1、Money and Capital Markets,17,C h a p t e r,Eighth Edition,Financial Institutions and Instruments in a Global Marketplace,Peter S. Rose,McGraw Hill / Irwin,Slides by Yee-Tien (Ted) Fu,Mutual Funds, Pension Funds, Insurance Companies, Finance Companies, and Other Financial Institutions, Learning Objec

2、tives ,To explore the many roles played by mutual funds, pension funds, insurance companies, finance companies, mortgage banks, and security dealers. To discover the different services they offer. To examine their principal sources and uses of funds. To understand the key problems they face today.,M

3、utual Funds (Investment Companies),Mutual funds, or investment companies, direct the savings of individual investors into bonds, stocks, and money market securities. A small saver who buys mutual fund shares gains opportunities for capital gains and indirect access to higher yielding securities that

4、 can be purchased only in large blocks, and yet still enjoys price stability, low risk, and high liquidity.,Mutual Funds (Investment Companies),Investment companies first developed in the U.K., and then made their appearance in the U.S. in 1924 as a vehicle for buying and monitoring subsidiary corpo

5、rations. Since then, the traditionally stock-investing industry has seen many innovations bond funds, money market funds, index funds, global funds, vulture funds, small/mid/large-cap investment companies, and hedge funds.,Mutual Funds (Investment Companies),Investment companies have a favorable tax

6、 situation they pay no federal taxes on income generated by their security holdings, provided their earnings flow through to their customers.,TAX,Mutual Funds (Investment Companies),Open-end investment companies, or mutual funds, buy back (redeem) their shares any time the investor wishes, and sell

7、shares in any quantity demanded. The price of each open-end company share is equal to the net asset value of the fund that is, the difference between the values of its assets and liabilities divided by the volume of shares issued.,Mutual Funds (Investment Companies),Closed-end investment companies s

8、ell only a specific number of ownership shares, which usually trade on an exchange. They offer “double discounts” discounted prices on the stocks they hold and discounted share prices to buy into the fund itself.,Mutual Funds (Investment Companies),Source: Board of Governors of the Federal Reserve S

9、ystem,17 - 8,Mutual Funds (Investment Companies),Investment companies adopt many goals. Growth funds invest mainly in common stocks offering strong growth potential to achieve long-term capital appreciation. Income funds typically purchase stocks and bonds paying high dividends and interest to gain

10、current income. Balanced funds acquire bonds, preferred stock, and common stock that offer both capital gains (growth) and current income.,Mutual Funds (Investment Companies),It is not clear if mutual funds hold a significant advantage over other investors in seeking the highest returns available in

11、 the financial marketplace. With the possible exception of index funds, these companies may roll over their portfolios too rapidly, running up the cost of managing the fund and reducing earnings.,Pension Funds,Pension funds protect individuals and families against loss of income in their retirement

12、years by allowing workers to set aside and invest a portion of their current income.,Pension Funds,Defined benefit plans promise a specific monthly or annual payment to workers when they retire based upon the size of their salary during their working years and their length of employment. Such progra

13、ms have the advantage of guaranteed income, but an employee who leaves early or is dismissed before retirement may get little or nothing.,Pension Funds,Defined contribution plans specify how much must be contributed each year in the name of each worker, but the amount to be received when retirement

14、is reached will vary depending upon the amount saved and the returns earned on accumulated savings. The funds saved belong to the employee, and are portable.,Pension Funds,Pension Funds,Pension funds are long-term investors with limited need for liquidity. Their incoming cash receipts are known with

15、 considerable accuracy, and their cash outflows are not difficult to forecast. However, the pension fund industry is closely regulated in all its activities.,Pension Funds,Source: Board of Governors of the Federal Reserve System,17 - 16,Pension Funds,Source: Board of Governors of the Federal Reserve

16、 System,17 - 17,Pension Funds,There appear to be serious problems ahead for both the growth and stability of pension plans. The rising proportion of pension beneficiaries to working contributors, related to the aging of the population. The increasing cost of maintaining pension programs, especially

17、defined benefit plans. The rising cost of government regulation with respect to reporting requirements and employee rights.,Life Insurance Companies,Life insurance companies offer their customers a hedge against the risk of earnings losses that often follow death, disability, or retirement. Policyho

18、lders receive risk protection in return for their payment of policy premiums. Additional funds to cover claims and expenses are provided by the earnings from the investments made by the insurance companies.,Life Insurance Companies,The principal kinds of policies sold by life insurance companies inc

19、lude ordinary or whole life, term life, endowment, group life, industrial life, universal life, variable life, adjustable life, and credit life insurance. Many policies combine financial protection against death, disability, and retirement with savings plans to help the policyholder prepare for some

20、 important future financial need.,Life Insurance Companies in the U.S.,Data Source: American Council of Life Insurers,Life Insurance Companies,The insurance business is founded upon the law of large numbers a risk that is not predictable for one person can be forecast accurately for a sufficiently l

21、arge group. So, life insurers invest the bulk of their funds in long-term securities, and frequently follow a “buy and hold” strategy. They generally pursue income certainty and safety of principal in their investments.,Life Insurance Companies,Source: Board of Governors of the Federal Reserve Syste

