Financial institution

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v•d•e

In financial economics, a financial institution is an institution that provides financial

services for its clients or members. Probably the most important financial service
provided by financial institutions is acting as financial intermediaries. Most financial
institutions are highly regulated by government.

Broadly speaking, there are three major types of financial institutions:[1]:

1. Deposit-taking institutions that accept and manage deposits and make loans,
including banks, building societies, credit unions, trust companies, and mortgage
loan companies)
2. Insurance companies and pension funds; and
3. Brokers, underwriters and investment funds.

Contents
[hide]
 • 1 Function
• 2 Corporate valuation
• 3 Regulation
• 4 See also
• 5 References

• 6 External links

[edit] Function
Financial institutions provide service as intermediaries of the capital and debt markets.
They are responsible for transferring funds from investors to companies in need of those
funds. Financial institutions facilitate the flow of money through the economy. To do so,
savings are pooled to mitigate the risk brought to provide funds for loans. Such is the
primary means for depository institutions to develop revenue. Should the yield curve
become inverse, firms in this arena will offer additional fee-generating services including
securities underwriting, and prime brokerage.

[edit] Corporate valuation

Relative metrics : Price/Equity Price/Book Value

Use Equity Multiples (as opposed to Enterprise Multiples). To consider how valuing a
Financial Institution's balance sheet is different from a non-Financial firm, consider how
an industrial firm wields capital machinery (asset) and the loans (liabilities) it used to
finance that asset. The line is blurred in Financial Institutions, which must hold deposit
accounts (liabilities) to fuel the issuance of loans (assets). The same accounts are
considered loans as they are held in ownership not of the bank, but of the individual
client.

Dividend Discount Model : Earnings-per-share

Dividends-per-share

Discounted Cash Flow (DCF) Model : You'll need the FCFE (Free Cash Flow for
Equity), which is the amount of money that is returned to shareholders. Calculate an
FCFF (Free Cash Flow to the Firm): EBIT (1-tax rate) -Capital Expenditures+
(Depreciation & Amortization) - (Net increase in working capital)= FCFF

FCFF-Debt+Cash=FCFE

Use the Capital Asset Pricing Model, not the Weighted Average Cost of Capital (for the
same reasons one uses Equity Multiples in relative valuation) to determine the cost of
equity (the return required by shareholders to make the decision to invest in a financial
institutions)

Excess Return Model : A model where valuation is expressed as the sum of capital
invested currently in the firm and the present value of dollar excess returns that the firm
expects to make in the future.[1]

[edit] Regulation
See also: Financial regulation

Financial institutions in most countries operate in a heavily regulated environment as they

are critical parts of countries' economies. Regulation structures differ in each country, but
typically involve prudential regulation as well as consumer protection and market
stability. Some countries have one consolidated agency that regulates all financial
institutions while other have separate agencies for different types of institutions such as
banks, insurance companies and brokers.

Countries that have separate agencies include the United States, where the key governing
bodies are the Federal Financial Institutions Examination Council (FDIC), Office of the
Comptroller of the Currency - National Banks, Federal Deposit Insurance Corporation
(FDIC) State "non-member" banks, National Credit Union Administration (NCUA)
-Credit Unions, Federal Reserve (Fed) - "member" Banks, Office of Thrift Supervision -
National Savings & Loan Association, State governments each often regulate and charter
financial institutions.

Countries that have one consolidated financial regulator include United Kingdom with
the Financial Services Authority, Norway with the Financial Supervisory Authority of
Norway, Hong Kong with Hong Kong Monetary Authority and Russia with Central Bank
of Russia. See also List of financial regulatory authorities by country.

[edit] See also

• Bank
• Credit union
• Financial economics
• Savings and loan association
• Consumer Credit Act 1974 (UK law)

[edit] References
1. ^ Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in
the Global Environment. Toronto: McGraw-Hill Ryerson. p. 40. ISBN 0-07-
087158-2.
[edit] External links
• Council on Foreign Relations, IIGG Interactive Guide to Global Finance

Retrieved from "http://en.wikipedia.org/wiki/Financial_institution"

Categories: Financial institutions | Financial services
Hidden categories: Articles to be merged from May 2010 | All articles to be merged

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