NON-DEPOSITORY INSTITUTIONS
Issue contract that are not deposits. before the term ends.
Pension funds and insurance companies issue
contracts for the future payments under certain
specified conditions. Mutual funds issue shares
in a portfolio of securities or “basket” securities.
Money market mutual funds issue accounts like
checking accounts that can be withdrawn by
checks. Finance companies raise fund that they
lend to households and firms by selling
marketable securities and borrowing from
banks.
Non-depository institution can be classifies into
the ff:
1. Insurance companies
a. Life insurance companies
b. Property/casualty insurance
companies
2. Fund managers
3. Investment banks/houses/companies
4. Finance companies
5. Securities dealers and brokers
6. Pawnshops
7. Trust companies and departments
8. Lending investors
INSURANCE COMPANIES
Are financial intermediaries that sell life
insurance policies. Life insurance companies
provide protection over contracted period or
term, which may be a year, 5 years or for a
lifetime. If the insured person dies during the
term of the policy, the insurance company pays
the beneficiaries the agreed-upon sum called
face value of the insurance policy. Loan value of
a policy is the amount that can be borrowed
against the policy during the term of the policy.
Cash surrender value is the amount that will be
given to the insured of beneficiary if the insured
or the beneficiary (whoever is paying the
premium) decides to surrender the policy
A special type of life insurance is the
accident insurance that insure against death or
disability caused by accidents.
In the UK, the members of the
Derbyshire Whiskers Club insured their beards
against “fire and theft” and a soccer fun insured
himself against psychic trauma if England
loses…
Property/casualty insurance companies
Often protection against pure risk. They
insure against injury or property loss resulting
from accidents work related injuries,
malpractice, natural calamities. It gives
protection against property losses to one’s
business.
Casualty insurance does not only cover
property but also individuals. Is person meets
an accident and say, loses a body part of
becomes a paraplegic or quadriplegic. At times,
it referred to as disability insurance.
AXA Corporation an insurance group of
companies stated that property casualty
business includes the insurance of personal
property and liability.
Allstate Corporation another insurance
company, discussed property casualty insurance
in insurance terms as one that can also be called
property liability insurance.
Allstate.com cited the following examples of the
sort of damages that property casualty may
cover:
 Medical bills - the injured person has
medical insurance or not is beside the
point. If you are found to be at fault,
you could be held responsible for the
payment of those bills.
 Pain and suffering – type of damage
people typically claim when in an
accident. Medical bills aside, if
someone is seriously injured, he can
also seek to hold you financially
responsible for the monetary
equivalent of the pain.
 Loss of wages – if someone is injured
severely at your fault, he may not be
able to work for quite a while. It
happens, you could be held liable for
those lost earnings.
 Legal fees – being sued can cost you to
hire lawyer to defend you. Casualty
insurance typically covers your
attorney’s fees of someone injured in
your home sues you for damages.
Homeowners insurance inure one’s house
and its contents. Your home and its content
are your greatest assets.
Auto insurance cover one’s, spouse’s, and
relatives’ home and other licensed drivers
to whom the insurer gives permission to
drive his car.
Flood insurance as special type of insurance
that covers damage to any structure or the
contents therein caused by flood
Windstorm insurance is also a special type
if insurance that protects homeowners and
business establishments from devastations
caused by windstorms and hurricanes.
Umbrella liability policy is also a special
type of insurance that provides coverage
over and above ones’ automobile or
homeowner’s policy.
Health insurance that covers the cost of an
insured individuals medical and surgical
expenses during an illness. Usually, the
insurer contracts healthcare providers and
hospitals to provide benefits to tits
members at a discounted rate. These costs
include medical exams, drugs, and
treatments referred to as “covered
services” on the insurance policy.
Long-term care (LTC) is defined as need for
assistance with some of the activities of
daily (often-called ADLS). ADLS include that
most of us perform each day, like eating,
bathing, using the bathroom, dressing,
transferring, and maintaining
Professional liability insurance – protects
professionals, such as financial advisors,
nursing home administrators. These type of
policies are often called errors and
omissions or malpractice policies. These
policies cover against alleged or actual
negligence, defense costs, and personal
injury.