22、m,17 - 23,Life Insurance Companies,The majority of the close to 1,700 U.S. life insurance companies are stockholder-owned corporations. The rest are mutuals that issue ownership shares to their policyholders. The population reached a high of almost 2,350 in 1988 and has been falling ever since. Most

23、 notably, the largest life insurers today are converging with other financial institutions to form huge multi-product businesses.,Life Insurance Companies,Life insurers are under increasing pressure to develop new services. Among the most important recent innovative services are universal and adjust

24、able life insurance, variable premium and variable life insurance, mutual funds, tax shelters, venture capital loans, guaranteed investment contracts, corporate cash management systems, and deferred annuities.,Property-Casualty (P/C) Insurance Companies,Property-casualty (P/C) insurers (insurance su

25、permarkets) offer protection against events like fire, theft, bad weather, and negligence that result in injury to persons or property. Traditional P/C insurance covers automobile, fire, marine, personal liability, and property. Many P/C insurers have also branched into health and medical insurance,

26、 clashing head-on with life insurers.,Property-Casualty (P/C) Insurance Companies,There are nearly 3,000 P/C companies in the U.S., of which about three quarters are stockholder-owned, while the rest are mutuals. P/C insurance is a riskier business than life insurance P/C claims are less predictable

27、 and inflation has a potent impact. Moreover, the P/C risk patterns appear to be changing. For example, there has been a rapid rise in product liability claims.,Property-Casualty (P/C) Insurance Companies,Source: Board of Governors of the Federal Reserve System,17 - 28,Property-Casualty (P/C) Insura

28、nce Companies,Like life insurance firms, P/C insurers plan to break even on their insurance product lines and earn most of their net return from their investments. However, achieving the break-even point is difficult. In fact, P/C insurers have experienced billions of dollars in underwriting losses

29、in recent years.,Property-Casualty (P/C) Insurance Companies,The earnings and sales revenue of the P/C insurance industry reflect the ups and downs of the business cycle. Moreover, inflation pushes up the cost of claims, while intense competition holds premium rates down. To improve their future sit

30、uation, P/C insurers must become more innovative in developing new services.,Finance Companies,Finance companies grant credit to businesses and consumers for a wide variety of purposes, including the purchase of business equipment, automobiles, vacations, and home appliances. As such, they are somet

31、imes called department stores of consumer and business credit.,Finance Companies,Consumer finance companies make personal cash loans to individuals, such as home equity loans and loans to support the purchase of passenger cars and home appliances. Sales finance companies make indirect loans to consu

32、mers by purchasing installment paper from dealers selling consumer durables. Commercial finance companies focus mainly on extending credit to business firms.,Finance Companies,Finance companies are heavy users of debt in financing their operations. The lack of an extensive network of branch offices

33、has put many finance companies at a disadvantage. The number of finance companies is on the decline, although their average size has grown considerably.,Other Financial Institutions,Security dealers “take a position of risk” in securities. They trade in securities with the expectation of earning a p

34、rofitable spread. Investment bankers assist businesses and governments in issuing debt and stock. Venture capital firms provide long-term capital financing for new businesses and rapidly emerging companies.,Other Financial Institutions,Mortgage banks work with other businesses on real estate develop

35、ment projects and sell the resulting loan instruments to other investors. Real estate investment trusts (REITs) fund commercial and residential real estate projects. Leasing companies purchase business equipment and other assets and then lease them in return for rental fees.,Trends Affecting All Fin

36、ancial Institutions Today,There are several major trends affecting virtually all financial institutions today: increasing cost pressures consolidation service diversification and homogenization convergence technological revolution global competition regulatory cooperation and harmonization deregulat

37、ion,Money and Capital Markets in Cyberspace,Mutual funds are discussed at /, /, and More information on pension funds can be found at and Websites for the insurance industry include /, and /.,Money and Capital Markets in Cyberspac

38、e,Visit some finance companies and investment banks like and ,Chapter Review,Mutual Funds (Investment Companies) The Background of Investment Companies Tax Status of the Industry Open-End and Closed-End Investment Companies Goals and Earnings of Investment Companies,Chapter Review,Pension Funds Grow

39、th of Pension Funds Investment Strategies of Pension Funds Pension Fund Assets Factors Affecting the Future Growth of Pension Funds,Chapter Review,Life Insurance Companies The Insurance Principle Investments of Life Insurance Companies Sources of Life Insurance Company Funds Structure and Growth of

40、the Life Insurance Industry New Services,Chapter Review,Property-Casualty (P/C) Insurance Companies Makeup of the P/C Insurance Industry Changing Risk Patterns in Property/Liability Coverage Investments by P/C Companies Sources of Income Business Cycles, Inflation, and Competition,Chapter Review,Fin

41、ance Companies Different Finance Companies for Different Purposes Growth of Finance Companies Methods of Industry Financing Recent Changes in the Character of the Industry Other Financial Institutions Trends Affecting All Financial Institutions Today,Money and Capital Markets,18,C h a p t e r,Eighth

