State banks that MEMBERS of the FED

Must keep a minimum amount of reserves on hand  RESERVE REQUIREMENT. Meet

withdrawl demands of its depositors and pay other obligations

How it’s calculated: REQUIRED RESERVE RATIO x Average weekly deposits

- RRR depends on the type of deposit (long0tern, shor-temr?), Size of bank

Describe how the Federal Reserve (quỹ dự trữ liên bang) regulates financial institutions

A. Support

1. Example

2. Example

B. Support

1. Example

3. Example

C. Support

1. Example

4. Example

Expl how savings and loan associations differ from commercial banks

A. Restate topic

B. Summarize three main points

C. Revisit introduction or tie all ideas together

Describe how credit unions operate

Distinguish among finance companies, insurance companies, and pension funds

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