Investment Intermediaries

9 Key excerpts on "Investment Intermediaries"

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  eBook - PDF

  CFIN

  • Scott Besley, Eugene Brigham, Scott Besley(Authors)
  • 2021(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  The issuing company wants a good market to exist for its stock, as do its stockholders. Therefore, if the investment banking house wants to do business with the company in the future, to keep its own brokerage customers happy, and to have fu- ture referral business, it will hold an inventory of the shares and help maintain an active secondary market in the stock. 3-4 FINANCIAL INTERMEDIARIES AND THEIR ROLES IN FINANCIAL MARKETS Financial intermediaries include such financial services organizations as commercial banks, savings and loan as- sociations, pension funds, and insurance companies. Designer491/iStock/Getty Images Plus/Getty Images underwriting syndicate A group of investment banking firms formed to spread the risk associated with the purchase and distribution of a new issue of securities. shelf registration Registration of securities with the SEC for sale at a later date. The securities are held “on the shelf” until the sale. 62 PART TWO: Essential Concepts in Managerial Finance Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. In simple terms, financial intermediaries facilitate the transfer of funds from those who have funds (savers) to those who need funds (borrowers) by manufacturing a variety of financial products. When intermediaries ac- cept funds (generally called deposits) from savers, they issue securities with such names as savings accounts, money market funds, and pension plans, that represent claims, or liabilities, against the institutions.

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  Basic Finance

  An Introduction to Financial Institutions, Investments, and Management

  • Herbert Mayo, , , (Authors)
  • 2018(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  The funds are initially lent to the intermediary, and the intermediary subsequently lends the funds to the ultimate users. To obtain the funds, the finan-cial intermediaries create claims on themselves . This creation of claims is an impor-tant distinction. An investment banker facilitates an initial sale; securities brokers and secondary markets facilitate subsequent sales. Investment bankers, brokers, and securities exchanges do not create claims on themselves. They are not financial inter-mediaries but rather function as middlemen who facilitate the buying and selling of new and existing securities. When a saver deposits funds in a financial intermediary such as a bank, that indi-vidual receives a claim on the bank (the account) and not on the firm (or individual or government) to whom the bank lends the funds. If the saver had lent the funds directly to the ultimate users and they failed, the saver would sustain a loss. This loss may not occur if the saver lends the money to a financial intermediary. If a financial intermediary makes a bad loan, the saver does not sustain the loss unless the finan-cial intermediary fails. Even then the saver may not sustain a loss if the deposits are insured. The combination of the intermediary’s diversified portfolio of loans and the insurance of deposits has made financial intermediaries a primary haven for the sav-ings of many risk-averse investors. (Diversification is an important topic in finance and is covered at length in Chapter 8 on the analysis of risk.) To tap these savings, a variety of intermediaries has evolved. These include com-mercial banks, thrift institutions (savings and loan associations, mutual savings banks, and credit unions), and life insurance companies. Many savers are probably not aware of the differences among these financial intermediaries. They offer similar services and pay virtually the same rate of interest on deposits.

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  Monetary Economics

  Theories, Evidence and Policy

  • David G. Pierce, Peter J. Tysome(Authors)
  • 2014(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  A rather different kind of intermediation with related benefits is provided by institutions like investment trusts, unit trusts, and in some respects pension funds. These institutions, along with others, 'alleviate the market imperfections caused by economies of scale in transactions in financial markets and also in information gathering and portfolio management' (Goodhart 1975a, p. 104). Economies of scale in brokerage and management enable the intermediaries to offer diversified portfolios to investors more cheaply than they could acquire them for themselves. Similarly these intermediaries may, through specialization and size, enjoy advantages of expertise, information and marketing that enable them to arrange such things as new share issues for companies in more favoured large blocks rather than numerous small ones. Finally we have the example of the insurance companies who, through their ability to pool risks and enjoy other economies of scale and information advantages, are able to meet the insurance requirements of people much more cheaply than would otherwise be the case. In this section we have sought to outline the essential characteristics of financial intermediaries, characteristics shared by all such intermediaries such as banks, hire-purchase finance houses, building societies, etc. Traditionally, however, a distinction has been drawn between the commercial banks on the one hand and non-bank financial intermediaries on the other. The rationale of this distinction was that the banks were regarded as being unique in that the indirect securities they issue (their deposits) are a means of payment and are therefore money, while the indirect securities of all other intermediaries are not generally acceptable as a means of payment and are therefore not money. Indeed it has been argued that the banks, by getting their indirect securities accepted as the main form of money have, in fact, ceased to perform an intermediary function to any significant degree.

