Chapter 3:Financial Institutions and

Operations

Contents
 Central Banks
 Depository Institutions
 Commercial banks
 Saving and Loan Associations
 Saving Banks
 Credit Unions
 Non-Depository Institutions
 Insurance companies
 Mutual funds
 Pension funds
 Investment Banking Firms
Central Banks
 Nature of Central Banks:
 A central bank, reserve bank, or monetary authority is a
banking institution granted the exclusive privilege to lend a
government its currency.
 A central bank is the apex bank in a country.
 It is called by different names in different countries:

 The bank of England

 The federal Reserve System in America
 The Bank of France in France
 National Bank of Ethiopia in Ethiopia
 State Bank of Pakistan
Functions of Central Bank

1. Regulator of currency
2. Banker, Fiscal Agent and Advisor to the Government
3. Custodian of Cash reserve of Commercial Banks
4. Custody and Management of Foreign Exchange
Reserves
5. Lender of Last resort
6. Clearing House for transfer and settlement
7. Controller of Credit
1. Regulator of currency

 It is the bank of issue. It has monopoly of notes (legal

tender money) issue.
 This monopoly of issuing notes has the following
benefits:
 Uniformity in the notes issued which helps in facilitating
exchange and trade.
 Enhances stability in the monetary system and creates
confidence among the public
 The central bank can restrict or expand the supply of cash
according to the requirement of the economy
2.Banker, Fiscal Agent and Advisor to the Government

 As banker to the government the central bank:

 bank keeps the deposits of the government and
makes payment on behalf of the government (state
and/or central)
 But it does not pay interest on goverment deposits

 It buys and sells foreign currency on behalf of the

government
 It keeps the stock of gold of the government

 Thus, it is the custodian of government money and

wealth.
2. Banker, Fiscal Agent and Advisor to the Gov’t ….Cont’d

 As fiscal agent of the government Central bank:

 Makes short term loans to the government
 It floats loans, pays interest on them, and finally
repays them on behalf of the government.
 Thus, it manages the entire public debt
2. Central Bank as Banker, Fiscal Agent and Advisor to the Gov’t
….Cont’d

 As Advisor of the government the central

bank
 Advises the government on such issues as
 economic and monetary matters as controlling
inflation or deflation,
 devaluation or revaluation of the currency,
 Deficit financing
 Balance of payment etc
3. Custodian of Cash Reserve Requirement of Comm. Banks

 Comm. Banks are required to keep reserve equal

to a certain percentage of both time and
demand deposits with the Central bank.
 It is on the basis of these reserve that central
bank transfers funds from one bank to another
to facilitate clearing of checks.
 The central bank acts as the custodian of the
cash reserve requirement of commercial banks
and helps in facilitating their transactions.
4.Custody and Management of Foreign Exchange

 It keeps and manages the foreign exchange reserve of

the country
 It sells gold at fixed price to the monetary authority of
other countries
 It buys and sells foreign currencies at international
prices
 It fixes the exchange rates.
 It manages exchange control operations by supplying
foreign currencies to importers and persons visiting
foreign countries on business, studies, etc in keeping
with the rules laid down by the government.
5.Central Bank Lender of Last resort

 As lender of last resort, the central bank grants

accommodations in the form of re-discounts
and collateral advances to commercial banks,
bill brokers, dealers, or other financial
institutions
 This facilities help such institutions in order to
help them in times of stress so as to save
financial structure of the country from collapse.
 6. Clearing House for transfer and settlement

 It acts as a clearing house for transfer and

settlement of mutual claims of commercial
banks
7. Controller of Credit

 This is the most important function of central bank in

order to control inflation and deflation.
 Additional controlling functions of Central banks
include the supervising and controlling of
commercial banks:
 Issue of licences
 The regulation of branch expansion

 To see that every bank maintains the minimum paid up

capital and reserve as provided by law
 Inspection or auditing the accounts of banks
7.Controller of Credit…. Cont’d

 To approve the appointment of chairpersons and

directors of such banks in accordance with the rules
and qualifications
 To control and recommend merger of weak banks
in order to avoid their failures and to protect interest
of depositors
 To recommend nationalization of certain banks
to the government in public interest
 To publish periodical reports relating to different
aspects of monetary and economic policies
Central Bank and objectives of Credit Control