Credit insurance is an optional protection
purchased from lenders and often
associated with mortgages, loans, or credit
cards. It protects the lenders and borrower
on the risks that he is unable to repay the
debt due to death or involuntary
unemployment.
FUND MANAGERS
Included among the fund managers are
pension funds companies and mutual fund
companies. Pension fund companies sell
contracts to provide income to policyholders
during their retirement years. Pension funds
can be funded by employees only or both
employees and their employers during the
policyholders income earning years.
 Pension plans may be defined as
contribution plans or defined benefits plans.
Defined contribution plans are ones where the
employees or the employee and the company
make payments to the fund as fixed percentage
of salaries making. Defined benefit plans a
fixed benefits payment to the employee is
calculated, which is usually related to the size of
the employee’s salary and the number of years’
service.
Mutual fund companies are engaged in
the mutual funds market. They allow investors
to purchase mutual funds that buy different
securities in the securities market like stocks,
long-term bonds.
Mutual funds are open-end investment
companies. They issue new shares whenever
one wants to buy them and repurchase share
whenever an investor wants to sell them.
INVESTMENT BANKS/HOUSES/COMPANIES
Investment companies are financial
inter mediaries that pool relatively smalll
amounts od investors money to finance large
portfolios of investment that justfy cost of
professional management. They could be
closed-end investment companies that issue a
ficed number of shres and sell to the public to
rasie money to purchase investment.
Philippine investment funds
assaciation (PIFA) – is an association that
contributes to nation-building through the
effective mobilization of long-term savings by
increasing the citizenry’s awareness regarding
investments.
Investment banks underwrite new
issues of equity and debt securities. In an
underwriting transaction,the investment bank,
also knownas mercahnt bank, guarantees the
sale of the issues at an agreed price. An
investment house or investment
bank/mercanht bank works primarily for
corporation and governments.
FINNACE COMPANIES
Are profit-oriented financial institutiond
that borrow and lend funds to household and
business. They are like banks anf thrifts.
Finance companies had been traditionally
grouped into three:
1. Sales finance companies
2. Consumer finance companies
3. Commercial finance companies
Sales finance companies
Provide installment credit to buyers if
big-ticket items like cars and householf
appliances. Most sales finance companies are
subsidiries of major manufactures of these cars
and household appliences. They serves as
outlets for the manufacturers; hence, they are
captive finance companies because they cannot
sell any other item excpet those manufactured
by the parent company.
Consumer finance companies
are grant credit to consumers. They
grant small loans to individuals. Generally those
with low credit ratings and are unable to
borrow from the regular lending institutions
lilke banks and thrifts.
Commercial finance companies
Also known as business finanve
companie, grant credit to business. Threfeore,
while consumer finance companies grant loans
to consumers, commercial finance comapanies
grant loans to commercial enterprises.
SECURITIES DEALERS AND BROKERS
 Can be counted among other finance
companies. Securities brokers are only
compensated by means of commisisons.
Securities dealers on the other hand, buy
securities and resell them and make a profit n
the difference between their purchase price and
their selling price.
PAWNSHOP
Are the agencies where people and
some small business “pawn” their assets as
collateral in exchange of an amount much
smaller than the value of the asset. A “pawn
transaction” does not include pledge to, or
purchase by, a pawnbroker of real or personal
priperty from customer. Pawnshops are the
agencies that lend money on the security of
pledged goods left in pawn.
TRUST COMPANIES/DEPARTMENTS
Barron’s banking dictionary defined
trust companies as corporations organized for
the purpose of accepting the executing trust
and acting as trustee inder wills, as exxecutor,
or as guardian.
LENDING INVESTORS
Are individuals or companies who loan
funds to borrowers, generally consumers or
household. Perform granting loans, but they are
not as big as the regular financial
intermediaries. Individual that grants loans
under the so-called “5/6” terms are in effect
lending investors. Companies that grant loan to
SSS pensioners are lending investors.
