Financial Institutions FIL 240 Dr Keldon Bauer Financial Markets Direct financial flows From those with surplus directly to those with deficits Indirect financial flows From those with surplus to a financial intermediary From those with a deficit to a financial intermediary The intermediary supplies its own contract security Financial Intermediation Benefits of Intermediation Denomination matching Aggregating small lenders with larger borrowers Maturity matching Taking shorter term deposits and making longer term loans Credit risk absorption Create information about credit worthiness and putting your money where their mouth is Commercial Banks The principal financial intermediary in most economies Seek to maximize owners wealth Therefore they seek to maximize interest rate spread Bank regulation Federal vs state chartered Federal Reserve Bank Federal Deposit Insurance Corporation Office of the Comptroller of the Currency Required Reserve Ratio Primary reserves Federal Reserve System Serves as Central Bank Organization 12 district banks Board of Governors Federal Open Market Committee 12 voting members 7 board members 5 district bank presidents Controlling the Interest Rates Open market operations Buying and selling t bills to shift the supply curve and affect short term interest rates Target interest rate and policy decided at FOMC meetings among voting members Minutes are posted on the Board of Governors website Discount window Lends to member institutions at the discount window The rate is called the discount rate Savings and Loans Thrifts Savings and Loans were established to take deposits and issue mortgages They could offer higher deposit rates They originally could only offer longterm mortgages When market forces moved faster than regulation dis intermediation occurred Many failures resulted Interest Term Structure Yield Curve on Treasury Securities Maturity in Years Thrift Regulation Federal vs state charter Office of Thrift Supervision OTS Federal Deposit Insurance Corporation FDIC Savings Association Insurance Fund SAIF Thrift Ownership Structures Stock ownership Seek to maximize shareholder wealth Mutual ownership Seek to maximize depositor borrower wealth Typically have a weak governance structure Management appoint the board to oversee the management Credit Unions Originated in Germany in the 1850s Offered credit to small business Volksbanken or farmers Raiffeisenbanken The Schulze Delitzsch type of cooperative bank was exported to Canada and the US in the early 20 th century Member owned Board elected by members and serves on a voluntary basis Maximizes wealth to members Minimizes the interest rate spread Credit Union Regulation Common bond Originally used to overcome information asymmetry Restricts market size and institution size Economies of scale Expanded and loosened Taxes National Credit Union Administration NCUA National Credit Union Share Insurance Fund NCUSIF Central Liquidity Facility CLF Finance Companies Finance Companies Consumer finance companies Commercial finance companies Sales finance companies Insurance Companies Life insurance companies Property casualty insurance companies Pension Funds Annuities
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