GROUP REPORTER NO.

AQUINO, A. DAVID, J. MARIMLA, CO.

CADAG, S. LAXAMANA, M.
 HE LOGO
GUESS T
L___
B___ __ ___
P__________
LAND
BANK OF THE
PHILIPPINES
M________
METROBANK
S__ ____
SUN LIFE
__________
M LHUILLIER
__________
&________
__________
SECURITIES
& EXCHANGE
COMMISSION
 FIX ME UP!
PINYA NONE SHAWL
INN THOR MEDYAS EY SHOWN
 N A N C I A L
FI
D IA T I O N
INTERM E d by Group 1
Prese nte
OBJECTIVES OBJECTIVES
Define financial Explain the
intermediation changing nature
of financial
Discuss direct and intermediaries
indirect finance
Classify the
different
financial
intermediaries
OBJECTIVES OBJECTIVES
Differentiate Explain the role
depository & non- played by financial
depository intermediaries in
financial institution socio-economic
development
Discuss the
different risk of Discuss in detail the
financial economic bases of
intermediation financial
intermediation
 WHAT IS
FINANCIAL
INTERMEDIATION ?
It refers to the practice
of linking an investor
(surplus units or SUs) and
borrower (deficit units or
DUs.
 FINANCIAL
INTERMEDIARIES
These are financial institutions that
act as bridge between investors or
savers (surplus units or SUs) and
borrowers or security issuers
(deficit units or DUs).

They may simply act as bridge

between deficit units & surplus units
without owning the securities issued
by the deficit units
EXAMPLES OF Loans
Commercial papers
SECONDARY Negotiable CDs
MMMFs
SECURITIES MMDAs
FUTHER IMPORTANCE OF FINANCIAL INTERMEDIARIES

A system specialized intermediaries can enable

savings to do more than just draw interest. For
example, individuals can put money in banks
and get both interest income and a convenient
way of making payments (checking), or put
money into life insurance companies and get
both interest income and protection for their
beneficiaries.
UNIQUE COMPOSITION IN ACCOUNTING PERSPECTIVE

Financial intermediaries are different

from other businesses in that their assets
and liabilities are overwhelmingly
financial. They have very small amounts
of tangible assets. This is because
intermediaries simply move funds from
one sector to another (Bodie et al. 1995).
 IN AN CE &
D IRE CT F CE
CT FIN AN
IND IR E
 DIRECT FINANCE
Direct finance is a method of financing where
borrowers borrow funds directly from the financial
market without using a third party service, such as a
financial intermediary.
 INDIRECT FINANCE
Indirect finance is where borrowers borrow funds from
the financial market through indirect means, such as
through a financial intermediary.
 NA TU R E
AN GIN G L
CH FIN A N CI A
O F R IE S
E R M ED IA
INT
THE OLD FINANCIAL ENVIRONMENT

Thomas (1997) described the changing nature of

financial intermediation. After the Great
Depression of the 1930s, the US Congress devised
a host of measures to promote a highly
specialized financial system.

The Banking Act of 1933 (Glass Steagall Act)

separated commercial and investment banking.
THE NEW FINANCIAL ENVIRONMENT
OFE began to change on the mid-1970s when the increase in
market rates of interest accompanied by high and rising
rates of inflation clashed with the existing regulatory
structures.

Hadjimichalakises (1995) described the new financial

environment as being characterized by market-determined
or deregulated rates on assets and liabilities of financial
intermediaries and by greater homogeneity among
financial institutions, which emerged in the 1980s.
THE NEW FINANCIAL ENVIRONMENT
The Hadjimichalakises (1995) opined that the
proximate cause for the demise of the regulated
deposit rates in the 1930s until the early 1970s was
high and rising rate of inflation in the late 1960s, the
1970s and the early 1980s.

In the early 1970s, MMMFs were first introduced and

households and small businesses began to have access
to a saving tool better than deposits.
THE NEW FINANCIAL ENVIRONMENT
In 1977, Merrill Lynch created the Cash Management
Account (CMA) by combining MMMF features with
securities account and credit line (Hadjimichalakises
1995).

In the advent of the new financial environment, credit

cards are replaced money in the wallets of individuals
and business executives. Even companies opened their
own credit card accounts.
 CLASSIFICATION OF
FINANCIAL INTERMEDIARIES
Financial intermediaries varied but they have one
common characteristic. All of them issue secondary
securities to be able to purchase primary securities
issued by deficit units. They can however be grouped into
two basic categories:
1 Depository Institution
2 Non- depository Institution
DEPOSITORY INSTITUTIONS
It refer to financial institutions that:

accept deposits from surplus units

issue checking or current accounts/ demand

deposits, savings, time deposits, and help
depositors with money market placement
DEPOSITORY INSTITUTIONS
Let’s remember!
Current or checking accounts can be
withdrawn by issuing checks.

Savings account can be withdrawn by

using the passbooks given by the bank to
the depositors.
DEPOSITORY INSTITUTIONS
Let’s remember!
Time deposits refer to deposits that have maturity,
like 30 days, 60 days, 180 days, or 1 year. It is
evidenced by certificate of deposits; however,
these are not negotiable CD’s bought and sold in
the open markets.
If the depositors want to earn more than time
deposit, depository institutions will help them and
do the more risky money market placements.
 Depository Institutions includes:
COMMERCIAL BANKS
biggest | largest | resource-wise | pioneers

Ordinary commercial banks

perform the more simple functions

of accepting deposits and granting
loans
do not do investment function
grant only short- term loans
 Depository Institutions includes:
COMMERCIAL BANKS
biggest | largest | resource-wise | pioneers

expanded commercial or
universal banks

combination of commercial banks

and investment house
perform expanded commercial
banking function & underwriting
functions of an investment house
 Depository Institutions includes:
COMMERCIAL BANKS
biggest | largest | resource-wise | pioneers

Bank supervision deals with

ensuring the soundness and
safety of the banks.

