The Definitions of Financial Intermediaries in the Economy

Definitions of financial intermediary is financial institutions accept money from the depositor or investor funds and borrowers, and the relationship between the income for those seeking in their capital and those seeking credit. Financial intermediaries including savings and credit unions, architecture and loan association, savings Banks, commercial Banks, life insurance company’s credit departments and investment companies. Besides that financial intermediaries are the institutions which are intermediaries between savers and investors, moving funds between the two. Examples include banks, insurance companies, credit unions, mutual funds, pension funds, and finance companies. In addition, the 1999 Gramm-Leach-Bliley Act(GLB) authorized the creation of financial holding companies (FHC) that are allowed to engage in a wide range of financial services, including banking, securities, and insurance activities. Bank is a financial intermediary channels for the equivalent of a deposit-taking and lending practices, either directly or through the capital market.

Banks to provide capital deficit of connection, can provide a residual value. Banks generally is a high standard of standardized industry, government restrictions on the media-bank financial activities, time and place of evolution. The current international bank capital standard is called the new Basel. In some countries such as Germany, banks, historically, have a professional stake in industrial enterprises in other countries like the united States prohibit banks have non-financial companies. Definition of financial institutions is as private or government is state-owned organization that, broadly speaking, presents two behavior of a kind of fund it is the savers and borrowers supplier and customer of capital. Two main types of financial institutions with increasingly fuzzy boundary is first keep banks and credit cooperatives savings to pay interest on the loan from profit, and second is non-depository insurance companies and mutual fund raising money, by selling their policy or stock by units are provided to the public the profit cycle efficiency and profits payable. Financial intermediaries are divided into two types, that is depository institutions and non-depository institutions. The separation is based on the type of account or liability the institution issues. Appendix E contains a chart which illustrates financial intermediaries by type and sources and uses of funds. Depository institutions obtain their funds primarily from deposits from the public. Examples of these institutions include commercial banks, savings and loan associations, savings banks, and credit unions.

From a consumer’s perspective, depository institutions now all provide similar banking services such as car loans, credit cards, home equity lines of credit, mortgage loans, checking accounts, and time deposits. Demand and time deposits account for most of depository institutions’ liabilities. Banks are the largest of the depository institutions, accounting for 23 percent of the total assets of all financial intermediaries in 2000. Savings institutions (S & Ls) and credit unions combined accounted for approximately six percent of the total assets of financial intermediaries in 2000. There are three major types of non-depository financial institutions first is Contractual Savings Institutions, second is Finance Companies and last is Investment Intermediaries. Examples of contractual savings institutions are include insurance companies and private, state, and local government pension funds.

These institutions enter into contracts with customers that are long-term financial arrangements. Insurance or pension payments are usually set for a fixed period of time. Second is finance companies, these companies borrow in the financial markets and lend to businesses and consumers. Included in this group are auto finance companies which are often called captives. Captives are owned by the automobile manufacturer which offers credit to their customers to purchase the automobiles they produce. In total, these companies were about four percent of the industry, as measured by assets, in 2000. Last are investment intermediaries.

Examples of investment intermediaries include mutual funds and money market mutual funds. These investment intermediaries are a fast growing sector of the financial industry. In 1970, mutual funds and money funds were small. By 2000, they controlled more than 23 percent of financial institution assets. In financial institutions transfer of capital between savers and those who need capital take place in the three different way, these is direct transfers of money and securities, investment banking house and financial intermediaries. An investment bank is a kind of financial institutions to help individuals, large enterprises and government through the financing of underwriting and as a representative of clients in securities combinations. Financial intermediary is a financial institution connection surplus and deficit agent. The classic example is the bank’s financial intermediary bank deposits, make into bank loans. Financial intermediaries the entire process, some asset or liability is converted into different asset or liability. So financial intermediaries channel money from those who have extra money depositor to people who may not have enough money to carry out a desired activities. In the United States, financial intermediary is a typical mechanism design, let us borrowers and financial institutions of funds between of indirect impact. That is to say, saver rate providing funds to an intermediary institutions such as bank, and the institutions to fund.

This may be in the form of loans or mortgages. Or, they can put money directly through financial markets, called financial intermediaries For the company of investment Banks also participate in merger and acquisition, and the provision of ancillary services such as market manufacturing, trading derivatives markets, fixed income instruments, foreign exchange, commodities, and equity securities. Telegraphic transfer money or credit transfer is an electronic funds transfer from one person or institution to another place. A wire can be made by a bank account to another bank account or cash through transfer funds of the office. Different telegraphic transfer system and operators offers a variety of options relative to directly resolve and finality and cost, value, and volume of trade. The central bank wire transfers systems, such as the Federal Reserve’s Fed Wire system in the United States are more likely to be summarized calculate RTGS real-time system. The fastest system to provide RTGS available funds, because they provide direct instant and finally publish irrevocable solve GDP into complete of electronic accounts telegraphic transfer system operation. Other systems provide such as chip net settlement, regularly. The more direct settlement system tends to monetary value higher requirement high transaction process, with high transaction costs, and small volume of payments.

