FINANCIAL

INTERMEDIARIES AND
OTHER PARTICIPANTS
FINANCIAL
INTERMEDIARIES

They were formed during the time

when market conditions make it hard
for lenders of fund to transact directly
with borrowers of fund.
FINANCIAL INTERMEDIATION

Is the process of indirect financing using financial

intermediaries as the main route to transfer funds from
lenders to borrowers.
SERVICES PROVIDED BY FINANCIAL
INTERMEDIARIES

• Enable trading of financial assets for the customers of the financial

intermediary through brokering arrangements
• Enable trading of financial assets through its own capital by buying
a stake in a financial asset that its customers wants to transact in
• Assist in forming financial assets needed by its customers and
distribute these to its customers and other market participants as
well
SERVICES PROVIDED BY FINANCIAL
INTERMEDIARIES (CONTINUED)

• Provide investment advice and consultation services to customers

• Manage financial assets of customers
• Facilitate payment mechanism between merchants and customers
 BENEFITS OF FINANCIAL INTERMEDIARIES

1. Acceleration of flow of funds between entities –

financial intermediaries serve as savings and wealth
storage function. Without them, fund providers may opt to
keep their money at home rather than in banks disrupting
the flow of money.
2. Efficient allocation of funds– Financial Intermediaries possess the expertise to
make sure that funds will flow to the economy in most efficient matter. They
manage asymmetric information that leads to two further problems : Adverse
selection and moral hazard.

Asymetric Information – occurs when potential borrowers have more

information about the transaction compared to the bank
Adverse Selection

means high risk borrowers that would tend to default is

more likely to be active in borrowing funds than low risk
borrowers who pay on time. Since high risk borrowers are
more eager to look for loans, they have a higher chance of
being chosen
Moral Hazard
Occurs when the borrowers has the
tendency to take undesirable or immoral
risks (for the lender) with the money, once
they receive it. Engaging in these
undesirable activities may lower the
chance that the loan will be paid back.
 BENEFITS OF FINANCIAL INTERMEDIARIES

3. Creation of Money– financial intermediaries serve as

savings and wealth storage function. Without them, fund
providers may opt to keep their money at home rather than
in banks disrupting the flow of money.
 BENEFITS OF FINANCIAL INTERMEDIARIES

4. Support in price discovery– financial intermediaries

play the role as experts and facilitators to enable to assign
values to financial instruments based on different factors.
The financial system specifically the banking sector, also
significantly influences the discovery of interest rates.
 BENEFITS OF FINANCIAL INTERMEDIARIES

5. Improved liquidity for lenders– Offering immediately

encashable products such as current and savings deposit
accounts.
 BENEFITS OF FINANCIAL INTERMEDIARIES

6. Reduced price risk for lenders– Financial

intermediaries offer very low-risk financial products such
as deposits to its lenders and at the same time offer
financial products with high price risk such as bonds and
shares to its borrowers.
 BENEFITS OF FINANCIAL INTERMEDIARIES

7. Diversification of Lenders– benefits members of household who

have smaller wealth, hence smaller investment opportunities.
Diversification is the process of investing funds in a portfolio of assets
that have individual returns that do not move in the same location
together.
A financial intermediary's risk-sharing activities are also referred to as
asset transformation.
 BENEFITS OF FINANCIAL INTERMEDIARIES

8. Economies of scale –occurs when fixed cost are optimized per unit as a
result of sheer volume of transactions. Cost per transaction is reduced as the
number of transactions increases. Financial intermediaries allows funds to be
concentrated to them and they will incur transaction and research cost in behalf
of all its depositors.
Transaction cost – cost associated with trading or managing of funds.
Research cost – cost incurred to monitor performance of potential companies
to be invested
 BENEFITS OF FINANCIAL INTERMEDIARIES

9. Payments system – certain financial assets become the medium

of payment and are settled efficiently ( assuming efficient clearing
and settlement system). Most common financial assets that are
accepted as payments are bank notes, coins and bank deposits
(through checks, straight credit cards and debit cards)
 BENEFITS OF FINANCIAL INTERMEDIARIES

10. Risk Mitigation – example : insurance against threats to their

life, income and properties

11. Implementation of monetary policy function

 BENEFITS OF FINANCIAL INTERMEDIARIES

12. Maturity Intermediation– The mismatch between fund providers and fund demanders can
become a problem if financial intermediaries did not exist. Also, financial intermediaries lessen the
cost of borrowing.
example : Time Deposits

13. Risk Reduction and diversification – (mutual fund)

14. Cost reduction for contracting and information processing

Mutual funds

Mutual funds work by pooling

your money with the money of
other investors and investing it in a
portfolio of other assets (e.g.,
stocks, bonds). Mutual funds are
typically managed by a fund
manager, who picks all the
investments in the portfolio.
 CLASSIFICATIONS OF FINANCIAL
INTERMEDIARIES

