Chapter 4

An Introduction to Financial Intermediaries and Risk

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Common Characteristics Types of risks faced by all FIs The Balance Sheets of FIs Pulling Things Together

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Common Characteristics (1)

Financial intermediaries (FIs) link up net borrowers and net lendersin the process, they provide the public with a

wide range of financial services

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Why do FIs perform these services?

To earn profits the quantity, quality, and type of financial services

offered will change as the perceived profitability of these services changes

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Why do FIs perform these services?

Banks “hire” funds from depositorsthe interest a bank pays on deposits is a cost

of doing business Banks then lend the funds to households,

firms, and governments---- the interest earned on loans represents revenue to the bank

The difference between the interest earned and the interest paid is the primary determinant of the bank’s profitability

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Why do FIs perform these services?

if funds can be hired more cheaply by providing a new type of deposit, banks will offer that deposit

if a particular type of lending turns out to be less profitable than expected, banks will have an incentive to lend less in this area

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Common Characteristics – FIs as Firms

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Common Characteristics (2） In general, FIs provide services to the

public for these purposesto reduce the risks and costs associated with

borrowing, lending, and other financial transactions

to fulfill the demand for various financial assets and services, including protection against the financial losses associated with various exigencies

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Reduction of Risk and Costs

FIs use their expertise to appraise the risk of defaultcan assess risk better than individuals

Since the funds of many net lenders are spread to thousands of net borrowers, risk is also reduced through diversification

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Provision of a Variety of Financial Services

FIs provide net borrowers with borrowing opportunities that they may not have otherwise

In addition, they provide a menu of financial claims and depository services tailored to meet the needs of net lendersrelatively safe and liquid claimscontingent claims that offer protection from some

catastrophic event或有索取权：对财产及人身保险的收益索取权，以便保证公众在发生盗窃、车祸、自然灾害以及死亡时遭受的严重财务损失得到赔偿。

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Common Characteristics (3） FIs are regulated by various levels and

agencies of governmentto promote a smooth-running, efficient

financial systemto protect the public from fraud and other

abusive practicesto promote competition in the market for

financial servicesto preserve the public’s confidence in the

system

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Regulation In the financial system, regulations take on

many formsentry into the industry is tightly controlleda government charter is needed to engage in

bankingrestrictions on the types of assets and

liabilities

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Effects of Regulation They tended to reinforce and encourage

specialization by FIs in particular services There are many different types of assets

and liabilities found on FIs’ balance sheets Over time, FIs saw the benefits of

diversificationthey discovered that providing the public with

a wider range of financial services could be profitable

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Types of Risk Faced by FIs

credit (default) risk interest rate risk liquidity risk exchange rate risk

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Credit (Default) Risk

Credit (default) risk is the risk that the borrower will be unwilling or unable to live up to the terms of the liability信用（违约）风险：借方不愿意或无力在债务到期时偿还的风险。 FIs employ experts in risk assessment to evaluate

default riskuses information from balance sheets, income

statements, and credit checks

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Interest Rate Risk

Interest rate risk is the risk that the interest rate will unexpectedly change so that the costs of an FIs liabilities exceed its earnings on assets

利率风险：利率发生未曾预见到的变化导致金融机构的负债成本高于资产收益。an FI’s profitability depends on the spread between

the interest rate earned on assets and that paid on liabilities

FIs have responded to this risk by using adjustable rate loans and financial futures, options, and swaps

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Liquidity Risk

Liquidity risk is the risk that occurs when an FI is required to make a payment when its assets are long-term and cannot be quickly converted to liquid funds without a capital loss

流动性风险：金融中介机构需要进行支付时，无法不受任何损失的将长期资产迅速变现的风险。depositors unexpectedly withdraw fundsan insurance company incurs high losses due to an

unexpected catastrophic event

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Financial Crisis The immediate cause or trigger of the crisis was the

bursting of the United States housing bubble which happened in 2005–2006. High default rates on "subprime" and adjustable rate mortgages (ARM), began to increase quickly at this time. An increase in loan packaging, marketing and incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to loan money from mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher.

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Exchange Rate Risk

Exchange rate risk is the risk that changes in the exchange rate will cause the dollar value of a foreign currency or foreign financial assets to fall

汇率风险：汇率发生变化时会降低外汇以及外币表示的金融资产的价值。

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Dollar Value of the Euro

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What This Means

International banks want the value of their assets to increase, and the value of their liabilities to decrease.

10 million Euros in September of 2009 was worth 14.6 million dollars

Today, they are only worth 13.6 million dollars.

