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DrakeDRAKE UNIVERSITY
Fin 129
Finance 129
Financial Institutions Management
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Fin 129Syllabus
TextbooksFinancial Institutions Management
PrerequisitesFinance 101, Econ 105, Junior Standing
Rules of the GameOffice Hours /Contact Information GradesWebsite
AssignmentsExaminations DisabilitiesAcademic Misconduct Evaluations
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Fin 129Academic Misconduct
Examples (include but not limited to:)Copying from another student’s paper, laboratory report or other report, or computer files and listings;Using, during a test material and/or devices not authorized by the person in charge of the test;Without the instructors permission, collaborating with another, knowingly assisting another or knowingly receiving the assistance of another in writing an examination or in satisfying any other course requirement;
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Fin 129Misconduct Continued
Incorporating into written assignments materials written by others without giving them credit, or otherwise improperly using information written by others (including that which may be stored on computer disks or other technological devises), or buying and submitting commercially prepared papers as one’s own work;Submission of multiple copies of the same or similar papers without prior approval of the instructors involved;Claiming as one’s own work that which was done by tutors or others with no mention of credit to or the assistance of those persons.
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Fin 129Grades
Individual Assignments 200 points (20%)Sept 21st 50 points Oct 10th 50 points Oct 26th 50 pointsNov 30th 50 points
Group Assignments (10%) 100 points (27.5%)
Tests 70%Sept 25th and Nov 6th 200 points each Final 300 pts
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Fin 129Course Description
Bank Vs. Financial Institutions Management
Financial Services Modernization Act 1999 (Gramm-Leach Bliley Act)
Breaking down the barriers between Banking, Investment Banking and Insurance.
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Fin 129The Modern Bank
Services Provided:Credit (loan) servicesThrift (savings) servicesPayment (transaction) servicesInvestment and financial planning servicesInvestment Banking (security underwriting)Brokerage (trading) servicesInsurance ServicesOther
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Fin 129Course Topics
Depository Institutions and the Financial System.Introduction, financial intermediation
Intro to ManagementUBPR, Dupont Analysis, Financial Analysis
Measuring Risk in FI’sGAP analysis (Rate sensitive assets and liabilities)Market, Liquidity, Credit, Operational and other Risks
Managing RiskLiability and Liquidity Risk, Capital Adequacy
International AspectsForeign Exchange and Sovereign Risk Geographic Diversification
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Fin 129For Next Time
Go to the class website and download notes.Download outside readings and look them over.Think about who you want to work with for the group projects.If you do not receive a welcome e-mail from me, send me an e-mail
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Fin 129Background
Financial Institutions (FI) – Channel funds from individuals and institutions with a surplus of funds to (suppliers) to those with a shortage or funds (users of capital).
Banks, Credit UnionsInsurance CompaniesMutual FundsPension Funds
Total assets 2005 = $48.948 Trillion
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Fin 129
Banking24%
Insurance12%
Securites21%
Pensions17%
Gov't Related13%
Other13%
Distribution of Assets
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Fin 129Categories of FI’s
Depository InstitutionsBanks, Savings and loans, Thrifts, Credit Unions
Nondepository InstitutionsInsurance Co’s, Investment Banks, securities firms, mutual funds and finance companies
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Fin 129Similar Risks and Rewards
All Financial Institutions:Hold Assets that are subject to default (or credit) riskAre exposed to interest rate risk based on maturity of assets and liabilitiesExposed to liquidity (withdraw) risksFace operational costs and risks
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Fin 129Without FIs
Corporations
(net borrowers))
Households
(net savers)
Cash
Equity & Debt
©2003 McGraw-Hill Companies Inc. All rights reserved
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Fin 129Problems w/o FI’s
Monitoring is costlyExposes households to increased risk
Lack of LiquidityHouseholds may not be able to easily convert claims to cash
Price RisksPrices fluctuate
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Fin 129With FIs as Intermediaries
Cash
Households Corporations
Equity & Debt
FI
(Brokers)
FI
(Asset Transformers)
Deposits/Insurance Policies
Cash
©2003 McGraw-Hill Companies Inc. All rights reserved
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Fin 129Special Roles played by FI’s
Economy - Wide ServicesInformation, Liquidity, Price risk reduction, Transaction cost and Maturity intermediation services
Institution Specific ServicesMonetary policy transmission (depository Institutions), Credit allocation (thrifts, farm banks), Intergenerational Transfers (Insurance and pensions, payments services (depository institutions) and Denomination intermediation
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Fin 129Roles played by FI’s
Brokerage FunctionResearch and information provider (reduces information costs such as agency costs)Economies of Scale (decreases transaction costs and information costs)
Asset – Transformation FunctionPurchase primary claims and issue secondary claims (reducing contracting costs)Allows for risk sharing via diversification (reduces price and liquidity risk)
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Fin 129Other Functions
Maturity IntermediationProvides households with desirable maturitiesIntermediaries are willing to accept longer term risks and finance them with short term deposits.
