25/09/2020

MONEY AND BANKING

Lecturer: Tran Thi Minh Tram

Email: tramttm@ftu.edu.vn

CHAPTER 3: FINANCIAL SYSTEM

Sources:
• Bodie, Z, & Merton, R. (2000), Finance, Prentice Hall Inc.
• Timothy J.G (2013), Financial Management: Principle and
practices, 6th ed, Freeload Press Publishers. [chapter 2]
• Mishkin, F.S. (2010), The Economics of Money, Banking and
Financial markets, 9th ed, The Addison – Wesley Series in
Economics
• Mandura, J.(2011), Financial Markets and Institutions, 10th ed,
South Western

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Chapter 3: Financial system

OVERVIEW OF FINANCIAL SYSTEM

FLOW OF FUNDS

FINANCIAL INSTRUMENTS/ SECURITIES

FINANCIAL MARKETS

FINANCIAL INTERMEDIARIES

FINANCIAL CRISIS AND FINANCIAL REGULATION

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CHAPTER 3.4: FINANCIAL

INTERMEDIARIES

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FINANCIAL INTERMEDIARIES

Financial intermediaries
• Financial intermediaries are defined as firms
whose primary business is to provide
financial services and products.
– Examples:
o bank (checking accounts, loans, CDs …)
o investment company (mutual funds …)
o insurance company (term life insurance …)

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Financial intermediaries
• Types of financial intermediaries:
– Depository institutions
• Commercial banks
• Thrift institutions (thrifts):
 Savings and Loans Associations (S&Ls)
 Mutual Savings Banks
 Credit Unions
– Contractual savings institutions
• Insurance companies (life insurance, fire and casualty
insurance)
• Pension funds and Government retirement funds
– Investment intermediaries
• Finance companies
• Mutual funds
• Money market mutual funds
• Investment banks

Depository institutions
• Depository institutions are financial intermediaries
that accept deposits from individuals and institutions
and make loans.
• The study of money and banking focuses special
attention on this group of financial institutions,
because they are involved in the creation of deposits,
an important component of the money supply.
• Include
– Commercial banks
– The so-called thrift institutions (thrifts) : savings and loan
associations, mutual savings banks, and credit unions.

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Banks (Commercial)
• A financial firm that serves as a financial
intermediary by taking in deposits and using
them to make loans.

Other depository savings institutions

• Depository savings institutions, thrift
institutions:
– Savings banks
– Savings and loans associations
– Credit unions
• Compete with commercial banks

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Contractual savings institutions

• Contractual savings institutions are financial intermediaries that
acquire funds at periodic intervals on a contractual basis.
• Include:
– Insurance companies
– Pension funds
• Because they can predict with reasonable accuracy how much they
will have to pay out in benefits in the coming years , they do not have
to worry as much as depository institutions about losing funds
quickly.
• As a result, the liquidity of assets is not as important a consideration
for them as it is for depository institutions, and they tend to invest
their funds primarily in long-term securities such as corporate bonds,
stocks, and mortgages.

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Insurance companies
• Insurance companies collect premiums from
customers then invest the premiums to obtain
the funds necessary to pay claims and other
costs.

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Pension funds
• Pension funds invest contributions from
workers and firms in stocks, bonds, and
mortgages to earn the money necessary to
make pension benefit payments.

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Investment intermediaries
• Investment intermediaries provide investment
services to clients.
• This category of financial intermediaries
includes finance companies, mutual funds,
money market mutual funds and investment
banks…

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Finance company
• Finance companies raise funds by selling
commercial paper (a short-term debt
instrument) and by issuing stocks and bonds.
• They lend these funds to consumers.

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Mutual funds
• A mutual fund obtains money by selling shares
to investors and invests the money in a
portfolio of financial assets.

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Money market mutual funds

• These financial institutions have the
characteristics of a mutual fund but also
function to some extent as a depository
institution because they offer deposit-type
accounts.
• A key feature of these funds is that
shareholders can write checks against the
value of their shareholdings.

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Investment banks
• Investment banks concentrate on providing
advice to firms issuing stocks and bonds or
considering mergers and acquisitions with
other firms.

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Venture Capital Firms

• Similar to investment banks, but corporate
clientele are usually start-up companies
• Help manage company until ready to go public

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Information Services
• Firms that specialize in providing financial
information
– Standard and Poor’s; Moody’s
– Best (Insurance)
– Bloomberg; Reuters
– Lipper, Morningstar, SEI

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Asset / Investment Management Firms

• Advise, and often administer: mutual funds,
pension funds, and other asset pools on
behalf of individuals, firms, and governments

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Functions of financial intermediaries

• Reduce transaction costs: through economies of
scale, economies of scope and liquidity services.
• Risk sharing: Help reduce the exposure of
investors to risk, i.e. the uncertainty about the
returns investor will earn on assets; through asset
transformation (risky assets are turned into safer
assets for investors) and diversification.
• Reduce asymmetric information: the problems
created by adverse selection and moral hazard
are an important impediment to well-functioning
financial markets; and financial intermediaries
can alleviate these problems.

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Summary
• In this chapter you have learned about:
– Financial systems in general, and the Vietnamese
financial system in particular
– Major participants in the financial system,
including the different types of financial securities,
financial markets and financial intermediaries

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ASSIGNMENT OF CHAPTER 3
1. SELF-TEST
2. REVIEW QUESTIONS
3. PROBLEMS

 DO IT BY YOURSELF FIRST
 ASK IN LATER CLASS IF YOU COULD NOT FINISH

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PREPARE FOR CHAPTER 4

1. Explain the difference between what an
accountant does and what a financial analyst
does?
2. Review of accounting: accounting basics
3. How many forms of business organization do
you know? Explore and find information!
4. What kinds of a firm’s financial statements do
you know? Explore and find at least one
example of a financial statement to analyze.

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