42、 Edition,Financial Institutions and Instruments in a Global Marketplace,Peter S. Rose,McGraw Hill / Irwin,Slides by Yee-Tien (Ted) Fu,The Regulation Of The Financial Institutions Sector, Learning Objectives ,To explore why financial institutions are one of the most regulated industries in the modern

43、 world. To discover the many types of regulation, and to understand how the financial institutions have been affected. To examine the recent global trend toward deregulation.,The Reasons Behind Regulations,Concern for the safety of the publics funds. To promote public confidence in the system. To en

44、sure equal opportunities and fairness in the publics access to financial services. To prevent excessive money creation, and hence excessive inflation. To aid “disadvantaged” economic sectors. To ensure that important financial services are provided reliably and at a reasonable cost.,Do Regulations B

45、enefit or HarmFinancial Institutions?,Regulations subsidize the growth of financial institutions and protect them from competition. Regulations tend to increase public confidence. Regulations spawn innovative escapes (regulatory dialectics) through loopholes in the regulations.,Regulations can benef

46、it financial institutions.,Do Regulations Benefit or HarmFinancial Institutions?,Regulatory dialectics are not the most productive form of innovation. The time and energy spent on regulatory compliance activities are costly.,Regulations can harm financial institutions.,The Regulation of Commercial B

47、anks,Due to their importance in the financial system, commercial banks are typically the most regulated of all financial institutions. Responsibility for regulating U.S. banks today is divided among three federal banking agencies the Federal Reserve System, the Comptroller of the Currency, and the F

48、ederal Deposit Insurance Corporation and the state banking commissions of the 50 states.,The Federal Reserve System,Supervises and regularly examines all member banks operating in the U.S. Imposes reserve requirements on deposits held by all depository institutions and grants temporary loans of rese

49、rves. Must approve all applications of member banks to merge, establish branches, or exercise trust powers.,The Federal Reserve System,Supervises international banking corporations organized by U.S. banks and foreign banks operating in the U.S. Regulates and examines all bank and financial holding c

50、ompanies in the U.S. Conducts monetary policy to control the growth of money and credit in the financial system.,The Comptroller of the Currency,Issues charters for new national banks. Regulates and regularly examines all national banks. Must approve all national banks applications for new branch of

51、fices, trust powers, mergers, and consolidations. Declares insolvent national banks closed.,Federal Deposit Insurance Corporation,Insures deposits of savings institutions (thrifts) and banks conforming to its regulations up to $100,000, and acts as receiver for all national banks declared insolvent

52、and for state banks if requested by a state banking commission. Must approve applications by insured banks to set up branches, merge or exercise trust powers Requires all insured banks to submit reports on their financial condition.,.,State Banking Commissions,Issue charters for new state banks. Sup

53、ervise and regularly examine all state-chartered banks. Approve applications by state banks to form a holding company, acquire subsidiaries, or establish branches. Declare insolvent state-chartered banks closed and appoint a receiver to liquidate or otherwise dispose of the assets of failed state ba

54、nks.,Regulations ControllingThe Geographic Expansion of Banks,The new geographic markets that banks can enter have been tightly controlled.,National Bank Act (1863-4) Banking Act (1933) Bank Holding Company Act (1956, amended 1970) Bank Merger Act (1960, amended 1966) Financial Institutions Reform,

55、Recovery, and Enforcement Act (1989) Riegle-Neal Interstate Banking and Branching Efficiency Act (1994),Regulation of the Services Banks Can Offer,Regulations controlling the services banks can offer have also been tight out of concern for bank safety and a desire to protect certain nonbank financia

56、l institutions from tough bank competition.,Glass-Steagall Act (Banking Act) (1933) Financial Services Modernization (Gramm-Leach-Bliley) Act (1999),The Rise of Disclosure Laws in Banking,One rapidly expanding area of U.S. banking regulation today concerns disclosure rules.,Truth in Lending Act (196

57、8) Home Mortgage Disclosure Act (1975) Community Reinvestment Act (1977) Truth in Savings Act (1991) FDIC Improvement Act (1991) Financial Services Modernization (Gramm-Leach-Bliley) Act (1999),The Growing Importance ofCapital Regulation in Banking,Another major trend reshaping the regulation of ban

58、ks and other financial institutions today centers upon their capital.,Basle Agreement (1988) FDIC Improvement Act (1991),The Unfinished Agenda for Banking Regulation,Slowly, banking is experiencing an era of deregulation, as legal constraints are lifted on a variety of banking activities. Supervisio

59、n of financial institutions in the future will rest primarily upon: government examinations (of market data and the firms risk management systems) capital requirements, and market discipline.,The Regulation of Nonbank Thrift Institutions,Credit Unions Chartering: National Credit Union Administration (NCUA) / state New branches: No approval required Mergers & acquisitions: NCUA / state Deposit insurance: NCUA Share Insurance Fund / state Supervision: NCUA / state Depository Institutions Deregulation and Monetary Control Act (1980),The Regulation of Nonbank Thrift Institutions,Sa