Bank regulation consist

of the administration of
laws in the form of rules
and regulations that
govern the conduct of
banking and the structure
of the banking industry.
 Depository Institutions includes:
COMMERCIAL BANKS
biggest | largest | resource-wise | pioneers

Philippine Deposit Insurance

Corporation
Bangko Sentral ng Pilipinas
Securities and Exchange
Commisions
Bureau of Internal Revenue
Provincial, city, local governments
Rating used by regulatory agencies to gauge
credit standing of banks:

199 199
4 5
C Capital adequacy
M Management
A Asset quality
A Asset quality
M Management
C Capital adequacy
E Earnings
R Risk management
L Liquidity
O Operating results
S Sensitivity to risk
 Depository Institutions includes:
THRIFT BANKS
savings and loan association

A branch is an independent
unit of the head office
performing all the functions
and offers the service
facilities of the head office.
An extension office operate
like a branch, but under the
supervision and
administrative control of the
nearest branch of the head
office, or the head office if
the office is the one nearest
to it.
 Depository Institutions includes:
THRIFT BANKS
savings and loan association

SAVINGS & MORTGAGE banks

specializing in granting mortgage loans
other than the basic function of accepting
deposits
organized for the purpose of accumulating
savings of depositors & investing at the
same time
Mortgage banks do not accept deposits but
extend loans
 Depository Institutions includes:
THRIFT BANKS
savings and loan association
Savings and loan
association (S&L)
accumulate savings of their
depositors or stockholders and use
these accumulated savings, together
with their capital for the loans that
they grant and for investment in
government and private securities
 Depository Institutions includes:
THRIFT BANKS
savings and loan association
Private development
banks
cater to the needs of agriculture
and industry providing them with
reasonable rate loans for medium-
term and long- term purposes.
Depository Institutions includes:
THRIFT BANKS
savings and loan association

Microfinance thrift banks

small thrift banks that cater to
small, micro, and cottage
industries

credit union
cooperatives organized by
people from the same
organization
grant loans to these people,
who become members of the
credit union, and get deposit
from them
 Depository Institutions includes:
RURAL & COOPERATIVE
BANKS
promote and expand the rural economy
in an orderly & effective manner by
providing the people in the rural
communities with basic financial
services
Rural banks are privately owned &
managed
Cooperative banks are organized/
owned by cooperatives or federation of
cooperatives
 NON- DEPOSITORY
INSTITUTIONS
issue contracts that are not deposits
1. Insurance companies
a. Life insurance
b. Property/ casualty insurance
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
 N A N C I A L
K OF FI
RIS ED I A T I O N
IN TE RM t h a t a c t u a l r e t u r n s w i l l
o s s i b i l i t y x p e c t e d .
is the p f e r f r o m w h a t i s e
v i a t e o r d i f
d e
 RISK OF FINANCIAL INTERMEDIATION

Interest rate or market price risk

Reinvestment risk arises as result of interest
rate or market price risk.
Refinancing risk is the risk that the cost of
rolling over or re-borrowing funds could be
more than the return earned on asset
investment.
 RISK OF FINANCIAL INTERMEDIATION

Default or credit risk is the risk that the

borrower will be unable to pay interest on a
loan or principal of a loan or both.
Inflation or purchasing power risk is the risk
of increase in value of goods & services
reducing the purchasing power of money to
purchase goods and services.
 RISK OF FINANCIAL INTERMEDIATION

Political risk is the risk that government laws or

regulations will affect the investor’s expected
return on investment and recovery of investment
adversely or negatively.
Off-balance-sheet risk - transactions that do not
appear in the financial institution’s balance sheet
but represent transaction that pose contingent
assets or liabilities on the financial institution.
 RISK OF FINANCIAL INTERMEDIATION

Technoly and operation risk

Liquidity risk results from withdrawal 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
Country or sovereign risk
 N A N CI A L
E O F FI
ROL S I N S OC I O -
ED IA R I E E N T
INTERM E V E L O P M
NO MI C D
ECO
 ROLE 1 ROLE 2
It brings available It had been
funds from urban influential and
areas to rural areas, helpful in the
which have the establishment of
most need in such schools and
funds. businesses.
 ROLE 3 ROLE 4
It had helped the It had helped individuals
government in to pursue education or
businesses and
securing funds for
livelihood projects for
infrastructure them to attain
development. economic
independence.
 IC B A SE S
E CO N O M IA L
F FI N A NC
O TI ON
E RM E DIA
IN T
 ECONOMIC BASES OF
FINANCIAL INTERMEDIATION
Financial intermediaries help both the
surplus units or SUs and the deficit units or
DUs.
According to Thomas (1997), financial
intermediaries increase economic
efficiency, boost economic activity, and
elevate living standards.
 ECONOMIC BASES OF
FINANCIAL INTERMEDIATION
LET US STUDY!
The financial market, just like any other
market, is imperfect.
An imperfect market is a market where
information is not quickly disclosed to all
participants in it and where buyer and sellers
are not match immediately.
 ROLE OF TWO MARKET IMPERFECTION
TRANSACTION
COST
refers to all fees, commissions,
and other charges paid when
buying or selling securities
including research cost, cost
of distributing securities to
investors, cost of SECC
registration, and the time and
hassle of the financial
transaction.
INFORMATION
GATHERING
Financial intermediaries
are major contributors to
information production.
They are especially good
at selling information
about a borrower’s credit
standing.