 The credit control is the means to control the lending

policy of Commercial banks by the central bank to
achieve the following objectives
 To stabilize the internal price level
 To stabilize the rate of foreign exchange
 To protect the outflow of gold
 To control business cycles
 To meet business needs
 To have growth with stability.
Monetary Policy (MP)
 Definition of MP:
 Monetary policy: the setting of the money supply
by policymakers in the central bank.
 MP refers to credit control measures adopted by
central banks of a country
 MP refers to a policy employing central bank’s
control of the supply of money as an instrument
for achieving the objective of general economic
policy.
 MO is any conscious action undertaken by the
monetary authorities to change the quantity,
availability, or cost of money.
Money Supply
 The money supply (or money stock):
the quantity of money available in the economy
 What assets should be considered part of the money
supply? Here are two candidates:
 Currency: the paper bills and coins in the hands of the
(non-bank) public
 Demand deposits: balances in bank accounts that
depositors can access on demand by writing a check
Measures of the U.S. Money Supply

 M1: currency, demand deposits,

traveler’s checks, and other checkable deposits.

M2: everything in M1 plus savings deposits,

small time deposits, money market mutual
funds, and a few minor categories.

Money supply = M1 + M2
Objectives of MP

 The following are the Principal objectives of

Monetary Policy:
1. Price Stability
2. Economic Growth
3. Balance of Payment
4. Full Employment
Mission of the National Bank of Ethiopia:
To maintain price and exchange rate stability, to foster a sound financial system and
undertake such other functions as are conducive to the economic growth of Ethiopia
(http://www.nbe.gov.et)
1. Price Stability objective of Central Banks

 Price Stability means relative controlling of inflation

or deflation.
 Deflationary price level raises increasing
unemployment and falling level of out put and
income. It ultimately leads to depression.
 Inflation is unjust and ruins the general economic
welfare of the community
Price Stability objective of Central Banks (cont’d)

 The goal of price stabilization implies that in general

the average price level as measured by the whole sale
price index or consumers’ price index should not be
allowed to vary beyond narrow margins.
2. Economic Growth Objective
 Economic growth can be defined as the process
whereby the real per capita income of a country
increases over a long period of time.
 It is measured by the increase in the amount of
goods and services produced in a country.
2. Economic Growth Objective… Cont’d

 How Monetary Policy contribute to Economic

Growth?
 Through:
 Management of Aggregate Demand
 Encouragement to saving and Investment
3. Balance of Payment objective
 A balance of payment is the difference between the
amount paid by a national government to other
countries and the amount it receives from them.
4. Full Employment Objective
 Definition of Full Employment:
 Fullemployment is a situation in which every body who
wants to work get work. ( Keynes).
4.Full Employment-cont’d
 It should be noted that full employment is not and
end in itself. It is a precondition for maximum social
welfare.
 Along with the full employment of labor, other
economic resources must be used with maximum
efficiency and productivity.
Instruments of MP
 The monetary authority use different instruments to achieve the
objectives of MP of their country.
 They are divided in to two categories:
1. Quantitative, general or indirect includes:
bank rate variations,
open market operations, and
changing reserve requirements.
They are meant to regulate the overall level of credit controls
in the economy through commercial banks.
2. Qualitative, selective or direct- ( include changing margin
requirement, and regulation of consumer credit). They aim at
controlling specific types of credit.
1. Bank rate Policy: as Instrument of MP
 The bank rate is the minimum lending rate of
the central bank at which it rediscounts first
class bill of exchange and government securities
held by Commercial Banks (CBs).
 When there is inflation in the economy the
central bank raises the bank rate which affects
the cost of credit:
 Borrowing from the Central bank becomes costly
and commercial banks borrow less from it.
 The Commercial Banks in turn raise their lending to
the business communities and borrowers borrow less
from CBs.
 There is contraction of credit and prices are checked
from rising further
Bank rate Policy: as Instrument of MP

 When prices are depressed, the central bank lowers the

bank rate:
 Itis cheap to borrow from national bank (NB) on the part of
the CBs.
 The latter also lower their lending rates.

 Business people are encouraged to borrow more.

 Investment is encouraged.

