ORGANIZATIONAL SET UP OF FINANCIAL INSTITUTIONS

Functions of Financial Institutions  1. Aids the flow of capital  2. Credit allocation  3. Provides economies of scale and scope  4. Satisfies the needs of general public  5. Provides specialization and expertise  6. Assists asset transformation  7. Offers INTERMEDIATION

Intermediation  The process of transforming a secondary security into a primary security by a financial institution.  It relates to financial investments by savors

Dis-intermediation  The process of reversing or rejecting the transfer of funds into the financial institutions.  This refers to the low deposit interest rates or high operating costs charge to customers.

Illustration of Disintermediation  The removing of Middlemen  The dis- or re-channeling funds flow from the FI  Changing Role to the Servicing of Markets  Security Investments  Mutual Funds  Insurance

Types of Intermediation  1. Liquidity  2. Maturity  3. Denomination  4. Risk

Types of Financial Institutions  By Banking Business Nature:  Banks  Non-Banks  Non-Finance

 By Business Operations:  Thrift type  Contractual type  Investment type  Other type

Thrift-type Financial Institutions  Banks:  Commercial Banks  Savings Banks  Investment Banks (Merchant Banks)  etc  Non-Banks:  Deposit-taking Company, Savings and Loan, Home Loans, Building Society,  Credit Unions

Contract-type Financial Institutions  Insurance Companies:  Life Insurance  Accident and Healthy Insurance  Pension Funds:  Mandatory Providence Funds  Retirement Funds/Pension Funds

Investment-type Financial Institutions  Investment Companies:  Closed-end Investment Companies - Investment Brokers  Open-end Investment Companies - Mutual Funds/Unit Trust  Real Estate Trust Investment Companies

Other Financial Institutions  Finance Companies  Factors Companies  Lease Companies  Mortgage Companies  Credit Card Companies  Non-finance Financial Institutions:  General Electric, Ford Motors, Toyota Motors  wholesalers, Manufactures, Department Stores

Why Financial Institutions?  Fulfill economic goals  Reduce transaction and information costs  Provide liquidity  Prevent risks  As transmission of monetary policy  Provide payment mechanism  Supply credit allocation

Analysis of Financial Institutions  1. Transaction Costs  2. Information Asymmetry -- Moral Hazard  3. Financial Risks  4. Financial Innovation

Solution  Information Asymmetry--Moral Hazard:  Information Symmetry and Full Disclosure  Regulation Reform  Financial Intermediation  Financial Risks:  Risk Management and Control  Burden Administration

Solutions  Financial Innovations:  Enhance Internal Control--  Planning, Control, and Administration  Tighten Asset Management and Quality  Modernized Operation System  Strengthen Regulation and Monitoring

Duties of the Management of Financial Institutions  1. Determining the optimal capital structure  Assets, Liabilities, and Capital  2. Managing interest rate/currency/credit risks  3. electing/Pricing investments and liabilities  Maturity Matching, Profit Making  4. Operating effectively  Information Processing  Communication Technology