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Q2. What is the difference between Financial Institutions , a commercial

bank and investment bank ? Which institution is more involved in

boosting merchandizing sector / trade?

In any given economy, there are numerous financial institutions - including banks, insurance

companies, credit card companies, investment funds, consumer finance companies, etc. Even

though a bank is a financial institution in itself, it differs from other financial institutions mentionedabove by a significant extent. The most prominent difference between bank and financial institution is

the fact that banks provides the facility of depositing cash by resorting to savings account - something

which most of the non-banking financial institutions are not entitled to do. In order to get a betterunderstanding of various differences between the two, you need to take a look at each of these concepts

individually.

Financial-Institutions

One has to first understand what financial institutions are, because bank in itself is one of the variousfinancial institutions that exist in an economy. Basically, the term financial institutions encompasses

several economic setups which provide financial services to its members or clients. This includesvarious deposit taking institutions such as banks and credit unions, as well as non-banking institutions

such as insurance companies, investment funds, brokers, etc. Most of these financial institutions areregulated by the government. The most important function of these financial institutions is to channelize

funds between lenders and borrowers indirectly

Banks

As we mentioned earlier in this writeup, a  bank   is a financial institution in itself - a deposit takingfinancial institution to be precise. As with most of the other institutions listed above, even banks acts as

financial intermediaries. Basically, banks allow consumers deposit money in savings accounts and lend

the same money in form of various loans. Banks are among the most strictly regulated financiainstitutions in any economy. While the basic concept of a bank is same in all the countries, therestrictions on these banks may differ from one country to another

Difference between Bank and Financial Institution

It is a tough task to compare bank and financial institutions owing to the fact there exist several financial

institutions, and each of these differ from banks by a significant extent. Basically,

differentiating between banks and financial institutions may seem same as comparing a deposit

taking financial institution with a non-deposit taking financial institution.

 

(If that criteria is taken into consideration both financial set-ups differ from each other on the basis ofdepositing facility, which is only provided by banking institutions as opposed to their non-banking counterparts.) That's true

to a certain extent, but it is by no means complete. Even though banks are deposit taking financialinstitutions themselves, they can at times differ from other deposit taking financial institutions as well

For instance, credit unions also allow consumers to deposit (or borrow) money, but in order to avail this

facility you need to be a member of this credit union and by becoming a member of the credit union youautomatically become one of its owner.

The basic difference may include:-

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• A Bank is an organization that accepts customer cash deposits and then provides financial

services like bank accounts, loans, share trading account, mutual funds, etc.

• A NBFC (Non Banking Financial Company) is an organization that does not accept customer 

cash deposits but provides all financial services except bank accounts.

• A bank interacts directly with customers while an NBFI interacts with banks and governments

• A bank indulges in a number of activities relating to finance with a range of customers, while an

 NBFI is mainly concerned with the term loan needs of large enterprises

• A bank deals with both internal and international customers while an NBFI is mainly concerned

with the finances of foreign companies• A bank's man interest is to help in business transactions and savings/investment activities while

an NBFI's main interest is in the stabilization of the currency

Besides the differences between the both commercial banks and the non banking financial institutions

they play both for the development of the economic structure of the country. If the both play positively

than it can be said that, the development of the country is sure.

Investment bank   DIFFERENCE FROM COMMERCIAL BANKS 

Investment banks differ from commercial banks primarily, in the following ways:

1. Investment banks cannot accept deposits of less than 30 days maturity, issue cheque books or accept

foreign currency deposits of less than three months. Term deposits can only be accepted by issuance of 

Certificates of Investment.

2. Lending is restricted to demand finance only and investment banks cannot provide overdraft lines.

3. Investment banks cannot operate letters of credit or provide trade finance.

4. Investment banks are subject to a 14% liquidity reserve requirement (including minimum of 1% cash

requirement) as against the requirement applicable to commercial banks to keep 20% (15% in cash and

5% in government securities).

