Financial Intermediaries

Help bring DSU and SSUs together

Many FIs exist because of different niches and due to regulations

Lower transaction costs through

Providing liquidity

Lowering search or information costs

Denomination –lowering

Exposed to risks:

Credit risk

Interest rate risk

For-ex risk

Generally very high levels of leverage

FIs can be classified in 4 main groups

1. Deposit types-main liability is deposits by investors

Types of deposits

Transaction deposits

Savings

Time deposits

Types of institutions

Within this category, the largest type is the commercial banks

Savings and Loans-housing

Credit Unions

2. Contractual types-liability is defined by contract

Often contingent claims (ie insurance)

Life Insurance-hold longer term assets

Pension funds are tax exempt institutions that provide for retirement

Invest in long term assets

Casualty Companies

Insurance companies for property (ex car insurance, houses)

They are taxed

Risky (natural disasters etc)

This is the largest category, due largely to the growth in pension funds

3. Investment types

Mutual Funds

Pooling of money for investment purposes

Money market funds

Enormous success

Types

Load No load

Closed vs open

4. Finance companies

The smallest of the groups. (under 1 trillion dollars)

Lend to households to finance consumer durables.

Generally will take more risks

Norwest, Benficial, the Money Store etc

GMAC etc.

Regulations and the types of business risk influence the type of asset the FI holds.

For example pension funds with predictable (and long term) liabilities hold more equities whereas commercial banks do not.