Introduction to PBF

8/10/2019 Introduction to PBF

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Introduction

Principles of Banking and Finance


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Financial Systems

an overview of financial systems, their

functions and general structure.


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Functions of financial systems

provide the mechanisms by which funds can betransferred from units in surplus to units with ashortage of funds in order to directly orindirectly facilitate lending and borrowing

(as shown in Figure 2.1)

enable wealth holders to adjust the compositionof their portfolios

provide payment mechanisms

provide mechanisms for risk transfer


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Figure 2.1


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The 3 Major Entities

Nature and characteristics of the three

major entities that compose financial

systems.

Financial intermediaries, securities and

financial markets


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Financial markets

markets in which funds are moved from

people who have an excess of available

funds (and lack of investment

opportunities)

to people who have investment

opportunities (and lack of funds).


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Financial markets

(such as bond and stock markets) are

markets in which securities are traded.


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Stock Certificates


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Bond


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Portfolio


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Treasury Bills


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Securities

Securities (also called financialinstruments) are financial claims on the

issuersfuture income or assets.

They represent financial liabilities for the

individual or firm that sells them

(borrower or issuer of the financial

claim) in return for money, and financial

assets for the buyer (lender or investorin the financial claim).


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Financial intermediaries

are economic agents who specialise in

the activities of buying and selling (at

the same time) financial contracts

(loans and deposits) and securities(bonds and stocks).

Note that financial securities are easily

marketable, while financial contractscannot be easily sold (marketed).


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Depository institutions

Depository institutions: intermediaries

with a significant proportion of their

funds derived from customer deposits

include: commercial banks savingsinstitutions and credit unions.


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Commercial banks

Commercial banks accept deposits

(liabilities) to make loans (assets)

and to buy government securities.

Deposits are broad in range, including

checkable deposits (deposits on which

cheques can be written),


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Commercial banks

Savings deposits (deposits that are

payable on demand, but do not allow

depositors to write cheques), time

deposits (deposits with a fixed term tomaturity).

Loans include consumer, commercial

and mortgage loans.


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Foreign Bank


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Savings and loan associations

Historically savings and loan

associations (S&Ls) and thrift

institutions have concentrated mostly on

residential mortgages by acquiringfunds primarily through savings deposits


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Credit unions

Credit unions are non-profit institutions

mutually organised and owned by their

members (depositors).

Their primary objective is to satisfy thedepository and lending needs of their

members, who have to belong to a

particular group (identified occupation,association, geographical location).


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Contractual savings

institutions Contractual savings institutions acquire

funds at periodic intervals on a

contractual basis.

The industry is classified into two majorgroups:

insurance companies and pension

funds.


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Contractual savings

institutions The liquidity of their assets is less

important than for depository institutions

because they can predict with

reasonable accuracy the futurepayments due to their customers.

As a consequence they invest their

funds in long-term securities (such as corporate bonds, stocks and

mortgages).


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Insurance companies

The primary objective of insurance

companies is to protect individuals and

firms (known as policy-holders) from

adverse events. Insurance companies

receive premiums from policy-holders,

and promise to pay compensation to

policy-holders if particular events occur.


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Insurance companies

There are two main segments in the

industry: life insurance on the one hand,

and property and causality insurance on

the other.


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Pension funds

Pension funds provide retirement

income (in the form of annuities) to

employees covered by a pension plan.

They receive contributions fromemployers or employees and invest

these amounts in corporate bonds and

stocks. There are private pension fundsand public pension funds.


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Investment intermediaries

Investment intermediaries comprise

mutual funds, finance companies,

investment banks and securities firm.s


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Mutual funds

Mutual funds pool resources from many

individuals and companies and invest

these resources in diversified portfolios

of bonds, stocks and money marketinstruments.


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Finance companies

Finance companies make loans to

individuals and corporations by

providing consumer lending, business

lending and mortgage financing. Some of their loans are similar to those

provided by commercial banks


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Three major types of finance

companies: Sales finance institutions that make

loans to customers of a particular

retailer or manufacturer (e.g. Ford Motor

Credit). Personal credit institutions that make

loans to consumers perceived as too

risky by commercial banks (e.g.Household Finance Corp).


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Three major types of finance

companies Business credit institutions that provide

financing to companies, especially

through equipment leasing and factoring

(purchase by the finance company ofaccounts receivable from corporate

customers).


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Group Discussion

Throughout this guide, there are a lot of

key terms, all collected in the Key

terms section at the end of each

section. Compile your own glossary withfull definitions and comments on each of

these terms, and use it for revision.

Documents

Introduction to PBF