 Output, employment, income and demand start rising and

the downward movement of prices is checked.
2. Open Market Operation: as instrument of MP

 Open market operation refers to sale and

purchase of securities in the money market by
central bank.
 With rising price (inflation), the NB sells securities.
The reserve of CBs are reduced and they are not in a
position to lend more to business people. Further
investment is discouraged and the rise in prices is
checked.
 When recessionary forces start in the economy, the
NB buys securities. The reserves of CBs are raised.
They lend more. Investment, output, income and
demand rise, and fall in price is checked.
3. Change in reserve ratio: as Instrument of MP

 Every bank is required by law to keep a certain

percentage of its total deposits in the form of a
reserve fund in its vault and also a certain
percentage with the central bank (NB).
 For instance, when prices are rising, the NB raises
the reserve ratio. Banks are required to keep more
with the central bank. Their reserves are reduced and
they lend less. The volume of investment, output,
and employment are adversely affected
4. Selective Credit Controls
 These controls are used to influence
specific types of credit for particular
purpose.
 When there is rapid speculative activity in the
economy or in particular sector in certain
commodity, and prices are rising, the NB
raises margin loans against specified securities.
The result is that the borrowers are given less
money in loans against specific securities.
 Types of financial institutions
 Financial institutions can be classified in many different
ways. The standard classification, however, will be as
follows:

Depository Institutions Non-Depository Institutions

Commercial Banks Insurance Companies
Savings and Loan Associations Pension Funds
Saving Banks Investment Companies
Credit Unions Investment Banking firms
Depository Institutions (DIs)

 DIs accept deposits from economic agents (liability

to them) and then lend these funds to make direct
loans or invest in securities (assets)
 Income of DIs:
 Income generated from loans
 Income generated from investment in securities, and
 Fee income
 Depository…
 Depository institutions, which are usually just called
banks, are categorized as such because their primary
source of funding is the deposits of savers.
 In other words, depository institutions are financial
intermediaries that accept deposits.
 These deposits represent the liabilities (debts) of the
deposit accepting financial institutions.
 With the fund raised through deposits and other funding
sources, they make direct loans to various entities and
invest in securities.
 Depository …
 In U.S.A., the Federal Deposit Insurance Corporation
(FDCI) insures the savings accounts of such institutions
up to a certain limit.
 Depository institutions are further subcategorized
depending on the market they serve, their primary
source of funding, type of ownership, how they are
regulated and the geographic extent of their market.
 Thus, depository institution includes commercial banks,
saving and loan associations, saving banks and credit
union.
 Depository …
 Depository institutions are highly regulated because
of the important role that they play in the financial
system.
 Because of their important role, they are affording
special privileges such as:
access to federal deposit insurance, and
access to a government entity that provides
funds for liquidity of emergency needs.
Asset/ Liability Problems of DIs
 Spread Income (margined Income)=
 Income from loan and Investment Less cost of its funds
(deposit and other sources)
Asset/ Liability Problems of DIs (Cont’d)

 DIs face the following risks:

 Credit(Default) risk
 Regulatory risk

 Funding risk (interest rate risk)

Risks of DI
 Credit risk (Default risk) refers to the risk that a
borrower will default on a loan obligation or that
the issuer of the security that the DIs holds will
default
 Regulatory risk is the risk that regulators will change
the rules and affect the earnings of the institutions
unfavourably
 Funding risk is the risk that the interest rate
movement may move in such a manner that profits
will be adversely affected.
Example of funding rsik
 Suppose a DI raise $100 million by issuing a deposit
account with a 1 year maturity and agreeing to pay
interest rate of 7%. Ignoring the reserve
requirement, let’s assume that the DI can invest the
entire amount, in a government security at 9%
interest rate for 15 years
 Thus spread for the first year = 2%
Example (cont’d)
 Spread for the remaining 14 years depends on the
future interest rate that DI pays for its new
depositors in order to raise the $100 million:
 If interest rate increases, spread declines
 If interest rate decreases, spread increases
 If the DI must pay more than 9%, the spread will be
negative.
 DI benefit from decline in interest rate but suffers
from increases
 A. Commercial Banks
 Commercial Banks are those FIs which accept
deposit from the public repayable on demand
and lend them for short periods.
Functions of Commercial Banks
1. Primary Functions (Accepting deposits and lending
money)
2. Secondary Functions (agency services and general
utility service)
Primary Functions of Comm. Banks

1. Accepting deposits
 Current or demand deposits
 Saving deposits
 Fixed or time deposits

2. Lending Money
 Overdrafts
 Loans and Advances
 Discounting of bill of Exchange
Secondary Functions: Agency service (Cont’d)