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  Speculative Management

  Stock Market Power and Corporate Change

  • Dan Krier(Author)
  • 2012(Publication Date)
  • SUNY Press

    (Publisher)

  capitalism in recent times. The widely used term financial intermediaries, which designates institutions between corporations (as users of capital) and primary fi- nancial markets (as suppliers of capital), inspired the conception of so- cial intermediaries. Financial intermediaries include investment banks, commercial banks, and the institutions that support them. Financial in- termediaries supply corporations with capital and investors with invest- ments. Corporations relate to primary financial markets through these institutions to obtain loans or float new equity or debenture securities. Through bank deposits and security purchases, investors supply funds to corporations through these institutions. The process of financial inter- mediation has received extensive attention in academic writing, and in- deed the entire field of financial economics was traditionally aimed at understanding primary markets and the issuance of securities. But this literature is of limited use for this study because secondary markets have supplanted primary security markets as the most consequential environ- ment of corporations. This study seeks to develop a conceptualization of institutional ties between corporations and the increasingly critical sec- ondary market for already-issued corporate securities. Chapter 2 described the rise of transactional finance in the late twentieth century that made secondary security markets a permanent 92 SPECULATIVE MANAGEMENT environment toward which corporations and investors continuously ori- ent their actions. Although primary markets and the financial interme- diaries that link firms to them are fleetingly critical to corporate management, secondary markets are a chronic aspect of the daily com- mand and control structure of U.S. corporations and were of prime im- portance for explaining corporate restructuring.

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  The Influence of Uncertainty in a Changing Financial Environment

  An Inquiry into the Root Causes of the Great Recession of 2007-2008

  • Ricardo A. Halperin(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  THE THEORY OF FINANCIAL INTERMEDIATION Neoclassical economists were aware that the decisions to save and to invest were largely taken by different economic actors. They argued that finan- cial intermediaries (at that time this reference was almost synonymous with commercial banks) brought them together and posited that interest rates were the variable that enabled savings and investment to come into equilibrium. Later an alternative consideration became common in the financial lit- erature: different economic actors have different appetites for risk, and the role of financial intermediaries is to allocate these risks in an optimizing manner. The development of forward markets, and later of derivatives, serves to highlight this important role. Finally, a third consequence of financial intermediation needs to be highlighted. Financial intermediaries do not just shift risks within the R.A. HALPERIN 79 economy, they also create liquidity and rely on leverage for their profits, and in the process they create new risks. These three perspectives on financial intermediation are not mutually exclusive, each one illustrates one of the roles of the financial sector, but it is the third one, sometimes overlooked, which deserves special attention as we try to understand how the economy works and what drives economic fluctuations. When the role of financial intermediaries creating, or absorbing, liquid- ity is taken into account, it becomes clear that intermediaries do not play a neutral role as sometimes assumed. Indeed, the word “intermediary” becomes misleading, as by creating additional risks they affect the evolu- tion of the economy. In addition, while liquidity is obviously necessary for the smooth functioning of the economy, it is far from evident that the more liquidity the better. On the contrary, at some point the negative consequences of additional liquidity start to exceed its benefits.

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  Demystifying Global Macroeconomics

  • John E. Marthinsen(Author)
  • 2020(Publication Date)
  • De Gruyter

    (Publisher)

  Chapter 7 Financial Intermediation For most businesses, having sufficient access to lines of credit at banks or other financial institutions is as essential to their health and survival as adequate access to water is for families. In the course of providing liquidity to businesses and individuals, financial intermediaries do more than just channel funds from lenders and savers to borrowers. They also act as independent money creators for the nation as a whole. The speed at which a nation ’ s money supply changes is important because it affects the rate and sustainability of real economic growth and development, as well as inflation. A central bank ’ s job is to ensure that the money supply is not growing so slowly that it causes a recession or too rapidly that it causes unwanted inflation. Central banks control financial intermediaries by regulating and supervis-ing both the structure and size of their balance sheets. This chapter discusses the bank assets and liabilities that are important to the money creation process, as well as the vital role that a nation ’ s check-clearing process plays in our financial system. The Rest of the Story section of this chapter discusses how companies use check clearing in their cash management systems, the process of international check clearing, financial dis intermediation, and ten major causes of bank failures. The Basics Financial Intermediaries What role do financial intermediaries play in an economy? Why do people place funds in financial intermediaries, such as banks and thrift institutions 1 when they could lend directly to borrowers and earn higher returns? Direct Versus Indirect Financing To frame our discussion, let ’ s divide the economy into two segments, with ulti-mate lenders and savers (lenders/savers) on one side and ultimate borrowers on the other side (see Figure 7.1).

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  Financial Policies and Capital Markets in Arab Countries

  • Saíd El-Naggar(Author)
  • 1994(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  The supply of equities in many countries has been limited by the reluctance of owners of private companies to dilute their ownership and control by issuing stock to the public and to comply with requirements to disclose information about their operations. The availability of less expensive debt finance has also discouraged equity issues. The absence of an appropriate legal, regulatory and tax framework has further inhibited the development of capital markets. Double taxation on dividends and capital gains, and the tax-free status of government securities has lessened the appeal of private equity and bonds. Investor confidence has been further undermined by the lax enforcement of corporate income taxes as closely held corporations are able to avoid taxes by showing depressed profits. The lack of timely and accurate financial information has often resulted in speculative trading that has further hurt investor demand for securities in developing countries.

  The efficient functioning of financial markets also depends on institutions that lend and borrow little on their own account; investment banks, securities brokers and credit rating agencies.

