FN5003 & FN5003T Institutional Financial
A financial institution is something that has been
established that contains financial trades for example investments, getting a
loan or putting a deposit (ABP, 2001). Financial institutions get dealt with on
day to day so almost everyone deals with it. Majority of the depositing,
borrowing money, exchanging money contains and must be done through financial
The functions in
financial system contains:
One of the functions of the financial institutions is
Commercial Banks. Commercial banks will accept deposits and provide very good
security and make it suitable for their customers. This is just a normal role
for the bank to give their customers money safe so that their customers don’t
have to physically keep their belonging in their home or on them (APB, 2001).
With having commercial banks there is no need to keep large amount of money in
hand because the banks can handle it such as online banking, checks, debit card
or credit card.
Another one is insurance companies, insurance
companies protect themselves or their properties such as your phone, your
vehicle or your house anything that you feel should be insured. Insurance use
statistical analysis to protect what has been covered by the company, insurance
company will cover your belongings that you want to insure. Insurance helps
people or company manage the risks and reserve prosperity.
Another function for the
financial system is Investment Banks, investments banks may be called “banks”,
and their process is different than deposit gathering banks commercial banks.
An investment bank more like a financial intermediary that does variety of
services for business and sometimes government. The services that investment
banks include underwriting debts and equity offering. Acting like an in-between
in problems, making markets, investing public and other reorganisations,
basically acting like a broker for institutional clients.
As well as the large universal banks, other types of institution found
within the part or area include elite investment banks, advisory-only
investment banks, and banks which focus on mid-market deals or on geographies.
The deposit-type institution for example some commercial banks,
commercial banks make loans to borrowers this will make commercial banks a
deposit type. There are other types of company that goes into the sections of
deposit-type institution such as Savings and Loan Associations, this type will
give out mortgage loans, so saving and loan associations make loans if a person
wants to purchase private housing or if you need money for home improvement,
for example if you want to retouch your house.
A non-depository institutions is, for example a life insurance,
insurance companies will deliver the essential insurance facilities to the
public and different business entities. (crackmba,2012) there are different
types of circumstances and procedures for insurance companies which is most
certainly different to banks rules and guidelines. Another one could be pension
funds, pension funds they seek to make money from the people and the money that
they have their intentions is to invest that money in risk free tools a good
one will be like the government bond.
2. Outline the main responsibilities of the
Federal Open Market Committee. Explain the key functions of the Bank of
England. Discuss how expansionary activities conducted by the Federal Reserve
impact the money supply, credit availability, interest rates and security
prices. Discuss what happens when the Bank of England conducts a restrictive
open market operation. What policy measures were taken by the Federal Reserve
and the Bank of England to address the financial crisis in 2008-09?
The federal open market committee
is indicted with supervising “open market operations, the main tool which the
Federal Reserve executes the US monetary policy. These processes that affect
the federal funds rate, which in turn affects overall monetary and credit
circumstances, aggregate demand, the whole economy. The federal open market
committee guides tasks undertaken by the Federal Reserve in imported exchange
markets, in recent years, has allowed currency switch plans with foreign
central banks. (Federal Reserve, 2016)
The Bank of England has individual obligation regarding choosing the
level of base loan fees. The Bank delivers its own particular measurements and
embraces money related investigation to enable it to make monetary soundness.
One of the main role for bank of England is quite obvious, making the money,
printing the banknotes and the bank of England have to make sure the notes get
to where it needs to be at. (The Bank of England, 2017). Bank of England has to
make sure that the people that use the notes feel safe using it and make the
notes feel and look real.
The bank of England lend money to commercial banks, for the bank of
England to lent money to the banks, the commercial banks sometimes the
commercial has short amount of cash, then the commercial banks can ask the bank
of England to lend them money. (Tejvan Pettinger, 2012) this function for bank
of England is very “important to help liquidity and confidence in the banking
The clear market operations conducted by the Federal Reservation affect
the money provision of an economy through the buying and selling of government security.
When the Federal Reserve wants to increase the money provision through open
market operations, it buys government security measures; when it wants to
decrease the money supply through open market operations, it sells government
the Federal Reserve uses open market operations to either brake or speed
up the process of people making, selling, and buying things through a strict
regulation of the process of people making, selling, and buying things money
supply so that the money supply forces the federal money rate to increase or
decrease toward a target rate. (tejvan pettinger, 2012)
The main object of funds for
commercial banks is savings. Deposits are put together in local markets and
have lower interest rate. They will be relatively stable. deposits can be known
as demand deposit (current deposit) etc. (Bhim Chimoriya,
2017) in a case where a
demand deposit is placed, the source of funds are the checking account that
does not pay any interest and permit check writing.
important source of funds for commercial bank’s liabilities management, the
banks have to manage liabilities very carefully make something as small as
possible and minimise risks and achieve the goals that is needed to be gained.
