Financial Intermediation

@ralphruba
Who are these?
Answer:
• Jose Abad Santos
• Josefa Llanes Escoda
• Vicente Lim
 Discuss financial intermediation
and identify the different
financial intermediaries.

Objectives
Differentiate bank supervision
from bank regulation
 Appreciate the role financial
intermediaries play in the socio-
economic development of a nation

Objectives
Discuss the different types of risk
faced by financial intermediaries
and investors in the business world.
 • “ an individual that acts
as a link between
people in order to try to
bring about an
agreement or
reconciliation; a
mediator.”

INTERMEDIARY
 • “an institution or
individual that serves as
a middleman among
diverse parties in order
to facilitate financial
transactions”

FINANCIAL
INTERMEDIARY
What bird is this?
Answer:
• Blue-naped Parrot
 SAVERS MIDDLEMAN
Parties
Involved

USERS
FINANCIAL
INTERMEDIARY
• “is typically an institution
that facilitates the channeling
of funds between lenders
and borrowers indirectly. ”
• Offers a service t help an
individual/ firm to save or
borrow money
 If you need to borrow Php 10,000.00- you could try
find an individual who wants to lend Php 10,000.00.
But, this would be very time consuming and you
would find it difficult to know how reliable the
lender was.

Example
Therefore, rather than look for individuals to borrow
a sum, it is more efficient to go to a bank to borrow
money. The bank raises funds from people looking to
deposit money, and so can afford to lend out to
those individuals who need it.
 This theory argues that intermediaries They have better and complete information
financing has better economy growth than than ourselves about market and from that
direct financing. true and better information, they can make
better decision.

THEORY OF FINANCIAL
INTERMEDIATION
What fish is this?
Answer:
• Malipuro
Types of DEPOSITING FINANCIAL
Financial INSTITUTIONS
Intermediaries
NON DEPOSITING FINANCIAL
INSTITUTIONS

FEDERAL GOVERNMENT
FINANCIAL INSTITUTIONS
Depositing
Financial • Where frequently
withdrawing and depositing
Institutions of cash occurs
• Banks
• Commercial Banks
• Islamic Banks
• Thrifts Institutions
 • Where not frequent
Non Depositing withdrawing and depositing of
cash occurs.

Financial
1. Insurance Companies
Institutions • Life insurance companies
• Non-life insurance
companies
2. Pension and retirement
fund
3. Mutual funds
• Open ended mutual funds
• Close ended mutual funds
Federal
Government • Provides financial
Financial services for its clients or
members. These are
Institutions owned by federal
government.
• National Saving
Center
What pearl is this?
Answer:
• South Sea Pearl
 Benefits of • SPREADING RISK- rather than lending to just
one individual, you can deposit money with a
Financial financial intermediary who lends to a variety of
borrowers- if one fails, you won’t lose all your
Intermediaries funds
• ECONOMIES OF SCALE- A bank can become
efficient in collecting deposits, and lending. Benefits of
Thus enables economies of scale-lower average
cost. If you had to sought out your own saving, Financial
you might have to spend a lot of time and effort
to investigate best ways to save and borrow. Intermediaries
 Benefits of
• LOWER SEARCH COST- You don’t have to find
Financial the right lenders, you leave that to a specialist.
Intermediaries
• CONVENIENCE OF AMOUNTS- It would be
difficult to find someone who wanted to lend
exactly Php 10,000.00. But, a bank may have
Benefits of
1,000 people depositing Php 10.00. therefore,
the bank can lend you the aggregate deposits
Financial
from the bank and save you finding someone Intermediaries
with the right sum.
Who is this?
Answer:
• Manuel L Quezon
Why Financial
Institutions are
Important?
 Perform the vital role of bringing together
those economic agents with surplus funds
who want to lend, with those with a shortage
of funds who want to borrow.

Financial
Institution In doing this they offer the major benefits of
maturity and risk transformation. It is possible
for this be done by direct contact between the
ultimate borrowers, but there are major cost
disadvantages of direct finance.
Why it is better
than Direct
Financing?
 Risk factor increases in case of
Indirect direct financing.