  Investment Banks . Investment banks are important constituents of securities markets; they are intermediaries for locating and collecting funds for their clients so they can finance new investment products. They are major players in the development of securities offerings. In addition, they arrange private placements, provide funds management, and perform corporate advisory and portfolio management services. Investment banks have yet to play a major role in Arab countries, which are still in the process of developing their nascent capital markets.

  Investment bankers bring new securities to the market by purchasing whole issues of securities from corporate issuers or from public bodies and distributing them to institutional and individual investors. By making a firm commitment to purchase the securities from the company, the investment banker insures any risk associated with a new issue. This service, known as underwriting, permits government and corporate entities to broaden their sources of long-term financing beyond the banking system. Underwriting is critical to the development of emerging markets where corporate or public entities are reluctant to raise equity capital without the guarantee provided by this service. Investment banks are also market makers in secondary markets.

  Corporate advisory services are a growing business for investment banks in emerging markets. The private sector in many developing countries has been accustomed to functioning in heavily controlled and protected market environments that have provided inadequate preparation for businesses to respond to market signals. Investment banks can play an important part in advising businesses on how to compete in a more open and international economy. However, they also have a key advisory role in relation to project financing, i.e., identifying project risks, attracting technical partners, identifying and selecting sources of finance, and structuring the financial package. While banks, long-term financing institutions, and institutional investors provide financing, investment banks arrange financing and can play a useful role in organizing loan syndications for large amounts of financing.

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  Banking in China

  Second Edition

  • V. Cousin(Author)
  • 2011(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Financial intermediation is not only a function undertaken by banks. Capital and money markets, as well as venture capital for example, can also allocate funds to productive uses. Financial intermediation can also take some informal traits when family, friends or other unregistered entities, for example, support an enterprise financially (either with debt or capital). 6.2 Financial intermediation and financial infrastructure A number of researchers have found that there is a low level of financial intermediation in China. Genevieve Boyreau-Debray (2003: 18) finds an ‘inverse relationship between the rate of financial intermediation and the Table 6.1 Local currency loans and deposits in China (year-end, CNY billion) 2000 2002 2004 2005 2007 2008 2009 Total loans 9,937 13,129 17,736 19,469 26,169 30,339 42,562 Total deposits 12,38 17,092 24,053 28,717 38,937 46,620 61,201 Loan to deposit ratio (%) 80.3 76.8 73.7 67.8 67.2 65.1 69.5 Source: Based on data from www.pbc.gov.cn. Table 6.2 Loans by economic sector and their share of GDP (%) 2000 2005 2008 to GDP* to loan portfolio** to GDP to loan portfolio to GDP to loan portfolio Loans to agriculture 15.1 7.4 12.2 13.2 11.3 14.1 Loans to construction 5.6 2.5 5.5 3.4 5.7 2.9 Loans to industry 40.4 25.9 42.2 25.7 42.9 28.9 Loans to commerce 39 27.2 40.1 18.8 40.1 14.2 Other loans 37.0 38.8 39.9 * is the percentage that this economic sector contributes to GDP. ** is the percentage of short- term loans lent by financial institutions to this particular economic sector. Notes: The National Bureau of Statistics publishes the contribution to GDP for the primary, the secondary and the tertiary sector and for the construction industry. The ‘other loans’ category is as stated in the PBOC statistics. Sources: Data from www.pbc.gov.cn and www.stats.gov.cn.

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  Financial Integration in the European Monetary Union

  • Sławomir Ireneusz Bukowski(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  B. Scholtens and D. van Wensveen (2003, pp. 35–37) point to an essential characteristic of financial intermediation, namely creating added value for savers and investors comprised in financial instruments. This type of instrument cannot be created together or individually by savers and investors. This process of added value creation is intensified by competition between the existing financial institutions and those entering the market and introducing financial innovations. Financial institutions must continuously analyze the preferences of the financial market participants and translate these preferences into characteristics of new financial products. An important function of financial intermediation institutions is risk transformation. They create added value by creating financial instruments that absorb risk. In this way, the sector of financial intermediation institutions has evolved into the financial industry sector (see also Allen & Santomero, 1997, pp. 1461–1476; Merton & Bodie, 1995, pp. 1–27; Allen & Gale, 2001, pp. 127–149).

  As it was mentioned before, the relationship between the role and place in the market of financial intermediation institutions (banks, insurance societies, investment funds, etc.) and the market of financial instruments has changed. In the traditional system, direct customers of financial intermediaries – savings providers and borrowers – were households of lower income and assets and small and medium-size enterprises (SMEs).

  In the modern system formed as a result of the just-described phenomena related to knowledge-based economy, households and SMEs are customers of financial intermediation institutions that intermediate in investing resources obtained from them in the market of financial instruments (especially those listed in organized markets) and offering products based on exchange listed financial instruments. On the other hand, big companies benefit, to a large extent, from raising financial resources directly in organized capital markets (exchanges).

  It is a result of the just-described factors that financial intermediation institutions have become financial product providers creating added value. At the same time, such a state of affairs indicates the growing role of financial markets in economy and even the fact that they have become “the heart” of the financial system and market economy and the money and information “pump.”

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