1. Depositary Institutions
2. Insurance Companies
3. Investment Intermediaries
Depositary
Institutions

• Firms that accept cash

deposits from individuals,
companies and entities. In
Philippines, these are
commercial banks, thrift
banks and savings banks.
TYPES OF DEPOSIT ACCOUNTS ISSUED BY
BANKS

1. Demand Deposits or checking account

2. Savings Deposit
3. Money Market Demand Account
4. Time Deposit
Insurance
Companies

Offer services to assume risk or

become underwriters of the risk
associated with various insurable
occurrences. In addition to their
role as risk bearers, insurance
companies also invest in the
financial markets.
TYPES OF
INSURANCE
Investment Intermediaries

Organizations whose primary objective is to maximize return from

investments in various financial instruments to add value for the
investors
 Types of
Investment
Intermediaries

1. Asset Management Firms –

companies that manage funds
owned by individuals, companies
or government through buying and
selling of financial instruments.
They charge their clients fees to
compensate their management
service.
Types of Investment Intermediaries

2. Regulated Investment Companies (RIC) – Financial Intermediaries that sells

shares to the general public in exchange of cash. Once they receive the proceeds,
they invest the money in a diversified portfolio of financial instruments. Normally,
Asset Management Firms are contracted to manage the investment of RIC.
An investment company that does not pay taxes on its earnings. mutual funds and
closed-end investment companies are both regulated investment companies. RICs
are able to escape corporate taxes because they profit from investments by
shareholders and do not have any real operations.
Types of Investment Intermediaries

3. Exchange Traded Funds – are like mutual funds, but the shares of the
portfolio funds trade in an exchange like a regular share offered by a company.
An ETF is called an exchange-traded fund since it's traded on an exchange just
like stocks. The price of an ETF’s shares will change throughout the trading
day as the shares are bought and sold on the market. This is unlike mutual
funds, which are not traded on an exchange, and trade only once per day after
the markets close.
Types of Investment Intermediaries

4. Hedge Funds
5. Investment Banks – highly leveraged institutions that have significant
influence on how primary and secondary market work. They assist entities
( household, corporate, individuals, government) in raising money to fund their
initiatives. They serve as the dealer or broker of transactions in the secondary
market.
Types of Investment Intermediaries

6. Finance companies – they raise funds through issuing of stocks and bonds
or selling commercial papers. They lend out funds to individual consumers (to
buy furniture, vehicles, home improvements) and small businesses. Example :
Toyota Motor Philippines and Toyota Financial Services
OTHER PARTICIPANTS