5. Investment banks are required to have a minimum paid up capital of Rs.200 million whereascommercial banks are subject to a minimum requirement of Rs.500 million.

The first investment bank was established by the Crescent Group. There are now 15 such licensed

institutions, 13 of which are listed on the stock exchanges. Out of the fifteen investment banks currently

functioning in Pakistan, 11 have been in commercial operations for more than three years. Nearly all of them are linked with either a prominent business group or a financial institution classified according to

their sponsorships.

investment banks have been playing a major role in the development of capital markets in thecountry. They are now focused on specialised services such as corporate finance, advisory services

underwriting and placement, etc., to match the growing demand for funds and new equity issues, and

in the emergence of new financial products. These services have helped the investment banks in

generating dependable and reliable source of fee-based income.

Reference

http://findarticles.com/p/articles/mi_hb092/is_6_30/ai_n28754134/

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http://www.bankinfobd.com/blog/banking-and-non-banking-financial-institutions-basic-

differences

www.buzzle.com/.../ difference - between - bank -and- financial - institution .html

Q3 In classifying, financial innovations, the bank for international

settlements refers to 'liquidity generating instruments'. Twocharacteristics of liquidity generating instruments are that increase the

liquidity of market and they allow borrowers to draw upon new sources

of funds . Explain why asset securitization results in liquidity - generating

instruments.

The securitization is a financial technique which changes non-liquid assets into liquid stocks (bonds or

not)the process of gathering a group of debt obligations such as mortgages into a pool, and then dividing

that pool into portions that can be sold as securities in the secondary market.

Securitization Process

• Participants

 – Borrower   – Loan originator 

 – Special purpose trust

 – Underwriter  – Investors

• Some of the Benefits

 – Liquidity

 – Market values – Lower cost

 – Improved credit rating

explanationMortgage-backed securities are a perfect example of securitization. By combining mortgages into one

large pool, the issuer can divide the large pool into smaller pieces based on each individual mortgage's

inherent risk of default and then sell those smaller pieces to investors.

The process creates liquidity by enabling smaller investors to purchase shares in a larger asset pool

Using the mortgage-backed security example, individual retail investors are able to purchase portions of

a mortgage as a type of bond. Without the securitization of mortgages, retail investors may not be able toafford to buy into a large pool of mortgages.

“Securitization" refers to the process of turning assets into securities -- financial instruments that can

 be readily bought and sold in financial markets, the way stocks, bonds and futures contracts are traded

When used in relation to real estate, securitization means taking mortgages issued by banks and otherlenders and converting them into securities that can be sold to investors.

Liquidity

The ease with which an asset can be converted to cash without losing value is called "liquidity." Gold,

for example, is extremely liquid: If you have an ounce of gold, you can take it to a metals dealer, whowill gladly pay you the going rate for it. Assets that aren't easily converted to cash are "illiquid." Real

estate is a generally illiquid asset. If you want to cash it in, first you have to find a buyer -- not always an

easy task -- and then you have to negotiate a price. And the greater your need to sell, the more likely youare to sell the property at a discount.

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Mortgages

The mortgages that banks and other financial institutions have on their books are valuable assets, butthey're generally illiquid. These loans are backed by real estate, which is itself illiquid, and while a

mortgage produces a healthy rate of return -- in the form of interest paid by the homeowner -- it can take

as long as 30 years to realize the full value.

Securitization

Securitization turns mortgages into liquid assets. The process works like this: A bank or other institutiongathers hundreds or thousands of mortgages into a "pool." It then divides that pool into shares and sells

those shares as securities. Buyers of these securities gain the right to collect mortgage payments made

 by the hundreds or thousands of homeowners whose mortgages have been pooled, which is why they'recalled "mortgage-backed securities."

Effect

If your mortgage has been securitized, it shouldn't have any real effect on you. The loan is a binding

contract, and all the terms remain in force. You may be directed to send your monthly house payments

to a different address, but that's about it.