Conduct of stock exchange transaction

such as purchase and sale of securities
for the customers,
Acting as executor and trustee,
Providing income tax services,
Conduct of foreign exchange business
Secondary Functions :General Utility service

 Safe keeping of valuables

 Issue of Commercial letters of credit and travellers’
cheque,
 Collecting trade information from foreign countries
for their customers
 Arrange business tours
 etc
 Bank Balance Sheet
1. Bank Assets
 Assets earn revenue for the bank and includes cash,
securities, loans, and property and equipment that allows
it to operate.
A. Cash
 One of the major services of a bank is to supply cash on
demand, whether it is a depositor withdrawing money or
writing a check or a bank customer drawing a credit.
 Hence, a bank must maintain a certain level of cash
compared to its liabilities to maintain solvency.
 Bank Balance Sheet
B. Securities
 The primary securities that banks own are Treasury
Bills and Government Bonds.
 These securities can be sold quickly in the secondary
market when a bank needs more cash.
 Therefore, they are often referred to as secondary
reserves.
 Bank Balance Sheet
C. Loans
 Loans are the major assets for most banks.
 They earn more interest than banks have to pay on
deposits, and, thus, are a major source of revenue
for a bank.
 Loans include the following major types:
 Business loans, usually called commercial and industrial loans.
 Real estate loans, e.g., residential mortgages
 Consumer loans, e.g., credit cards
 Inter-bank loans, i.e., the loan given to other banks.
 Bank Balance Sheet
2. Bank Liabilities
 Liabilities are either the deposits of customers or
money that banks borrow from other sources to use
to fund assets that earn revenue.
A. Checkable/Demand deposits
 Checkable or demand deposits are deposits where
depositors can withdraw the money at will.
 Most checkable or demand accounts pay very little
interest or no interest.
 Bank Balance Sheet
B. Saving deposits
 Since saving accounts are not used as a payment system,
banks are forced to pay more interest for it.
 Saving deposits are mostly passbook saving accounts,
where all transactions were recorded in a passbook.
C. Certificate of Deposit (CD)
 CD is a deposit where the depositor agrees to keep the
money in the account until the certificate of deposit
expires.
 The bank compensates the depositor with a higher
interest rate.
 Bank Balance Sheet
D. Borrowing
I. Banks usually borrow money from other banks in what is
called the central/federal funds market.
II. Banks also borrow funds from non-depository
institutions, such as insurance companies, pension fund.
However, most of these loans are collateralized in the
form of repurchase agreement, where the bank gives the
lender securities, usually Treasury bills, as collateral for a
short-term loan.
 Bank Balance Sheet
III. As a last resort, banks can also borrow funds from the
central bank.
But since borrowing from the central bank shows that
banks are under financial stress and unable to get
funding elsewhere, they do this rarely.
 Bank Balance Sheet
3. Bank Capital
 Banks can also get more funds either from the bank’s
owners if it is a corporation or by issuing more stocks.
Regulation of Commercial Banks
Types of Regulations of CBs
1. Safety and soundness regulation,
2. Monetary policy regulation,
3. Credit allocation regulation,
4. Consumer protection regulation,
5. Investor protection, and
6. Entry and chartering regulation,
 1. Safety and soundness regulation,

 Objective of this regulation is to protect depositors

and borrowers against the risk of commercial banks
failure.
 These regulation include:

Layer 1 protection:
Commercial banks should diversify their assets-
 InUS banks are prohibited from making loans exceeding 10%
of their own equity capital fund to any one company or
borrower.
1. Safety and soundness regulation (cont’d)

Layer 2 protection:
 Stockholders’ contribution (equity) to the total fund
of the banks should be adequate in such a way that it
protects liability claim holders against insolvency risk.
 The higher the proportion of capital contributed by
owners the greater the protection.
1. Safety and soundness regulation (cont’d)

Layers 3 protection: Provision of guarantee fund

(such as Bank insurance Fund in US)
Deposit insurance mitigates a rational incentive
depositors otherwise have to withdraw their funds at
the first hint of trouble.
2. Monetary Policy Regulation
 In most countries, regulators commonly impose a
minimum level of required cash reserve to be held
against deposits
 (see cash reserve ratio requirements of MP instruments)
3. Credit Allocation Regulation
 Credit allocation regulation supports the commercial
bank’s lending to socially important sectors as
housing, farming etc. For example;
 a commercial bank may be required to hold a minimum
amount of assets (loan) in one particular sector of the
economy
 The regulator may set maximum interest rate, price or
fees to subsidize certain sectors
4. Consumer Protection Regulation

