Financial

Intermediaries
and Risks
Princess Rayannah B. Bato
 FINANCIAL INTERMEDIARIES

financial intermediaries are engaged in bringing together the ultimate

borrowers and ultimate lenders of finance. They allocate the funds of
companies that have a surplus of capital and lend them to production
companies.

There are many characteristics of financial intermediaries depending on

their type. Financial intermediaries work in the investment cycle of an
economy by serving the borrowers and lenders.
Common Characteristics of
Financial Intermediaries and
Risk
 Risk Reduction
Compared to other individuals, financial
intermediaries have greater resources to
bear and spread the risk among different
individuals.
Because they have expertise in managing
diversified portfolios and they also employ other
financial experts. As they manage the large sizes of
the portfolio it helps in reducing risk through
diversification
 Scale Economies
Financial intermediaries are commercial banks, mutual funds,
credit unions, stock exchanges, insurance companies, and
other financial institutions that help in the growth process of
the economy.
Financial intermediaries take deposits from a large number of
clients and lend money to multiple borrowers, in this way they
maintain economies of scale.
 Regulation
Regulation is necessary for financial intermediaries
because of the complexities of the financial
system. Due to weak regulation financial crises
may happen and may put the economy at risk.
 Provide Loans
Financial intermediaries play an important role in bringing
together those investors who have surplus cash wishing to
lend them and those companies who wish to obtain loan
facilities.

They provide liquidity to the market by providing shares to

shareholders and capital to companies. One of the core
businesses of financial intermediaries in providing short-
term and long-term loans. They accumulate the deposited
funds and assists the entities who are looking for funds to
borrow.
 Asset Storage
Financial intermediaries provide their clients with
safe storage for both cash and precious metals
such as gold and silver.

Clients who make deposits receive proof of deposit

and all records of withdrawals. Depositors can
use deposit cards and checks to access their
funds.
Investment Advice

Many financial intermediaries help their clients in increasing their

investments. They assist their clients to grow money by making
investments.

Companies find it difficult to choose the right industry to make

investments and maximize return.
 Provide Liquidity

They make short-term loans and finance them for longer periods
and diversify loans among different types of borrowers.
Basically, with their diversified operation, they maintain
liquidity.
 Bring Stability in the Capital Market

Financial intermediaries deal with a lot of assets and liabilities

which are traded in the capital market. By following rules and
regulations, financial intermediaries bring stability to the capital
market helps industries through diversified financial services.
 TYPES OF RISKS FACED BY
FINANCIAL INTERMEDIARIES
Reporter: Jasmirah Rocaya D. Polog ☺
1. Market Risk

• is largely caused by economic uncertainties

• is the risk of losses in positions arising from

movements in market variables like prices and
v o l a t i l i t y.
2. Interest Rate Risk

• the risk that changes in interest rates (in the

U.S. or other world markets) may reduce (or
increase) the market value of a bond you hold.
3. Off-balance-sheet Risk

• represent disparities between an organization's

reported and actual assets and liabilities.
4. Credit Risk

• the possibility of a loss resulting from a

borrower's failure to repay a loan or meet
contractual obligations
5. Liquidity Risk

• the risk of incurring losses resulting from the

inability to meet payment obligations in a timely
manner when they become due or from being
unable to do so at a sustainable cost.
6. Foreign Exchange Risk

• is a financial risk that exists when a financial

transaction is denominated in a currency other
t h a n t h e d o m e s t i c c u r r e n c y o f t h e c o m p a n y.
7. Country or Sovereign Risk

• is the risk that a government could default on

its debt (sovereign debt) or other obligations.
8. Technology Risk

• also known as information technology risk, is a

t y p e o f b u s i n e ss r i s k d e f i n e d a s t h e p o t e n t i al
for any technology failure to disrupt a business.
9. Operational Risk

• is the risk of losses caused by flawed or failed

p r o c es s es , policies, s y s tem s or ev e n t s that
disrupt business operations.
10. Insolvency Risk

• i s t h e r ea l p o s s i b i l i t y t h a t a c o m p a n y m a y b e
u n a b l e t o m e e t i t s p aym en t o b l i g at i o n s i n a
defined period of time – generally in a one-year
horizon.