Advantages

Securitization allows banks to convert their mortgages to cash, which they can then use to lend money tomore home buyers. This ensures that there is a steady supply of credit available to the housing market.

And as long as the homeowners whose loans were pooled make their payments on time, buyers of the

securities get a nice return on their investment.

Disadvantages

Unfortunately, securitization can also encourage lenders to lend money to high-risk people who areunlikely to pay it back. That's because once a mortgage has been securitized and sold off to investors

the lender no longer has any money at stake; all the risk has been passed off to the investors. This is

what happened in the housing bubble of the early to mid-2000s. When homeowners began defaulting on

loans in record numbers, the securities backed by those mortgages lost their value.

http://homeguides.sfgate.com/meaning-securitization-6615.html

Mortgage

DefinitionA loan to finance the  purchase of real estate, usually with specified payment  periods and interest rates.

The borrower (mortgagor ) gives the lender (mortgagee) a lien on the property as collateral for the loan.

Mortgage-Backed Securities

Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from

 pools of mortgage loans, most commonly on residential property. Mortgage loans are purchased from

 banks, mortgage companies, and other originators and then assembled into pools by a governmentalquasi-governmental, or private entity. The entity then issues securities that represent claims on the

 principal and interest payments made by borrowers on the loans in the pool, a process known as

securitization.

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Explanation

When you invest in a mortgage-backed security you are lending money to the home buyer or businessAn MBS is a way for a smaller regional bank to lend mortgages to its customers without having to

worry about whether the customers have the asset to cover the loan, instead, the bank acts as a

middleman between the home buyer and the investment markets

 

Q4. What is meant by ' Institutionalization ' of capital markets?

Capital market is a sub-set of financial markets, which provides a linkage between the users andsuppliers of the funds for long-term investment. A capital market mainly consists of stock (equity) and

 bonds markets.

Institutionalization

The gradual domination of financial markets by institutional investors, as opposed toindividual investors. This process has occurred throughout the industrialized world.

Institutional Investment

Institutional investment plays an important role in the development of corporate culture and growth ofthe financial markets. It enhances the liquidity in capital market by allowing more players to enter in the

capital market. Institutional investment covers the pension, provident and mutual funds and insurance

companies. They minimize the risk bydiversification and ensure the better returns. The institutional investment will make responsible to the

companies, improve the governance and accountability, implement the

  professionalism and improve the savings in the economy. It is a common observation in all theindustrialized countries and Far Eastern economies that institutional investors contribute the major part

of the equities in the financial structures of the companies. In Pakistan, 40 percent equity shares are held by the directors and promoters, 35 percent by the small investors and only 25 percent by the institutional

investors. There is a need to improve this situation. An enhanced share of institutional holding will notonly improve the corporate governance and earnings but also encourage the saving culture in the

economy.

As trading has grown and globalization of the capital markets has occurred over the years

institutionalization of securities markets become known. The effects of the institutionalization of

securities markets are as follows:

1. Commissions

2.Block trades3.National Market System4.Stock price volatility impact.

1. Commissions

Commissions are defined as the explicit fee to trade a security. Given the institutionalization of 

securities markets, commissions were structured by the SEC and work to limit unfair practices with

respect to how firms charge commissions for trading.

2. Block Trades

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Block trades are large trades that are primarily done through institutions. Given the growth of the

financial markets, block trades have increased in frequency. As a result, block trading houses weredeveloped to handle these trades in an organized and efficient manner so as not to disrupt the securities

market and cause large-scale volatility.

3. National Market System

The National Market System (NMS) has been proposed; it would provide even greater efficiency with

lower transaction costs. In proposals, the NMS would contain a centralized reporting system, a

centralized quotation system, centralized limit order book and increased competition among all marketmakers.

