Module 2

Financial
Institutions
and markets
Majeed Hanif
Leddielyn Tomayao
Jacqueline Chelsea Tedoco
 Financial institutions and markets
Most Successful Firms have an ongoing need for funds which
can be obtained from the following external sources:

FINANCIAL FINANCIAL PRIVATE

INSTITUTIONS MARKETS PLACEMENTS
that accepts savings organized forums in the sale of a new
and transfers them to which the suppliers security directly to an
those that need funds and demanders of investor or
various types of funds group of investors
can make transactions (rather than on the
open market)
 Financial
institutions
Next
 Financial institutions
- serve as intermediaries by
channeling the savings of individuals,
businesses, and governments into
loans or investments.

Many financial institutions directly or

indirectly pay savers interest on deposited
funds
Others provide services for a fee
Some financial institutions accept
customers’ savings deposits and lend this
money to other customers or to firms, others
invest customers’ savings in earning assets
or both
Key customers of financial institutions

INDIVIDUALS BUSINESSES GOVERNMENTS

also deposit some of
savings of individuals maintain deposits of
their funds to financial
provide financial institutions (usually in
temporarily idle funds, certain
institutions with a large checking accounts tax payments, and Social
portion of their funds with comm. banks) Security payments in
also borrow funds from also borrow funds from commercial banks.
financial institutions financial institutions indirectly borrow from
(loans) BORROW MORE THAN Financial institutions by selling
THEY SAVE their securities to institutions
SAVE MORE THAN THEY
and governments
BORROW
BORROW MORE THAN THEY
NET SUPPLIER SAVE
OF FUNDS NET DEMANDERS OF FUNDS
Commercial Banks, COMMERCIAL BANKS

Investment banks, are institutions that provide

savers with a secure place to
and the shadow invest their funds and that
offer loans to individual and

banking system business borrowers

INVESTMENT BANKS SHADOW BANKING SYSTEM

are institutions that assist describes a group of institutions

companies in raising capital, that engage in lending activities,
advise firms on major much like traditional banks, but
transactions such as mergers or these institutions do not accept
financial restructurings, and deposits and are therefore not
engage in trading and market subject to the same regulations as
making activities. traditional banks.
 Commercial Banks,Investment banks,
and the shadow banking system
The traditional business model of a commercial bank—taking in
and paying interest on deposits and investing or lending those
funds back out at higher interest rates—works to the extent that
depositors believe that their investments are secure.
Commercial Banks,Investment banks,
and the shadow banking system
GLASS-STEAGALL ACT
•The Glass-Steagall Act was an act of Congress in 1933 that
created the federal deposit insurance program and separated the
activities of commercial and investment banks.

–Repealed in the late 1990s.

 oTHER FINANCIAL INSTITUTIONS

SAVINGS AND LOANS CREDIT UNIONS INSURANCE COMPANIES

Also referred to as S&L or Normally associated Provide individuals and
thrift banks. Unlike with or are an offshoot organizations a way to
commercial banks, the of cooperatives. They are manage risk. They operate
bulk of financial Not open to the general on the principle of pooling
transactions are public. Profit sharing is risks wherein premiums are
dedicated to residential done among members. collected from clients and in
mortgages. exchange, these clients are
protected from the
unexpected.
oTHER FINANCIAL INSTITUTIONS

BROKERAGE INVESTMENT COMPANIES

It earns through Corporations wherein

commissions. They individuals and
facilitate the buying and organizations invest in
selling of securities. investment portfolios that
are managed by
professionals who are tasked
to keep track of market
trends and the performance
of different financial
products or instruments.
Financial
markets
Next
 Financial MARKETS
- are forums in which suppliers of
funds and demanders of funds
can transact business directly.