• also known as bankruptcy risk

Commercial
Banking
Prepared by: Aishah Mae M. Atomar
Table of contents
01. 02. 03.
Meaning of Functions of Credit Creation by
Commercial Bank Commercial Bank Commercial Bank

04. 05. 06.

Credit Creation by Types of Signifance of
Commercial Banks Commercial Commercial
and its Limitations Bank Banks
Meaning of
Commercial
Banking

01
Commercial
Bank
A commercial bank is a financial
institution which performs the
functions of accepting deposits
from the general public and
giving loans for investment with
the aim of earning profit.
 How does a Commercial Bank Make Money?

Fees Loans Credit Cards

There are fees attached
Commercial banks lend The interest rate on most
money to consumers in credit cards far
to most of the products the form of car loans,
that a commercial bank outweighs that charged
mortgages and personal for any other type of loan.
provides, and these fees loans. The bank collects
add up to a large part of Revolving credit places
interest on the money the buying power you
the average annual profit. of its depositors while need into your hands
never risking any actual instantly at the time you
money of its own. need it, and customers
are charged a premium
for this privilege.
Functions of
Commercial
Banking
02
Functions of Commercial Banking

❑ Accepting Deposits

● Savings deposits
● Current Accounts
● Term or Fixed deposists
Functions of Commercial Banking

❑ Advancing Credit Facilities

Short-term and medium-term loans from a

percentage of cash deposits at a high interest rate.
Functions of Commercial Banking

❑ Credit Creation
Deposit Accounts from which borrowers can draw
funds in the form of cash or cheque according to their
needs.
 Functions of Commercial Banking

❑ Agency Functions
Serve as agents of customer by helping them in:
● Collecting and paying checks, dividends, interest
warrants, and bills of change
● Paying insurance premiums, utility bills, rent, etc.
● Trading shares, securities, and debentures
Credit Creation
by Commercial Bank

03
 Credit Creation
Credit creation is the most significant function of
the commercial banks. Commercial banks accept
deposits and lend loans and advances. In this process
they create two types of deposits, namely primary
deposits and derivative or active deposits.
Thank you!

Aishah Mae M. Atomar

ACT171-*1
Commercial
Banking
Arligue, Dolly Anne S.
Table of contents
01. 02. 03.
Meaning of Functions of Credit Creation by
Commercial Bank Commercial Bank Commercial Bank

04. 05. 06.

Credit Creation by Types of Significance of
Commercial Commercial Commercial
Banks and Its Bank Banks
Limitations
Credit Creation by
Commercial Banks
and Its Limitations

04
A money supplied by
commercial banks is
called credit money.
Commercial banks create credit by advancing
loans and purchasing securities.

➢ lend money to individuals and

businesses out of deposits
accepted from the public

➢ required to keep a certain amount

as reserve with the central bank
for serving the cash requirements
of depositors
Total Credit Creation = Original Deposit * Credit
Multiplier Coefficient
Credit multiplier coefficient= 1 / r where r = cash reserve
requirement also called as Cash Reserve Ratio (CRR)
If CRR is 10%
Credit multiplier co-efficient = 1/10% = 1/ (10/100) = 10
Total credit created = 10,000 *10 = 100000

If CRR changes to 5%
Credit multiplier co-efficient = 1/5% = 1/ (5/100) = 20
Total credit creation = 10000 * 20 = 200000
Types of
Commercial Banks

05
Significance of
Commercial Banks
06
“Bank is the heart and
central point of modern
exchange economy.”
- Wick-sell
 The following points highlight the significance of
commercial banks:

(i) They promote savings and accelerate the rate of capital formation
(ii) They are source of finance and credit for trade and industry
(iii) They promote balanced regional development
(iv) Bank credit enables entrepreneurs to innovate and invest
(v) They help in promoting large-scale production and growth of priority
sectors
(vi) They create credit
(vii)They help commerce and industry
(viii) They make optimum utilization of resources possible
 Thank you!
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