Currencies exchange risk because market volatility may decrease direct solution. Securities for money, for the purposes of item, include such things as Euro currency paper, bills of exchange, promissory notes and face value vouchers where the voucher can be redeemed for cash. Securities for money are sometimes exchangeable for cash but always represent a value to the holder. They are often held in place of a debt. The types of investments in financial intermediaries specialize is depository institutions provide mortgages, make loans to businesses and consumers, and invest in United States government and other securities. Insurance companies and pensions funds are the contractual savings institutions, these is receive much of their funds from long-term contracts. Since they have a predictable, long-term flow of funds, contractual savings institutions can invest in longer-term assets, without fear of loss of liquidity. Thus, these intermediaries invest in corporate bonds and stocks, as well as U.S. government and state and local municipal securities. Life insurance companies also make commercial mortgage loans.

Finance companies make business and consumer loans. Automobile manufacturers often have their own finance companies called captives, which provide credit to customers who purchase their particular make of automobile. Some finance companies are a source of credit for higher risk borrowers who cannot qualify for loans from depository institutions.

Investment intermediaries, as the name implies, invest in stocks and bonds, and, in the case of money market mutual funds, in short-term money market instruments. Caused the changes in market share of different types of financial intermediaries over the last three decades is shifts in market shares of the different types of financial intermediaries represent an interesting example of the adjustment of financial markets and institutions to changing economic and regulatory conditions. At the end of the 1970s, short-term market interest rates rose with inflation. However, banks could not pay market interest rates because regulators maintained ceilings on the interest rates banks could pay depositors. In response to this opportunity, money market mutual funds became popular. These money market mutual fund accounts, issued by investment firms, paid market interest rates to small savers by pooling investor funds and purchasing financial instruments. These investments provided savers with higher interest rates than regulated accounts such as passbook savings accounts. Consumer’s rapid acceptance of money market mutual funds suggests that that the higher market interest rates compensated for the lack of deposit insurance on these products. In the 1980s and 1990s, mutual funds were able to broaden their appeal to savers by offering a wide array of stock, bond, and money funds designed to appeal to savers. During the 1990s, the upswing in the stock market typically generated higher returns on stock funds than the market interest rates banks paid on time and savings deposits. As a result of these higher returns, the mutual fund industry, including money market funds, now accounts for more than one-fifth of financial institutions’ assets. The difference between direct and indirect investment is indirect investment occurs when people and businesses borrow and lend through financial intermediaries.

Direct investment occurs when people and businesses borrow and lend directly rather than through intermediaries. Today, many large corporations borrow and lend directly in the financial markets without going through a financial intermediary because they can get better rates by borrowing or lending directly. Commercial paper, a short-term unsecured promissory note issued by a large corporation, provides a good example of direct investment. Corporations might buy commercial paper directly from another firm as an investment rather than putting their funds into a bank that holds commercial paper in its portfolio. Corporations also borrow directly, with guarantees from banks, in the commercial paper market rather than borrowing from a bank. Similarly, small savers often buy Treasury securities directly rather than putting funds into a bank which holds Treasury securities in its portfolio. Besides that, last is a mutual fund. Mutual fund are corporations that accept money from savers and then use these funds to buy stocks, long-term bond, or short term debt instruments issued by business or government units. Conclusion: Definition of mutual funds is open mode fund investment company operation raise shareholders in one group and investment assets, in accordance with the prescribed objectives.

Mutual fund raise money by selling stock fund to the public, like other types of corporations can sell stock itself is open to the public. Mutual funds and then put the money they receive from the sale of their shares and use it to buy all kinds of investment way, such as stocks, bonds, money market instruments. In exchange for funds, they to buy shares of stock, fund in shareholders receive a copy of the international monetary fund equity position, in fact, each of its securities. For most common fund, shareholders are free to sell their shares at any time, although the price mutual-fund shares will fluctuate daily, depending on securities held in the performance of the fund. Mutual fund benefits include diversity and specialized fund management strategy. Mutual fund provide choice, liquidity, and charge fees and convenient, but often need at least investment. An enclosed fund is often incorrectly called mutual funds, but actually is a kind of investment trust.

There are many types of mutual funds, including the aggressive growth fund, fund asset allocation, balanced fund, adjustable fund, a bond fund, capital appreciation fund, cloning funds, close fund, stock fund, crossover fund and tax free.

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