Financial Institutions/Intermediaries

1. Depository Institutions
2. Non-Depository Institutions

Depository institutions
As the name implies, refers to financial institution that accepts deposits from surplus units. It issues checking
or current account, savings, and time deposit and help depositors with money market placement.

1. Commercial Banks
a. Ordinary commercial banks
b. expanded commercial or universal banks
2. Thrift Banks
A. Savings and mortgage banks
B. Private development banks
C. Savings and loan associations
D. Microfinance thrift banks
E. Credit unions
3. Rural Banks

Commercial banks
-Nationwide branching

Ordinary Commercial Banks – perform more simple functions of accepting deposits and granting loans.
They do not do investment functions.
Expanded Commercial Banks or Universal Banks (also called as unibanks) – perform investment
services. They are “expanded” because they function as an investment house and investing on stocks and bonds of
non-allied businesses. In addition they render financial services, payment processing, securities transactions,
underwriting, and financial analysis.

Bank Supervision – Deals with ensuring the soundness and safety of banks.
Bank Regulation – consists of the administration of laws in the form of rules and regulations that govern the
conduct of banking and the structure of banking industry
Prior 1994, MACRO RATING: 1994-Present – CAMELS C – Capital Adequacy
M – Management A – Asset Quality
A – Asset Quality
C – Capital Adequacy
M – Management
R – Risk Management E – Earnings
O – Operating Results L – Liquidity
S – Sensitivity to Risk
The purpose of CAMELS ratings is to determine a bank’s overall conditions and to identify its strengths and
weaknesses financially, operationally, and managerially. Each element is assigned a numerical rating based on 5
key components. CAMELS is a comprehensive rating on a scale of one to five, with one signifying the best and
five as the lowest. It provides an early warning signal to prevent a collapse. A rating of means most stable, two or
three is average, suggesting supervisory attention, and a rating of four or five means below average, signaling a
problem bank.

Thrift Banks
Thrift Banking System is composed of savings and mortgage banks, private development
banks, stock savings and loan associations, and microfinance thrift banks.
Credit unions, although not classified as banks, can be considered as a thrift institution in the
sense that they encourage people to save.
 These different institutions cater to the needs of households, agriculture, and industry.
 They encourage the habit of thrift and savings and provide loans at reasonable rates.
 Engaged in accumulating savings of depositors and investing in them.
 Provide short-term working capital and medium and long-term financing to businesses engaged in
agriculture, services, industry ad housing, and diversified financial and allied services, and to their chosen
markets and constituencies, especially small and medium enterprises

Branch – an independent unit of the head office.

Extension Office – operates like a branch, but is under the supervision and administrative control of the nearest
branch of the head office or the head office if the head office is the one nearest to it.

Allowed to grant loans under the Agrarian Reform Credit and Supervised Credit Programs of the
government.
They may invest in the equity of allied undertakings and may own up to 100% of the equity.
Savings and mortgage banks
Banks specializing in granting mortgage loans other than the basic function of accepting deposits.
Private development banks
Cater to the needs of agriculture and industry providing them with reasonable rate loans for medium and
long-term purposes.
They ask assistance from government agencies to uplift the economic status of private development banks’
clients
Savings and Loan Associations (SLA, S&L)
Accumulate savings of their depositors/stockholders and use these accumulated savings, together with their
capital, for the loans that they grant and for investments in government and private securities.
These associations provide personal finance and long-term financing for home building and improvement.

Microfinance thrift banks

Are small thrift banks that cater to small, micro, and cottage industries, hence, the term “Micro”.
They grant small loans to small businesses, like sari-sari stores, small bakeries, cottage industries, among
others.
They help uplift the standard of living in most rural areas.

Credit Unions
Are cooperatives organized by people from the same organization (whether formally or informally
organized)like farmers, fishermen, teachers, sailor, employees of one company, among others.
Credit Unions grant loans to these people who become members of the credit union and get deposits from
them.

Rural Banks and Cooperative Banks

Are the more popular type of bank in the rural communities. Their role is to promote and expand the rural
economy in an orderly and effective manner by providing the people in the rural communities with basic financial
services.

NON-DEPOSITORY INSTITUTIONS
Issues contracts that are not deposits.
Non-depository institutions such as pension funds, life insurance companies, mutual funds, and finance companies
like depository institutions also perform financial intermediation.

