Chapter 3: Learning Objectives

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Chapter 3Learning Objectives

• What Do Financial Institutions Do?
• Functions of Intermediaries
• Financial Institutions and Market Types
• The four pillars
• The role of technology government regulation
• How Important is the Financial System?

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The Function of Financial Institutions

• Intermediation ? transforming assets
• Brokerage? an agency function

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The Functions of Intermediaries

• Facilitate the acquisition/payment of goods
  services
• via lower transactions costs
• Facilitate the creation of a portfolio
• economies of scale scope
• Ease liquidity constraints
• Reallocate consumption/savings patterns
• Provide security
• Reduce asymmetric information problem

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The Functions of Intermediaries

• Facilitate the acquisition/payment of goods
  services
• via lower transactions costs
• Facilitate the creation of a portfolio
• economies of scale scope
• Ease liquidity constraints
• Reallocate consumption/savings patterns
• Provide security
• Reduce asymmetric information problem
• Moral Hazard vs. Adverse Selection

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Implications

• Intermediation provides value-added but there are
  potential
• externalities

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Types of Financial Institutions

• Deposit-taking
• chartered banks, trusts, credit unions
• Insurance Companies and Pension Funds
• Investment Dealers and Investment Funds
• Government financial institutions
• TABLE 3.1

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FINANCIAL INSTITUTIONS BY SIZE, 2004
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A Legacy from the Past

• The Four-Pillars
• Chartered banks,trusts, insurance and
  investment dealers
• Conflict in Regulation
• Federal vs. Provincial

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Types of Financial MarketsA Selection of Types

• Primary vs Secondary
• newly-issued vs previously issued
• Term to maturity
• short vs long term, money vs capital
• Direct vs Indirect
• brokerage vs intermediation functions
• Size
• Retail vs Wholesale
• Organization
• open auction, private, public

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Assets as a Percent of total assets
Non-Financial Assets
57.8
42.2
Financial Assets
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Most important Financial Instruments, 2004
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The Relative Importance of the Financial Sector
Non-Financial Sector
Financial Sector
40.98
59.02
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Key Financial Sector Institutions in Canada
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What Future for Banking?

• Non-bank firms are increasingly offering
  financial services
• Are banks better at spreading risks?
• The threat opportunities from technology
• Banks One-stop shopping for all financial
  services

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Summary

• Intermediation is a central concept
• Financial institutions can be classified by type,
  size, function
• Financial markets can be classified by size,
  term, organization, type of assets issued
• Banks are the most adept at the intermediation
  function
• Financial systems should strive for efficiency