Ambayec, Mounicha C. BSA-1 FM 19 Mrs.

Mary Joy
Teodosio
Video Insight: Types and Risks of Financial Institutions
The video clearly presented the different types of financial institutions as well as the risks
they typically possess just like any component of a financial system. Previously, we are taught
that financial institutions serve as a link between surplus units and deficit units that is why they
are also being called as financial intermediaries. There is a wide variety of financial institutions
that we can see all around us and each of them has its own purpose whether they grant loans,
accept deposits, trade securities, give financial advices, and the like. Knowing the different types
of financial institutions is essential for us to determine where we should go to seek help and
response whenever a financial need or crisis exists. My understanding on the different types of
financial institutions are summarized in the diagram shown below:

FINANCIAL INSTITUTIONS

has two major types

Non
Depository
Depository

Commercial Banks Finance Companies

-banks that accept deposits and -grant loans to businesses and
grants commercial or business individuals but not allowed to
loans accept deposits

Mutual Funds
Thrifts
-pool financial resources and invest
-includes savings and loans
in a diversified portfolio
associations, and savings banks.
-comes with an experienced fund
Savings banks accept deposits
manager
and grants loans like residential
-are highly regulated and generally
and mortgages EXCEPT
safe
commercial loans

This cycle shows how mutual

funds work
Investors

Credit Unions
-are non-profit and their Fund
Returns
transactions are exclusive to their Manager
members only. Sometimes called
cooperative bank.
Securities Firms Securities
-underwrite securities and engage
in securities brokerage and
trading
-they can either be:
 Investment Banks

Brokerages

Insurance Companies
-provide individuals and firms with
insurance policies that reduce their
financial burden related with death,
illness, or damage to property

Pension Funds
-offer savings funds for
retirement
-are also highly regulated and
generally safe

I also learned that just like how normal people face challenges in their day-to-day lives,
financial institutions too face their own share of risks and disadvantages. In finance, risk is
defined as the possibility of an unfavorable outcome. Among few, the video laid out ten (10)
risks that are faced by financial institutions. These are COMFORTILI (I made my own
mnemonics to easily remember them):
1. Credit risk – the possibility of loss due to a borrower’s inability to pay its loan
2. Operational risk- the risk that occurs from conducting day-to-day operations
3. Market risk- usually associated with a trading portfolio brought about by the instability
of market prices of financial instruments
4. Foreign exchange risk- the potential loss because the exchange rate of a particular
currency moves unfavorably against a financial institution
5. Off balance sheet (OBS) risk- the risk that financial institutions face because of its
contingent assets and contingent liabilities, as well as OBS financing
6. Reinvestment risk- the risk that financial institutions will not be able to reinvest at a
rate comparable to their current rate of return
7. Technology risk- the risk of facing technology failures or that technology will not work
according to how it was designed
8. Interest rate risk- the risk that an asset will decline in value in response to interest rate
movements
9. Liquidity risk- the risk that a firm may run out of cash needed to pay their bills and to
keep the firm operating
10. Insolvency risk—the risk that a financial institution will not be able to satisfy its debt
that results to negative equity (insufficient assets)
With all these risks, regulation of financial institutions is highly important in order to
protect the public and their interests, and I quote the ending statement of the video which
was: “The country cannot afford to have a failure in financial institutions because this would
lead to a failure in the financial markets and to the entire financial system” which will
ultimately and eventually affect the entire functionality of our economy.