Denomination IntermediationCommercial paper is issued in $250,000 units, too large for most households
Payment MechanismFacilitate the payment of claims w/o cash.
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Fin 129Special Roles played by FI’s
Transmission of Monetary PolicyThe liquid nature of depository institutions make them the main way monetary policy is transmitted to the public
Credit AllocationPrimary suppliers of capital to special sectors of the economy (Residential lending for example)
Intergenerational Transfer of WealthInsurance and pension funds
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Fin 129
The Impact of FI’s on Economic Growth
Traditional Economic Theories of GrowthLabor Usage and Capital AccumulationLimited explanation due to decreasing marginal returns to capital, sustained growth requires productivity growth
New Growth TheoryTechnological change increases productivity that offsets diminishing marginal returnsTermed “Endogenous Growth”
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Fin 129
The Impact of FI’s on Economic Growth
Financial Development’s ImpactPromotes Capital Accumulation & Productivity GrowthRajan and Zingales (1998)
Young firms in higher productivity sectors depend upon external financing and benefit from low cost financing associated with financial development
Galindo, Schiantarelli, and Weiss (2002)Financial liberalization in developing economies improves capital allocation
Both Studies stress the importance of the quality of regulation, supervision and enforcement.
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Fin 129Regulation
Given their vital role in the economy FI’s are highly regulated. The goal of this regulation is to protect against a disruption in the services they offer (provide confidence in the system).Some segments of the population could be discriminated against without regulation (race, gender etc)The difference the private benefits and private costs of regulation are the net regulatory burden.
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Fin 129
Safety and Soundness Regulation
Protects borrowers and depositors against failure of the FIDiversification requirementsMinimum capital to asset ratiosGuaranty funds provisionsMonitoring and surveillance
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Fin 129Monetary Policy Regulation
Since Financial Intermediaries serve as a conduit for monetary policy they merit special regulation.Reserve requirements, for example.Might make control of monetary policy more predictable.
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Fin 129Credit Allocation Regulation
Supports lending to portions of the economy deemed socially important (housing and farming are two examples).
Requiring a % of assets in a particular sector of the economy for example. Also interest rate restrictions.
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Fin 129
Consumer Protection Regulation
Home Mortgage Disclosure ActPrevents discrimination in lending based upon gender, race, age, or income. Requires standardized form on why credit is granted or deniedMay provide a heavy net regulatory burden without an offsetting social benefit.
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Fin 129
Investor Protection Regulation
Protection of investors that use investment banks directly. Insider trading restrictions, lack of disclosure and breach of fiduciary responsibility are examples.
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Fin 129Entry Regulation
Barriers to entry can promote safety and soundness.Also impose costs on current market participants.
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Fin 129Trends in the US
Bank Produced Insurance Rev
$ Billions
% change1999 2006
Annuities 24.2 51.6 113.2
Commercial 4.4 14.2 222.7
Property Casualty 3.1 6.3 103.2
Credit Coverage 2.9 3.6 24.1
Individual Life/Health
1.8 2.4 33.3
Total 36.4 78.1 114.6http://www.financialservicesfacts.org/financial2/convergence/banks/