Financial

Intermediaries

Cunado | Fermin | Ronquillo

Financial

Intermediaries
-were formed to facilitate indirect financing.
-were formed during the
time when market conditions make it hard to lenders of
funds to transact directly with borrowers of
funds.
FINANCIAL
INTERMEDIATION
- p r o cess o f in d i r ect
f i n a n cin g usin g t h e
f i n a n cia l in ter med i a r i es a s
th e ma in r o ute t o t r a n sf er
f un ds fr o m l en der s t o
b o r r o wer s.
EXAMPLES OF FINANCIAL
INTERMEDIARIES
-depository institutions
-insurance companies
-asset management firms
-regulated investment
companies
-investment banks
 Financial intermediaries generally provide the
following services:
- Enable trading of financial assets for the customers of the financial intermediary through
brokering arrangements
- Enable trading of financial assets through its own capital by buying a stake in a financial
asset that its customers want to transact in
- Assist in forming financial assets needed by its customers and distribute these to its
customers and other market participants as well.
- Provide investment advice and consultation services to customers
- Manage financial assets of customers
- Facilitate payment mechanism between merchants and customers.
 BENEFITS
FROM
FINANCIAL
INTERMEDIA
RIES
 Acceleration Of Flow Of Funds
Between Entities
Fund providers use financial intermediaries to transfer funds to fund
demanders.
Financial intermediaries also serve a savings and wealth storage
function, allowing parties with excess funds to store their funds in risk-
free/low-risk financial instruments.
 Efficient Allocation of Funds

Asymmetric information occurs when potential borrowers have more information

about the transaction compared to the bank. It may lead to two further problems:
adverse selection and moral hazard.

Moral hazard occurs when

Adverse selection means that
borrowers have the tendency to
high risk borrowers that would
take undesirable or immoral
tend to default is more likely to be
risks (for the lender) with the
more active in borrowing funds
money, once they receive it, not
than low risk borrowers who pay
disclosed during the loan
on time.
granting process.
Creation of Money
 Support in Price Discovery
Price Discovery is a process of setting a price which is acceptable for
the buyer and the seller.

- Improved liquidity for lenders

-Reduced price risk for lenders
-Diversification of lenders
-Economies of scale
-Payment system
-Risk mitigation
-Implementation of monetary policy function
 Improved liquidity for lenders
Liquidity of ultimate lenders is enhanced through the presence of
financial intermediaries.

Financial intermediaries can manage cash from different lenders

through immediately encashable products.
 Reduced price risk for lenders
Price risk means that prices of financial instruments may vary over
time.

Risk sharing or asset transformation happens when financial

intermediaries create and sell financial assets with risk profile that
their clients are comfortable to invest on.
 Diversification of lenders
Diversification is the process of investing funds in a portfolio of assets
that have individual returns that do not move in the same direction
together.

Diversification usually results in an overall portfolio risk that may be

low of each individual asset.

Diversification also allows lenders to share risk from their

investments.
 Economies of scale
Economies of scale occurs when fixed costs are optimized per unit as a
result of sheer volume transactions.

There are two main economies of scale that are optimized by financial
intermediaries: transaction costs and research costs.

Research costs refer to costs

Transaction costs pertain
to cost associated with
trading or managing
funds and investment
transactions.
incurred to monitor performance of
potential companies to be invested
in through economic, industry and
financial analysis and look for other
investment opportunities that will
pay off in the long run
 Payment system
The financial system serves as the main structure for making
payments for any goods, services or securities that are purchased.
Certain financial assets become the medium of payment and are
settled efficiently.
 Risk mitigation
Risks may pertain to the uncertainty that something untoward or
damaging may occur to a person or entity. Some types of financial
intermediaries offer protection to individuals and organizations
against adverse incidents that may occur.
 Implementation of monetary

policy function
The financial system provides the best mechanism to allow the
government to implement its monetary policies to manage economic
growth, steady employment rate, equilibrium of balance of payments
and inflation. Government is also able to greatly influence interest
rates which consequently affect consumption and investments and the
demand for loans.
 ~Maturity Intermediation
Maturity intermediation gives fund providers/investors more
alternatives in terms of how long they want to invest in financial
instruments and borrowers have more choices on the length of
maturity of their debts.
 ~Risk reduction through
diversification
Diversification is the economic function exercised by financial
intermediaries which converts more risky assets to less risky assets
through sharing of risks.
 ~Cost reduction for contracting and
information processing
Information processing costs refers to the cost of acquiring and
processing information needed to evaluate purchase or subsequent sale
of a financial instrument. Information processing costs also include
opportunity cost of time associated with information processing.