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The Balance Sheets of FIs

A balance sheet is an accounting statement that presents the monetary value of the assets, liabilities, and net worth at a specific point in time for an FI, assets include loans and securitiesfor an FI, liabilities include deposits and borrowed

funds资产负债表：一张关于某一经济单位在某一特定时点的资产、负债和所有者权益的货币价值的财务报表。

Assets must be equal to the sum of liabilities and net worth

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Deposit-Type FIs Contractual-Type FIs Investment-Type FIs Finance company-type FIs

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Deposit-Type FIs Depository institutions have a large portion of

liabilities as deposits Depository institutions include

commercial banks（商用银行：吸收支票、定期存款、储蓄存款并对商业企业发放贷款的存款机构。）Thrifts（储蓄机构）

savings and loan associations (S&Ls)（旨在聚集本地居民储蓄、用于支持住房建设和购买的一种存款机构） savings banks（用于支持住房建设和购买的一种存款机构） credit unions（合作性的、非营利的、免税的存款机构，其服务对象是持有其共同债券的成员。）

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Commercial Banks

Commercial banks are typically defined as institutions that issue deposit liabilities that are checkable and extend loans to commercial businesses

They do many other things as wellissue time and savings depositsoffer many other types of loans

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Commercial Banks Deposits fall into three categories

transactions depositscan be exchanged for currency and are used by writing a check or

using an electronic transfer可以提现、可以通过签支票或电子转账等方式进行支付的存款账户。

savings depositscannot be withdrawn by writing a check but are highly liquid高流动性活期存款，可随时支取，无需签支票支取。

time depositshave a scheduled maturity and if funds are withdrawn early there is

a penalty有固定的到期日，如提前支取则收取罚金的存款。

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Commercial Banks

Deposits are the main source of funds for a bankbanks have developed other nondeposit

sources of funds fed funds repurchase agreementsEurodollar borrowings

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Commercial Banks

A bank must decide how best to use its funds to maximize profit and minimize riskthe bank will try to diversify its portfolio by

holding a mix of loansthe bank will also hold reserve assets

increases liquidity required by the Fed

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Savings Associations

Savings associations include S&Ls and savings banksdeveloped to help finance the construction

and purchase of homes The major source of funds for savings

associations are time, savings, and checkable deposits

The major use of funds for savings associations is mortgage loans

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Savings Associations

During the 1980s, the S&L industry experienced multiple strains (the S&L “crisis”)more than 500 institutions became insolvent

and were seized by regulators at the taxpayers’ expense ($124 billion)

the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 created a new federal regulatory structure to resolve this crisis

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Credit Unions

Credit unions are cooperative, nonprofit, tax-exempt associations operated solely for the benefit of membersmembers must share a “common bond”

The major source of funds for credit unions are members’ savings accounts

The major use of funds for credit unions are consumer loans and mortgage loans

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Contractual-Type FIs

Contractual-type FIs have liabilities that are defined by contractgenerally call for regular payments to the FIs in

exchange for future payments under specified conditions (contingent claims)

Contractual-type FIs includelife insurance companies（寿险公司）pension funds（养老基金、退休基金）property and casualty companies（财产保险公司）

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Life Insurance Companies Life insurance companies offer protection

against the financial costs, losses, and reductions in income associated with death, disability, old age, and various other health problemspremiums are paid to the companythe company lends these funds

not overly concerned about liquiditythe company uses the income from these loans

to pay benefits to policyholders

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Pension Funds

Pension funds are tax-exempt institutions set up to provide participants with retirement incomesome are run by private companies, while

others are associated with governmental unitslittle need for liquidity so long-term securities

are purchased

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Property and Casualty Companies

Property and casualty companies provide financial protection against unexpected occurrences on propertyautomobiles and homes

These firms are taxed at the full corporate rate

The stream of payments made to individuals is much less predictable than for life insurance companies

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Investment-Type FIs The major types of FIs in the investment category are

mutual funds 共同基金：从公众处获得并集中基金购买长期金融证券，将扣除一定费用后的收益返还给集资人的投资型中介机构。

acquire and pool funds from the publicinvest the funds in capital market instrumentsreturn the income received (minus a management fee) to

investorsmoney market mutual funds are an example of funds that are

limited to a particular type of financial claim货币市场共同基金：投资于货币市场金融工具的共同基金。

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Finance Company-Type FIs

Finance companies lend funds to households to finance the purchase of consumer durables and to businesses to finance inventories and the acquisition of equipment

金融公司：向个人提供消费品购买融资，向企业提供存货融资的中介机构。in the past, these FIs loaned funds to borrowers

considered riskytoday, these FIs lend to all types of borrowers

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Pulling Things Together

Contractual-type FIs are the largest group in terms of total assets

Each group can be distinguished from other groups by the financial services they specialize in and the composition of their balance sheets

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Pulling Things Together

The composition of each FI’s balance sheet will depend onthe range of financial services offeredany specialization in services offeredthe tax status of the institutionthe nature of the institution’s liabilitieslegal constraints or regulations governing the

types of assets and liabilities that can be acquired

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Trend Toward Financial Supermarkets

Banks are increasingly trying to enter the markets traditionally provided by other FIs

Other FIs are trying to enter the markets traditionally served by banks

The Gramm-Leach-Bliley Act (GLBA格雷姆 -里奇 -比利雷法 ) removed barriers between banking and other financial servicescreated holding companies to link commercial

banks with securities, and insurance firms

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格雷姆 -里奇 -比利雷法（ GLB Act）也就是 1999年的金融现代化法案，它是在美国颁布的一项法律，用于控制金融机构处理个人信息的方式，这项法案包括三部分：财产保密条例、安全措施条例、托辞供应。其中财产保密条例，用于管制对私人财产信息的搜集和泄露；安全措施条例，用于保证财政机构必须实现对私人信息的安全保护；托辞供应用于禁止使用不正当的托辞访问私人信息。 GLB法还要求金融机构给顾客一个书面的保密协议，以说明他们的信息共享机制。