4. Stock Price Volatility Impact

One theory of the institutionalization of securities markets is that volatility is increased given the

increased institutional trading, typically done in block trades. The counterargument to the theory is that

institutional trading will decrease volatility because it will make the markets more liquid. As such, thereis no empirical evidence that the institutionalization of securities markets has impacted stock price

volatility.

Major Institutional PlayersInstitutional investors are a heterogeneous group of investors that populate the global capital

markets.Based on their legal type, institutional investors can be broadly classified into mutual funds, pension funds, insurance companies, sovereign funds, hedge funds, and private equity funds.

A mutual fund is an investment vehicle that buys a portfolio of securities selected by a professional

investment adviser to meet a specified financial goal (investment objective).

A pension fund is a pool of assets forming an independent legal entity that are bought with the

contributions to a pension plan for the exclusive purpose of financing pension plan benefits. largest

 pension funds as ranked by Pensions & Investments. Insurance companies and banks are also importanttypes of institutional investor that constitute the traditional asset managers.

A hedge fund is an unregulated pool of money managed by an investment advisor, the hedge fund

manager, who typically has the right to have short positions, to borrow, and to make extensive use ofderivatives. Hedge fund managers receive both fixed and performance fees.

A private equity fund is a pooled investment vehicle which invests its money in equity securities of

companies that have not “gone public” (i.e. are not listed on a public exchange). Private equity funds aretypically limited partnerships with a fixed term of ten years (often with annual extensions). At inception

institutional investors such as pension funds and endowments (limited partners) commit a certain

amount of capital to private equity funds, which are run by the general partners.

Reference:

http://www.qfinance.com/contentFiles/QF02/g26fs3i7/11/0/the-role-of-institutional-investors-in-

corporate-financing.pdf 

www.investopedia.com/...markets /institutionalization - capital - markets -effects.asp

Q5. What are some key indicators of whether or not a country is

liberalizing its rules on financial activities by foreign-owned banks and

companies?Strong and efficient financial systems

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Internationalization can help countries build more robust and efficient financial systems by introducinginternational practices and standards; by improving the quality, efficiency, and breadth of financial

services; and by allowing more stable sources of funds. Given the state of institutional development of

many developing countries' financial systems, these benefits could be substantial. Yet, there have beenmany concerns expressed over the speed and degree to which countries should open up to foreign

competition in the financial sector.

Increase the competition

Openness to foreign competition puts pressure on domestic financial firms to improve their productivity

and services, thus providing consumers with better, more appropriate and cheaper services. It also givesfinancial firms access to new technologies and ideas to help them raise efficiency.

Internationalization has raised a number of fears:

 

The threat to domestic financial service firms and domestic financial systems; the undermining of

 prudential controls; the loss of monetary autonomy; and the increased volatility of capital flows. Butmany of these concerns are not related to internationalization. It is useful to distinguish three types of 

financial liberalization, and to delineate the scope of each.

• Domestic financial deregulation

Allows market forces to work by eliminating controls on lending and deposit rates and on credit

allocation and, more generally, by reducing the role of the state in the domestic financial system.

• Capital account liberalization

 Removes capital controls and restrictions on the convertibility of currency.

• Internationalization of financial services

 Eliminates discrimination in treatment between foreign and domestic financial services providers, andremoves barriers to the cross border provision of financial services.

Conclusion:The question is how much the presence of foreign financial institutions can assist in

the strengthening of the domestic financial system by introducing global standards and

 practices ? It appears that in most cases, the entry by foreign financial firms, especially in

developing countries, has led to greater stability and soundness in the financial system, notleast because foreign financial firms are subject to monitoring by more advanced supervisory

agencies; and to greater market discipline. Also, there will be better access to foreign savings

 by foreign banks, especially in times of financial turbulence, and increased confidence in thedomestic financial system as a result of foreign presence. This may need to be balanced,

however, against the possibility that the entry of foreign financial firms could add to the ease

of moving savings abroad, and of individuals engaging in the flight of capital. Could this

offset the gains from increased foreign entry?