Contracting costs refers to the cost incurred for writing loan

agreements enforcing terms of agreements to the concerned parties.
 Classification of

Financial Intermediaries
 •firms that accept cash deposits from individuals, companies and
entities.
•extend loans to different entities.
•The biggest portion of the asset base of a depositary institution is
loans.
•keep a significant investment on securities such as interest-bearing
deposits purchased from other financial institutions, repurchase
agreements, treasury bills, mortgage-backed securities and other
equity and debt instruments.
•In the Philippines, depository institutions are further subdivided to
commercial banks, thrift banks and savings banks.

Depository Institutions
 Commercial Banks

These banks authorized to accept drafts/checks and issue

letters of credit; discount and negotiate promissory notes,
drafts of exchange, and other evidences of debts; receive
deposits; buy and foreign exchange and gold or silver bullion;
and lend money against securities consisting of personal
property or first mortgages on improv real estates and the
insured improvement thereon.
 Thrift Banks

These banks are primarily mobilized small savings and provide loans at
generally longer and easier terms than do commercial banks as they
cater to the lower income groups.
 Savings Banks

•organized for the purpose of accumulating savings deposits, and

investing them for specified purposes

•Banks offer a variety of services to their clientele which can be

grouped into individual banking, institutional banking and global
banking.
 •financial intermediaries that
obtain funds at periodic intervals
based on an existing contract.
Contractual
•can project more accurately how
much money they need to pay in the
future in the form of benefits
Savings promised

•Usually, contractual savings

Institutions institutions need to pay their
contractual obligations after
several years
 Insurance Companies
•offer a unique service to individuals, corporations and other entities in
a country
•Insurance companies collect premiums (payment made by parties who
want to be insured) in exchange for selling protection against potential
future risks. Premiums can be paid lump sum prior to the contract or
during the life of the insurance policy. If the risk materializes in the
future, the insurance company shall pay the insured amount to the
beneficiary of the policy. Benefits can be paid via lump sum (one-time
payment) or annuity (yearly payments). The beneficiary can be the one
who paid the premiums or other party who the payor assigned.
 Investment Intermediaries

organizations whose primary objective is to maximize return from

investments in various financial instruments to add value for the
investors.
 • Asset Management Firms
- companies that manage funds owned by individuals, companies or the government
through buying and selling of financial instruments.

- compensated for the management service through fees that they their clients.

The types of accounts / funds usually handled by asset management firms are:
 - Regulated investment companies (RIC)
-Exchange Traded Funds (ETF)
-Hedge Funds
-Separately managed accounts
 Each share stands for proportional interest in
the portfolio of financial instruments managed
by the RIC. Each share in the portfolio is valued
at Net Asset Value (or NAV). NAV is
interpreted to be a per share metric. 
NAV =Pm-Lnumber of shares
Pm = Market Value of the Portfolio
L = Liability
Open-end funds, or more commonly known as
mutual funds, do not have fixed number of
shares.
On the other hand, closed-end funds have a
fixed number of shares upon its inception and
do not issue additional or redeem shares.

Regulated investment companies (RIC)

-like mutual funds, but the shares of the portfolio funds trade on an
exchange like a regular share offered by a company.

-both open-ended and closed-ended funds

Exchange Traded Funds (ETF)

 -developed to cater to sophisticated investors and are not subject to
the same regulations covering mutual funds.

-are usually organized as a private investment partnership or offshore

investment corporation

Hedge Funds
-are distinct funds solely dedicated to an individual or institutional
investor.

Separately managed accounts

 • Investment Banks
-highly leveraged institutions that have significant influence on how
primary and secondary markets work.

- assist entities (individual, corporate, government) in raising money to

fund their initiatives. Investment banks also assist potential investors

Activities that an investment bank can offer:

-Public offering of securities
-Private Placement of Securities
-Trading of securities
-Advisory services for mergers, acquisitions and financial
restructuring
-Merchant banking
-Securities Finance and Prime Brokerage Service
-Asset Management
-Research
 Other Participants
significant number of participants who interact with each other to buy
or sell different kinds of financial instruments
Household Sector

- composed of individuals and families, including families serving

charitable, religious and non-profit organizations.

- unincorporated businesses such as retailers, farmers and

professional partnerships
Government
Government role is focused more on regulating all participants
and the market in general.
NGAs
LGUs
GOCCs
 Corporate Sector/

Non-financial Corporations

- financial and non-financial corporations

-include depositary institutions, investments banks,

asset management companies and insurance companies.
Foreign Sector

all entities, individuals, assets and organizations that are

situated outside of the jurisdiction of a certain country
Non-profit organizations

that exist to respond to specific causes like 

humanitarian aid, socio-civic causes, environment,
arts and many more.
Thank
You!