 This regulation is concerned about the discrimination

on the basis of age, race, sex, of income-( Banks
should not discriminate on such grounds).
 For example, the US congress passed the Home Mortgage
Disclosure Act (MHDA) in 1975 to prevent discrimination by
lending institutions.
 Since 1992, CBs have had to submit reports to regulators
summarizing their lending on a geographic basis, showing the
relationship between the demographic area to which they are
lending and the demographic data (such as income and
percentage of minority population) for that location.
 CBs must now report the reason that they granted or denied
credit.
5. Investor Protection Regulation

 In US a considerable laws protect investors who use

CBs directly to purchase securities and/or indirectly to
access securities markets through investing in mutual
banks or pension funds managed by CBs.
 Various laws protect investors against abuse such as
insider trading, lack of disclosure, outright , and breach
of fiduciary responsibilities.
6. Entry and Chartering Regulation

 The entry of CBs is regulated, as the their activities

once they have been established.
 Increasing or decreasing the cost of entry into a
financial sector affects the profitability of firms
already competing in that industry.
 Thus, the industries heavily protected against new
entries by high direct costs (e.g. through capital
requirements) and high indirect costs (e.g. by restricting
the type of individuals who can establish CBs) of
entry, produce larger profits for existing firms than
those in which entry is relatively is easy
 B.Saving & loan Association
 The basic purpose of establishing saving and loans
associations was pooling the savings of local residents
for financing the construction and purchase of a
homes.
 The collateral for the loan would be the home being
financed.
 Saving and loans are either mutually owned (means there
is no stock outstanding) or have corporate stock
ownership, so technically the depositors are the owners.
 Assets of Saving and Loan Associations


 Traditionally, the only assets in which saving and

loans associations were allowed to invest have been:
 Mortgages (Loans secured by a property).
 Mortgage – backed securities
 Government securities
 Saving and Loans Associations invest in short-term assets
for operational (liquidity) and regulatory purpose.
  Funding of Saving and Loan Associations
 The principal source of funds for Saving and Loans
Associations consisted of passbook savings
accounts and time deposits.
 Then it was expanded to negotiable order of
withdrawal (NOW) account, which is similar with
demand account.
 C.Saving banks
 Saving banks are institutions similar to saving and
loans associations even though they are much older
than S & Ls.
 Originally, they were established to provide a
means for small depositors and earn a return on
their deposits.
 They can be either mutually owned (i.e., mutually
saving banks) or stockholder owned.
 However, most saving banks are of the mutual

form.
 Asset structure of saving banks and S & Ls are almost
similar.
 The principal assets of saving banks are residential
mortgages.
 The principal source of funds for saving banks is
deposits which is very similar with S & Ls.
 They have obtained funds primarily by tapping the
savings of households.
 D.Credit Unions


 They are the smallest & nonprofit depository

institution.
 They can obtain either a state or federal charter.

 Their unique aspect is the “common bond”

requirement for membership, such as:

 the employees of a particular company,
 unions,
 religious affiliations or who
 live in a specific area etc.

 They are governed by a board of volunteers.

 Credit Unions are either cooperatives or mutually
owned.
 There is no corporate stock ownership.

 Since they are nonprofit and owned by their

customers, they charge lower loan rates and pay
higher interest rates on savings.
 Therefore, the dual purpose of credit unions is to
serve their members saving and borrowing
needs.
Non depository Institutions
 These Non-depository institutions are
financial institutions that do not mobilize
deposits:
 These include (among others):
• Insurance companies
• Mutual funds
• Pension funds
• Investment Banking Firms
A. Insurance Companies
 The primary function of insurance companies is to
compensate individuals and corporations
(policyholders) if perceived adverse event occur, in
exchange for premium paid to the insurer by
policyholder.
Insurance Companies
 Insurance companies provide (sell and service)
insurance policies, which are legally binding
contracts.
 Insurance companies promise to pay specified
sum contingent on the occurrence of future
events, such as death or an automobile accident.
 Insurance companies are risk bearer. They
accept or underwrite the risk for an insurance
premium paid by the policyholder or owner of
the policy.
Types of Insurance Business
 Insurance industry is classified in to two
 Life insurance
 General or Property-causality insurance
Insurance Companies