The items that are in liabilities of commercial banks are equity, reserves,
borrowing, deposits, new account, money market liabilities, deposit account
etc. (Bhim Chimoriya,
reason why banks issue bonds is that there will be an interest on top of the
bond that’s going to be given out. Banks finds this a smart movement and pursue
to profit by adding on interest rate matching with the borrower’s credit risk.
The insurance companies or pension gets cash from savers, which then could use
to purchase long term bond from the bank, the bank therefore secures the
funding with so that it will make a long-term loan. (Cameronhume, 2017)
This basically means that banks issue out bonds so that in return there would
be a percentage that will be added on the amount that’s been borrowed,
therefore the banks are making more money while they lend it out. Another main
reason why banks issue bonds is that to finance fixed assets.
banks that need temporary funds, the banks
then use federal money bought (borrowed), they can ask to borrow temporary
money from the federal banks, make a repurchase decision, and Eurodollar
borrowing. (Cameronhume, 2017) this means that if commercials banks need
temporary money they have several options where to go and get what they need
with an agreement of the temporary money.
The mortgage backed securities contributed to
the financial crisis because as they declined in the home prises enhanced, a
high number of people found that they are struggling to make their monthly
mortgage payment. This situation escorted to a higher levels of mortgage non-payments.
A large number of these home loans had been
“securitized” and exchanged in the market place. This scattering of
hazard is for the most part something worth being thankful for, yet in this
occasion it additionally implied that potential misfortunes from defaults were
spread more broadly than they generally may have been. Defaults inordinate
affected certain bond issues. This is on the grounds that in a run of the mill
contract supported security bargain, any home loan defaults at first influence
just the most reduced evaluated tranches. This implies regardless of whether
the general default rate for the pool of home loans is moderately low, the
misfortune for a specific tranche of home loan sponsored securities could be
generous. At the point when the financial specialists that hold these tranches
utilize use, misfortunes can be considerably more prominent.
As worries about the lodging decay developed,
advertise members started dodging contract related dangers such as mortgage
related risks. Financial specialists turned out to be significantly more
apprehensive after Bear Stearns was compelled to close two speculative stock
investments that had endured huge misfortunes on contract sponsored securities.
As the size and recurrence of home loan related misfortunes started to expand,
liquidity began to vanish for some different sorts of securitized, settled
salary securities, prompting expanding vulnerability about their actual esteem.
Explain the difference between a private
pension fund and a public pension fund. Explain what a defined-contribution
pension plan is and explain how it differs from a defined benefit plan. (300
Public pension fund is the retirement plans
for the people who work in the city or local governments. Employees who work
for businesses are enclosed by the private pension plans, however not all
businesses/companies offer the same plans. For some that has just entered the
workforce, are the type of plan which employer provides could disturb where
they wish to go work.
Private pension is a way that you can save
money for when you get into your retirement stages. The value of your
retirement money is determined by how much you have contributed.
Defined contribution schemes is job-related
where is based on your own contributions and your employers are then both
invested and then the proceeds used to buy pensions will then benefit you into
your retirement stages. The money that you will get back depends on how much
you have contributed to it. (The Pensions Authority,2017)
A defined benefit plan depends on how you
will get paid because is based on how long you have been working for the
employer and how much money you have earned from there.
The differences between defined contribution
and private pension is that private pension is in your own hand, it will look
at how much you have contributed to the pensions rather than for defined
benefit it looks at how many years you have worked for that employer and how
much salary you’re getting.
6. What purpose do property and casualty
insurance serve? Explain how the characteristics of property and casualty and
life insurance differ?
Property and casualty insurance is where they
help their customers protect the properties you own and personal belonging. For
example, you’re home, your car, your phone etc. (Allstate, 2017). they also
cover and protect your liabilities as well such as if you get into a car
accident and is your fault and you have damaged someone’s belonging it will
protect you and cover you, however for car insurance there are different types
of insurance like for instant you open a car insurance just third party cover
rather than comprehensive, so third party only cover damage to the third party
so basically the person’s properties that u have damaged will cover you, this
means that you will have to sort out your own damage to your belonging.
Life insurance, there are 3 types of life
insurance one of them being whole life insurance, term life assurance and
annuity. So for whole life insurance is when there is a death of a person that
has whole life insurance that’s when you will get paid out to someone that you
have chosen to or legal heir of the person that was insured.
(Surbhi S, 2017). The
second type is term life assurance, so the amount that the policy has agreed to
will be paid out if the person comes to death and that will be passed down to
the nominee, or some at a certain age it will come to a maturity of the term
therefore the person will be given the money. Last one is annuity, annuity is
when the term of the policy runs out, and therefore the payment of the policy
will be to the holder, as long as he/she is still alive.
The differences between life insurance and
P&C insurance is that life insurance is not a contract that can get renewed
yearly and the only way for it to expire is with the death of the insurer.
P&C is something where it always can get renewed annually or semi-annually,
or monthly, this depends on what type of insurance term and conditions are
based on and agreed on. (Nick Joly, 2017)