Chapter 2. Financial Intermediaries & Financial Innovation

Chapter 2. Financial Intermediaries & Financial Innovation • • • •

financial institutions role of financial intermediaries

asset/liability management financial innovation

I. Financial Institutions •

provide financial services transforming financial assets (own one type, issue another type) trade financial assets create & sell assets on behalf of others investment advice & management  –

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depository institutions acquire funds mostly from deposits nondepository institutions acquire funds from other sources  –

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II. Role of Financial Intermediaries •

raise funds FOR direct investment their assets stock, bonds, loans raise funds BY indirect investment issue their own liabilities accept deposits, sell insurance policies sell mutual funds shares  –

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indirect investments allow investors •

choice of desired maturity maturity intermediation diversification w/ small amount of capital lower transactions costs alternative payment mechanisms  –

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III. Asset/liability Managment •

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liabilties = claims on financial institution liabilities differ in the certainty about their amount and timing

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old way: bank originates mortgage bank holds mortgage & collects payments until loan is paid new way: bank originates mortgage bank sells mortgage to Fannie Mae bank gets fee for servicing mortgage Fannie Mae issues securities  –

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advantages • •

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bank capital not tied up in loans institutions specialize in part of process pool of loans is diversified (less risk) loans are more liquid easier to get cheaper to get  –

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