(organized forums in which the

suppliers and demanders of
various types of funds can make
transactions)
Whereas the loans made by financial
institutions are granted without the direct
knowledge of the suppliers of funds
(savers), suppliers in the financial markets
know where their funds are being lent or
invested.
Financial MARKETS
To raise money, Firms can use:

PRIVATE PLACEMENT PUBLIC OFFERING

involves the sale of a the sale of either bonds
new security directly to or stocks to the general
an investor or group of public. (method usually
investors, such as an used by most firms)
insurance company or
pension fund.
 Financial MARKETS
Primary Market vs Secondary Market

PRIMARY MARKET SECONDARY MARKET

•is the financial market in are financial markets in which
which securities are initially preowned securities (those
issued; the only market in that are not new issues) are
which the issuer is directly traded.
involved in the transaction.
 2 key financial markets
The Money Market
- is created by a financial relationship between
suppliers and demanders of short-term funds
(funds with maturities of 1 year or less).

It exists because some individuals,

businesses, governments, and financial
institutions have temporarily idle funds
that they wish to invest in a relatively safe
interest-bearing asset while some of the
same are looking for temporary or seasonal
funds
 2 key financial markets
The Money Market
- Most money market transactions
are made in marketable securities
which are short-term debt
instruments, such as U.S. Treasury
bills, commercial paper, and
negotiable certificates of deposit
issued by government, business, and
financial institutions, respectively.

- Investors generally consider

marketable securities to be among
the least risky investments available.
 2 key financial markets
The Money Market
- The international equivalent of the US domestic money market
is called the Eurocurrency market.

-This market for short-term bank deposits is denominated in U.S.

dollars or other major currencies.

-Eurocurrency deposits arise when a corporation or individual

makes a bank deposit in a currency other than the local currency
of the country where the bank is located.

-For example, if a multinational corporation were to deposit U.S.

dollars in a London bank, this action would create a Eurodollar
deposit (a dollar deposit at a bank in Europe).
 2 key financial markets
The Money Market

-The Eurocurrency market has grown rapidly mainly because it is

unregulated by the issuer of the currency (as the deposit is in a
different country with a different domestic currency) and because
it meets the needs of international borrowers and lenders.
 2 key financial markets
The Capital Market
- The capital market is a market that enables suppliers and demande
of long-term funds to make transactions.
- The key capital market securities are bonds (long-term debt) and
both common and preferred stock (equity, or ownership).
–Bonds are long-term debt instruments used by businesses
and government to raise large sums of money, generally from
a diverse group of lenders.
–Common stock are units of ownership interest or equity in a
corporation.
–Preferred stock is a special form of ownership that has
features of both a bond and common stock.
 2 key financial markets
The Capital Market - Role of the Capital Market
From a Firm’s Perspective

- the role of capital markets is to be a liquid market where firms

can interact with investors in order to obtain valuable external
financing resources.

From an Investor’s Perspective

- the role of a capital market is to be an efficient market that

establishes correct prices for the securities that firms sell
and allocates funds to their most productive uses.
 2 key financial markets
The Capital Market - Role of the Capital Market
- An efficient market allocates funds to their most productive
uses as a result of competition among wealth-maximizing
investors and determines and publicizes prices that are
believed to be close to their true value.

- In an efficient market, the stock price is an unbiased estimate of

its true value, as investors who compete with one another for
information take actions (buy undervalued stocks or sell overvalued
stocks which would in turn raise or lower the price of a stock
respectively[Law of Supply and demand] which bring the market to
equilibrium) based on newly available information such that the
stock price reflects all available information about a stock
 2 key financial markets
The Capital Market - Role of the Capital Market
For Example:

is currently trading at

Previously
unpublished
postive news
comes out
 2 key financial markets
The Capital Market - Role of the Capital Market
For Example:

Investors raise their

estimate for the true
value of PLDT’s stock
price at 45

As more investors try to buy the

undervalued PLDT stock against
a few willing to sell, the actual
market price of PLDT’s stock will
more or less increase to 45
 Role of financial intermediaries in
financial markets
1.Reduce Cost – Without intermediaries, it will be harder for
savers and borrowers of funds to transact with each other.
2.Diversification – They help savers lower risk by helping
them choose the types of financial products that they will
include in the portfolio.
3.Pooling of Funds – They can pool funds from several
saversin order to grant a single borrower a loan involving a
huge sum of money.
4.Financial Flexibility – They offer a variety of financial
products to both savers and borrowers of funds.
Flow of Funds in a Business Organization
Flow of Funds With financial institutions
 Thank You
for Listening!