Classification of non-depository institution

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

Life insurance companies

Financial intermediaries that sell life insurance policies.
Policyholders pay regular insurance premiums. These premiums are used to purchase investments so that the
company can pay cash as needed.
Life insurance companies provide protection over a contracted period of term, which may be a year, five
years, or for life.

Loan Value – the amount that can be borrowed against the policy during the term of the policy
Cash Surrender Value – the amount that will be given to the insured or beneficiary if the insured or he
beneficiary decides to surrender the policy before the term ends, which means the policy is discontinued.
Property/casualty insurance companies
Offer protection against pure risk. They insure against injury or property loss resulting from accidents, work-
related injuries, malpractice, natural calamities, and, at the extreme, exotic adventure trips to the wild like in the
African safaris.
 Types of insurances
Casualty Insurance – provides help if a person meets at accident.
Homeowners Insurance – Insurance for house and its contents.
Auto or Vehicle Insurance – covers a person, his spouse, and his relatives who lice in one home and other
licensed drivers to whom the insurer gives permission to drive his car.
Flood Insurance – becoming more and more popular nowadays as places that normally do not experience floods
become flooded due to extreme weather.
Windstorm Insurance – a separate type of coverage that protects one’s home or business against wind damage.
Umbrella Liability Policy – refers to an additional policy that starts when other’s insurance policy has reached its
limit.
Health Insurance – a type of insurance that pays for medical expenses in exchange for premiums.
Long-term Care (LTC) – is defined as a need for assistance with some of the activities of daily living.
Professional Liability Insurance – a specialty coverage not covered under any property or homeowners
endorsements.
Credit Insurance – is an optional protection purchased from lenders and is often associated with mortgages,
loans, or credit cards.

Fund managers
Included among the fund managers are pension fund companies and mutual fund companies.
Pension fund companies－Sell contracts to provide income to policyholders during their retirement years.
Pension funds are set up to accumulate funds to provide for retirement, disability, and/or lump-sum death benefit
payments to the employees of companies or labor union members.
Pension plan- Places a member contributions in a portfolio of stocks, bonds, and other assets in the expectation of
building an even larger pool of funds as the need arises. It also helps employees to balance planned consumption
upon retirement with the amount of savings set aside today.
Defined-contribution plans- The ones where the employees only or both the employees and the company make
payments to the fund as a fixed percentage of salaries making the size of the retirees benefit dependent upon the
investment success of the fund manager.
Defined-benefit plans- A fixed benefit payment to the employee is calculated, which is usually related to the size
of the employee’s salary and the number of years of service, actuaries estimate the interest that the portfolio will
earn and the expected life span of the employee. A plan that either pays a retired employee so many dollars/pesos
per month or it pays the individual a percentage of his average final salaries.
Mutual fund companies- Companies engaged in the mutual funds market. They allow investors, including
individuals, to buy into mutual funds that buy different securities in the securities market, like stocks, long-term
bonds, or short-term debt instruments issued by businesses or government units
Open-end investment companies- Called as mutual funds. They issue new shares whenever one wants to buy them
and repurchase shares whenever an investor wants to sell them.
The price of a mutual fund share equals the net value of the portfolio divided by the number of shares outstanding
at that time.
Types of mutual funds
Growth Funds – Which invest in assets that are expected to reap large capital gains
Income Funds – which invest in stocks that regularly pay dividends and in notes and bonds that regularly pay
interest
Balanced Funds – which combine the features of both the growth funds and income funds
Sector Funds – which invest in specific industries as health care, financial services, utilities, extractive industries
Index Funds – which invest in a basket of securities that make up some market index as he S&P 500 index of
stocks
Global Funds – which invest in securities issued in many countries providing diversification

Money market mutual funds

Invest in high-quality short-term securities. They have check-writing privileges, combining the
features of current account and mutual funds.
Investment banks/houses companies
Are financial intermediaries that pool relatively small amounts of investors money to finance
large portfolios of investments that justify the cost of professional management.
Close-end investment companies
Issue fixed number of shares which they which they sell to the public to raise money to purchase
investments.
Investment banks
Underwrite new issues of equity and debt securities. In an underwriting transaction, the
investment bank, also known as merchant bank, guarantees the sale of the issues at an agreed price.
Finance companies
Are profit oriented financial institutions that borrow and lend funds to households and businesses.

@LRC