 Income of Insurance Companies:

 Initial underwriting income (insurance
premium)
 Investment income that occur over time

The profit of the insurance companies = insurance

premium + investment income –operating expense +
insurance payment or benefits
B. Mutual Funds
 Nature of Mutual Fund
A mutual fund (in US) or unit trust (in UK and
India) raise funds from the pubic and invests the
funds in a variety financial asset, mostly equity both
domestic and overseas and also in liquid money and
capital market. (Keith)
Nature of Mutual Fund
 Mutual funds are investment companies that pool
money from investors at large and offer to sell and
buy back its shares on a continuous basis and use the
capital thus raised to invest in securities of different
companies
Nature of Mutual Fund-ctd
 The stocks these mutual funds are very fluid and are
used for buying or redeeming and/or selling shares at
a net asset value.
 Mutual funds posses shares of several companies and
receive dividends in lieu of them and the earnings are
distributed among the share holders
Nature of Mutual Fund
 Mutual funds sell shares (units) to
investors and redeem outstanding shares
on demand at their fair market value.
 Thus, they provide opportunity of small investors
to invest in a diversified portfolio of financial
securities.
 Mutual funds are also able to enjoy economies of
scale by incurring lower transaction costs and
commission.
Advantage of Mutual Funds

1. Mobilizing small saving

2. Professional management
3. Diversified investment/ reduced risks
4. Better liquidity
5. Investment protection
6. Low transaction cost (economy of scale)
7. Economic Development
Advantage of Mutual Funds(Cont’d)

7.Economic Development
 Mutual funds mobilize more savings and channel
them to the more productive sectors of the economy
 The efficient functioning of mutual funds
contributes to an efficient financial system.
 This in turn paves ways for the efficient
allocation of the financial resources of the
country which in turn contributes to the
economic development.
Return to Investors in the Mutual Fund

 Investors in the mutual fund have the

potential to gain:
They are entitled to a share in the capital
appreciation of the underlying assets,
They have a claim on the income generated
by the underlying assets of the fund
C. Pension Funds
 Pension funds are major institutional investors and
participants in the financial markets.
 Pension plan is established for the eventual payment of
retirement benefits
 The entities that establish pension plans-called plan
sponsors- may be private business entities acting for
their employees, federal, state, and local entities on
behalf of their employees.
 Pension funds are financed by contribution from
employer and/or employees.
Pension Funds
 The key factor explaining pension fund growth
is that the employer’s contribution and a
specified amount of the employee’s
contribution, as well as the earnings of the
fund’s assets, are tax exempt.
 In essence, a pension is a form of employee
remuneration for which the employee is not
taxed until funds are withdrawn.
 D. Investment Banking Firms
 It is a financial institution engaged in securities business.
 They perform activities related to the issuing of new
securities and the arrangement of financial
transactions.
 They mainly involve in primary markets, the market in
which new issues are sold and bought for the first time.
 They advice issuers on how best to raise funds, and then
they help to sell the securities.
 They are also involved in planning and executing other
types of financial transactions such as merger, acquisition
and restructuring.
 Thus, they perform two general functions:
1. They assist both government and nongovernmental
companies in obtaining funds by selling securities, i.e.,
raise funds for clients.
2. They act as brokers or dealers in the buying and selling of
securities in secondary markets, i.e., assisting clients in
the sale or purchase of securities.
 Activities of investment banking firms

1. Public offering (underwriting of securities)

 Investment bankers performing one or more of the
following three functions:
 Advising the issuer on the terms and the timing of the
offering.
 Buying the securities from the issuers.
 Distributing the issue to the public.
 Activities of investment banking firms

2. Private Placement of Securities

 In addition to underwriting securities for
distribution to the public, investment banking
firms place securities with a limited number of
institutional investors like insurance companies,
pension fund etc.
 Activities of investment banking firms

3. Merger and Acquisition

 They may participate in merger and acquisition
activity in one of the following ways:
 Finding merger and acquisition candidates.
 Adjusting acquiring companies or target companies with
respect to price and non price terms of exchanges or
helping companies fend off (defend) an unfriendly
takeover.
 Assisting acquiring companies in obtaining the necessary
funds to finance a purchase.
 Activities of investment banking firms

4. Money Management
 Investment banking firms have created subsidiaries that
manage funds for individual investors or institutional
investors such as pension funds.
END OF CHAPTER THREE