RISKS FINANCIAL ITERMEDIATION
Risk is the possibility thatactual returns
will deviate or differ from what is expected. If
you expect prices to go up and you buy
securities, you are taking a risk because prices
could go either up or down.
INTEREST RATE/,ARKET PRICE RISK
Financial intermediaries perform what
is known as asset transformation in their
buying primary securities and selling secondary
securities. They also perform masmatching
securities. Interest rate or market value/price
risks iis the risk that the matket value (price) of
an asset will decline (when interest rate rises)
resulting ing capital liss when sold. Market
value of an asset or liability Is theoritically equal
to its discounted future cash flow.
REINVESTMENT RISK
Arises as a result interest rate price risk.
It is the risks that earnings from a financial asset
needs to be reinvested in lower-yielding assets
or investment because interest rates have fallen
or decreased.
REFINANCING RISK
Is the risk that cost of rolling over or re-
borrowing funds could be more than the return
earned on asset invsetments.
DEFAULT/CREDIT
Is the risk that the borrower will be
unable to pay interest on a loan or principal of a
loan or both. If A borrows from the bank and A
fails to pay any interst payment on the loan or
fails to pay principal upon maturity, A is said to
be in default.
INFLATION/PURCHASING POWER RISK
Is the risk if increase in vale of goods
and services reducing the purchasing power of
money to purchase goods or services.
POLITICAL RISK
Is the risk that government laws or
regulations will affecr the investor’s expected
return on investment and recovery of
investment adversely or negatively.
OFF-BALANCE-SHEET RISK
Off-balance-transactions are usually
engaged in by financial institutions. Off-
balance-sheet transactions are those
transactions that do not appers in the financial
institution’s balance sheet.
Happening of contigent assets is
favorable but, happening of sontigent liability
becomes unfavorable and is diasadvantageous
to a financial intermediary.
TECHNOLOGY AND OPERATION RISK
Are related because technologucal
innovation generrally involve and affect
operations.
LIQUIDITY RISK
Results from wtihdrawal of funds by
investors or exercise of loan rights or credit
lines of clients.
CURRENCY OR FOREIGN EXCHANGE RISK
Is the possible loss resulting from an
unfavorable change in the value of foreign
currencies. Diversification reduces their foreign
exchange risk because holding only securities
denominated in one currency will make the
financial intermediary at a losing end should the
currecncy of the securities it is holding fall in
value without any security to offset the loss.
COUNTRY OR SOVEREIGN RISK
In general, while investing in securities
denominated on other fereign surrencies is
advantageous, for a financial intermediary, it is
like posing a country or sovereign risk in
investing in securities denominated in foreign
currency.
ROLE OF FINANCIAL INTERMEDIARIES IN
SOCIO-ECONOMIC DEVELOPMENT
Financial intermediaries play an
important role in its socio-economic
development. While financial intermediaries
paly an important role in the urban areas,
where a lot of buisnesses are located and where
the financial markets are very active.
In addition to rural banks, cooperative
bank and microfinance thrift banks, the growth
of commercial banks in the rural areas has
helped the ares tremendously by making credit
availavble to the rural residencies
ECONOMIC BASES FOR FINANCIAL
INTTERMEDIATION
Imagining the world without financial
intermediaries helps explain the role finaicial
intermediaries play in the economic, if not,
social development country.
The spread of risk is made possible only
buy pooling funds. This is generally termed as
diversification.
Financial intermediaries also help the
deficit units by broadeing the range of
instruments, donominations, and maturities of
finacial instruments enabling even small savers
or surplus units to take advantage of the safer
more profitable investment alternatives.
An imperfect market is a market where
information is not quickly disclosed to all
participants in it and where buyers and sellers
are not matched immediately.
1. Transaction cost – refer to all fees,
commicions, and other charges paid
 when buying or selling securities
including research cost of distributing
securities to investors.
2. Information gathering – financial
intermediaries are major contributions
to information production. Asymmetric
information occures when buyers and
sellers do not have access to the same
nformation.