1. Household Sector – it includes unincorporated businesses such as retailers,

farmers and professional partnerships
2. Government – it includes Non Government Agencies, LGUs and GOCCs.
Normally, the national government raises funds through Bureau of Treasury
3. Corporate Sector / Non Financial Corporations
WHICH OF THE FOLLOWING CAN BE DESCRIBED AS INVOLVING
DIRECT FINANCE?
A) A CORPORATION'S STOCK IS TRADED IN AN OVER-THE-COUNTER
MARKET.
B) PEOPLE BUY SHARES IN A MUTUAL FUND.
C) A PENSION FUND MANAGER BUYS COMMERCIAL PAPER IN THE
SECONDARY MARKET.
D) AN INSURANCE COMPANY BUYS SHARES OF COMMON STOCK IN
THE OVER-THE-COUNTER MARKETS.
E) NONE OF THE ABOVE.
WHICH OF THE FOLLOWING CAN BE DESCRIBED AS INVOLVING
DIRECT FINANCE?
A) A CORPORATION'S STOCK IS TRADED IN AN OVER-THE-COUNTER
MARKET.
B) PEOPLE BUY SHARES IN A MUTUAL FUND.
C) A PENSION FUND MANAGER BUYS COMMERCIAL PAPER IN THE
SECONDARY MARKET.
D) AN INSURANCE COMPANY BUYS SHARES OF COMMON STOCK IN
THE OVER-THE-COUNTER MARKETS.
E) NONE OF THE ABOVE.
WHICH OF THE FOLLOWING CAN BE DESCRIBED AS INVOLVING
DIRECT FINANCE?
A) A CORPORATION'S STOCK IS TRADED IN AN OVER-THE-COUNTER
MARKET.
B) A CORPORATION BUYS COMMERCIAL PAPER ISSUED BY ANOTHER
CORPORATION.
C) A PENSION FUND MANAGER BUYS COMMERCIAL PAPER FROM THE
ISSUING CORPORATION.
D) BOTH A AND B OF THE ABOVE.
E) BOTH B AND C OF THE ABOVE.
WHICH OF THE FOLLOWING CAN BE DESCRIBED AS INVOLVING
DIRECT FINANCE?
A) A CORPORATION'S STOCK IS TRADED IN AN OVER-THE-COUNTER
MARKET.
B) A CORPORATION BUYS COMMERCIAL PAPER ISSUED BY ANOTHER
CORPORATION.
C) A PENSION FUND MANAGER BUYS COMMERCIAL PAPER FROM THE
ISSUING CORPORATION.
D) BOTH A AND B OF THE ABOVE.
E) BOTH B AND C OF THE ABOVE.
WHICH OF THE FOLLOWING CAN BE DESCRIBED AS INVOLVING
INDIRECT FINANCE?
A) A CORPORATION TAKES OUT LOANS FROM A BANK.
B) PEOPLE BUY SHARES IN A MUTUAL FUND.
C) A CORPORATION BUYS COMMERCIAL PAPER IN A SECONDARY
MARKET.
D) ALL OF THE ABOVE.
E) ONLY A AND B OF THE ABOVE.
WHICH OF THE FOLLOWING CAN BE DESCRIBED AS INVOLVING
INDIRECT FINANCE?
A) A CORPORATION TAKES OUT LOANS FROM A BANK.
B) PEOPLE BUY SHARES IN A MUTUAL FUND.
C) A CORPORATION BUYS COMMERCIAL PAPER IN A SECONDARY
MARKET.
D) ALL OF THE ABOVE.
E) ONLY A AND B OF THE ABOVE.
7) FINANCIAL MARKETS IMPROVE ECONOMIC WELFARE BECAUSE
A) THEY ALLOW FUNDS TO MOVE FROM THOSE WITHOUT
PRODUCTIVE INVESTMENT OPPORTUNITIES TO THOSE WHO HAVE
SUCH OPPORTUNITIES.
B) THEY ALLOW CONSUMERS TO TIME THEIR PURCHASES BETTER.
C) THEY WEED OUT INEFFICIENT FIRMS.
D) THEY DO ALL OF THE ABOVE.
E) THEY DO A AND B OF THE ABOVE.
FINANCIAL MARKETS IMPROVE ECONOMIC WELFARE BECAUSE
A) THEY ALLOW FUNDS TO MOVE FROM THOSE WITHOUT
PRODUCTIVE INVESTMENT OPPORTUNITIES TO THOSE WHO HAVE
SUCH OPPORTUNITIES.
B) THEY ALLOW CONSUMERS TO TIME THEIR PURCHASES BETTER.
C) THEY WEED OUT INEFFICIENT FIRMS.
D) THEY DO ALL OF THE ABOVE.
E) THEY DO A AND B OF THE ABOVE.
WHICH OF THE FOLLOWING ARE PRIMARY MARKETS?
A) THE NEW YORK STOCK EXCHANGE
B) THE U.S. GOVERNMENT BOND MARKET
C) THE OVER-THE-COUNTER STOCK MARKET
D) THE OPTIONS MARKETS
E) NONE OF THE ABOVE
WHICH OF THE FOLLOWING ARE PRIMARY MARKETS?
A) THE NEW YORK STOCK EXCHANGE
B) THE U.S. GOVERNMENT BOND MARKET
C) THE OVER-THE-COUNTER STOCK MARKET
D) THE OPTIONS MARKETS
E) NONE OF THE ABOVE
15) A CORPORATION ACQUIRES NEW FUNDS ONLY WHEN ITS
SECURITIES ARE SOLD IN THE
A) SECONDARY MARKET BY AN INVESTMENT BANK.
B) PRIMARY MARKET BY AN INVESTMENT BANK.
C) SECONDARY MARKET BY A STOCK EXCHANGE BROKER.
D) SECONDARY MARKET BY A COMMERCIAL BANK
15) A CORPORATION ACQUIRES NEW FUNDS ONLY WHEN ITS
SECURITIES ARE SOLD IN THE
A) SECONDARY MARKET BY AN INVESTMENT BANK.
B) PRIMARY MARKET BY AN INVESTMENT BANK.
C) SECONDARY MARKET BY A STOCK EXCHANGE BROKER.
D) SECONDARY MARKET BY A COMMERCIAL BANK
• Many common stocks are traded over the counter, although a majority of the
largest corporations have their shares traded at organized stock exchanges.
• The government agency that insures each depositor at a commercial bank,
savings and loan association, or mutual savings bank up to a loss of $100,000 per
account ($250,000 for individual retirement accounts) is the Securities and
Exchange Commission (SEC).
• Many common stocks are traded over the counter, although a majority of the
largest corporations have their shares traded at organized stock exchanges. TRUE
• The government agency that insures each depositor at a commercial bank,
savings and loan association, or mutual savings bank up to a loss of $100,000 per
account ($250,000 for individual retirement accounts) is the Securities and
Exchange Commission (SEC). FALSE