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Overview of Financial Institutions and Their Functions

Mar 24, 2025

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Lecture on Financial Institutions

Overview

  • Focus on financial institutions: banks, insurance companies, and investment banks.
  • Types of financial institutions: ADIs (Authorized Deposit-taking Institutions) and non-ADIs.
    • ADIs engage in taking deposits and lending money.
    • Non-ADIs provide financial advice without taking deposits.

Types of Financial Institutions

Authorized Deposit-Taking Institutions (ADIs)

  • Commercial Banks: Main financial institutions authorized to take deposits.
  • Building Societies: Provide loans, primarily for residential properties.
  • Credit Cooperatives: Employee-based credit organizations (e.g., Police Credit Union).

Non-Deposit Taking Financial Institutions

  • Investment Banks: Provide advice on mergers, acquisitions, and IPOs.
  • Insurance Companies: Offer products like car and home insurance, investing premiums in financial markets.
  • Superannuation Funds: Accumulate savings for retirement, investing in financial markets.
  • General Finance Companies: Provide financial services but not authorized to take deposits.

Banking Industry Evolution

  • Pre-1980s: Focus on asset management; loans matched available deposits.
  • Post-1980s: Shift to liability management; banks sourced funds from capital markets.
  • Growth due to deregulation, allowing diverse financial services and international market access.

Sources and Uses of Funds

Sources of Funds

  • Debt and Equity: Fund loans using deposits (debt) and shareholders' equity.
  • Deposits: Mix of current accounts, demand deposits, and term deposits.
    • Current Accounts: Business accounts with high liquidity, low interest.
    • Demand Deposits: Savings accounts, more stable than current accounts.
    • Term Deposits: Fixed-period deposits with higher interest rates.
  • Negotiable Certificates of Deposits: Short-term discount securities.
  • Bills of Exchange: Financial instruments, with banks as acceptors or discounters.
  • Debentures and Bonds: Supported by collateral, sold to raise funds.
  • Subordinated Notes: Rank below other creditors, higher risk.
  • Foreign Currency Liabilities: Loans in foreign currency markets.

Uses of Funds

  • Personal and Housing Finance: Includes investment properties and fixed-term loans.
  • Commercial Lending: Business loans with variable or fixed interest rates.
  • Overdrafts: Short-term facilities allowing account overdrafts.
  • Leasing: Bank purchases equipment to lease to borrowers.
  • Government Lending: Purchase of government-issued discount securities and bonds.

Non-Banking Financial Institutions

Investment Banks

  • Provide advice on mergers, acquisitions, and risk management.
  • Source funds from international markets, focus on off-balance sheet services.

Managed Funds

  • Collect and pool savings to invest in financial markets.
  • Types: Cash Management Trusts, Public Unit Trusts, Superannuation Funds.

Insurance Companies

  • Life Insurance: Focus on death or disability, long-term investments.
  • General Insurance: Short-term investments due to unpredictable liabilities.

General Finance Companies

  • Offer financial services, not authorized to take deposits.
  • Lend to higher-risk individuals who can't get loans from banks.

Building Societies and Credit Unions

  • Building Societies: ADIs focusing on loans for residential properties.
  • Credit Unions: Employee-based, collect deposits, provide loans to members.

Regulatory Authority

  • APRA (Australian Prudential Regulation Authority): Regulates financial stability, ensures quality in deposit and loan systems.

These notes summarize the key points from the lecture on financial institutions, covering their types, functions, sources, and uses of funds, and regulatory aspects.

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