Financing is
better than
direct A lot of problem have to face in
direct financing
financing due
to following
reasons: Wastage of time
Who is he?
Answer:
• Benigno S Aquino Jr
Indeed, one explanation of the
existence of specialist
financial intermediaries is that
they have a related (cost)
advantage in offering financial
services, which not only
enables them to make profit,
but also raises the overall
efficiency of the economy.
Without the existence of
these Intermediaries, savers
would have to buy the
securities directly from the
borrowers.
As savers prefer to provide
finances at short-term
maturity period whereas
borrowers prefer to borrow
at long-term maturity period,
this would have created
incongruity of the maturity
needs of borrowers and
lenders.
FI’s execute significant role
of maturity intermediation to
generate savers investments
and borrowing money for
borrowers
Who is she?
Answer:
• Corazon C Aquino
Banks
Brief History
• The idea of banks began as long ago as 1,800 BC in
Babylon. In those days moneylenders
made loans to people. In Greece and
Rome banks made loans and accepted
deposits. They also changed money.
(In the Bible Jesus famously drove the money changers
out of the temple in Jerusalem)
• However with the collapse of the Roman Empire trade
slumped and banks temporarily vanished. Then
12th and
banking began to revive again in the
13th centuries in the Italian towns of
Florence and Genoa.
Top 3 Banks In •BDO
the Philippines 302,728.00
in Terms of •Metrobank
Capital 271,288.00
•BPI
236,511.00
What cat is this?
Answer:
• Palm Civet
Bank Regulation vs
Bank Supervision
 Bank Regulation
•  is a form of government regulation
which subjects banks to certain
requirements, restrictions and
guidelines, designed to create market
transparency between banking
institutions and the individuals
and corporations with whom they
conduct business, among other things.
Bank Regulation
• The belief is that without this aid,
the crippled banks would not
only become bankrupt, but
would create rippling effects
throughout the economy leading
to systemic failure.
Bank
Regulation
Two
Components
LICENSING SUPERVISION
 Sets certain requirements for starting a new bank.

Provides the license holders the right to own and

to operate a bank.

Licensing Process is specific to the regulatory environment of the

country and/or the state where the bank is located.

Involves an evaluation of the entity's intent and the ability to

meet the regulatory guidelines governing the bank's
operations, financial soundness, and managerial actions.

The regulator supervises licensed banks for compliance with the

requirements and responds to breaches of the requirements by
obtaining undertakings, giving directions, imposing penalties or
(ultimately) revoking the bank's license.
 Is an extension of the license-granting process and consists of supervision of the
bank's activities by a government regulatory body : central bank / Banko Sentral
ng Pilipinas

Ensures that the functioning of the bank complies with the regulatory guidelines
and monitors for possible deviations from regulatory standards.

Supervisory activities involve on-site inspection of the bank's records, operations

and processes or evaluation of the reports submitted by the bank.

Supervision
Risks in Financial Institutions
$81M heist
What type of risk do you think
was involved?
Technology Risk
• One of the major objectives of a
financial institution’s (FI’s)
managers is to increase the FI’s
returns for its owners • Increased
returns often come at the cost of
increased risk, which comes in
many forms
 the risk that the promised cash
flows from loans and securities
held by FIs may not be paid in full

Credit risk
FIs that make loans or buy bonds
with long maturities are relatively
more exposed to credit risk
 is the risk that a sudden and unexpected increase in
liability withdrawals may require an FI to liquidate assets
in a very short period of time and at low prices – day-to-
day withdrawals by liability holders are generally
predictable – unusually large withdrawals by liability
holders can create liquidity problems

• the cost of purchased and/or borrowed funds rises for

Liquidity risk FIs • the supply of purchased or borrowed funds declines

• FIs may be forced to sell less liquid assets at ―fire-sale‖
prices

FIs may be forced to sell less liquid assets at ―fire-sale‖

prices
 IS THE RISK INCURRED IN TRADING ASSETS AND LIABILITIES
DUE TO CHANGES IN INTEREST RATES, EXCHANGE RATES,
AND OTHER ASSET PRICES – CLOSELY RELATED TO INTEREST
RATE AND FOREIGN EXCHANGE RISK

Market risk
Foreign exchange
(FX) risk
IS THE RISK THAT EXCHANGE RATE CHANGES CAN AFFECT THE VALUE OF
AN FI’S ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES
Country or sovereign
risk
• is the risk that repayments from foreign borrowers
may be interrupted because of interference from
foreign governments
 • technology risk is the risk
incurred by an FI when its

Technology technological investments do

not produce anticipated cost

risk
savings
• the major objectives of
technological expansion are to
allow the FI to exploit potential
economies of scale and scope
by: – lowering operating costs –
increasing profits – capturing
new markets – operational risk
is the risk that existing
technology or support systems
may malfunction or break down
Operational
risk • the risk of loss resulting from
inadequate or failed internal
processes, people, and systems
or from external events
 • the risk that an FI may not have
enough capital to offset a
sudden decline in the value of

Insolvency risk its assets relative to its liabilities

– insolvency risk is a
consequence or an outcome of
one or more of the risks
previously described
• generally, the more equity
capital to borrowed funds an FI
has the less insolvency risk it is
exposed to – both regulators
and managers focus on capital
adequacy as a measure of a FI’s
ability to remain solvent
 • – in reality, all of the previously
defined risks are interdependent

Other risks and • e.g., liquidity risk can be a function of

interest rate and credit risk – when

interactions managers take actions to mitigate

one type of risk, they must consider
such actions on other risks – changes
among risks in regulatory policy constitute
another type of discrete or event-
specific risk –
• other discrete or event specific risks
include • war, revolutions, sudden
market collapses, theft, malfeasance,
and breach of fiduciary trust –
macroeconomic risks include
increased inflation, inflation volatility
and unemployment
Questions???
End of 1st talk
Thank You