Finance and Financial Markets

Third Edition

by Keith Pilbeam

Chapter 3 - Financial Institutions

Find an overview and useful learning resources below to accompany Finance and Financial Markets chapter three.

Chapter Introduction

Individuals and businesses have various motives for saving and a wide variety of financial requirements. Individuals save for retirement, house purchase, future consumption, to meet future payments and insurance against loss of life or loss of property and so forth. Businesses put aside cash to meet unexpected contingencies, to finance investment, takeovers or for future development of the enterprise generally. Both individuals and businesses place many demands on financial institutions; they may require short-term borrowing facilities and may have a strong demand for long-term capital to finance projects. In addition to meeting the varied needs of businesses and individuals, financial institutions also face demands from governments that typically wish to borrow funds to meet various commitments as well as finance for capital projects.

A variety of financial institutions exist to meet these demands. Some institutions offer a wide variety of fairly standard services, while others provide more specialist products and services. In this chapter we look at various types of important financial institutions and the services that they offer. We first look at the central bank which has a number of important functions, one of which is overseeing the proper functioning of the banking system. We then proceed to look at deposit-accepting institutions that accept deposits and lend these directly to final borrowers. These bodies include the banking sector and other savings institutions. We also look at other types of financial intermediaries.

Learning Objectives

In this chapter you will learn about:

  • The various roles played by central banks
  • The importance of capital adequacy
  • The distinctions between commercial and investment banking
  • The insurance industry and different types of insurance
  • Mutual finds, investment companies and exchange traded funds
  • The importance of other institutional investors such as pension funds, hedge funds and private equity

Further Reading

Fabozzi, F., Modigliani, F. and Jones, F. (2009) Foundations of Financial Markets and Institutions, 4th edn, Pearson.

Madura, J. (2008) Financial Markets and Institutions, 7th edn, South Western College Publications.

Mishkin, F. and Eakins, S.G. (2008) Financial Markets and Institutions, 6th edn, Pearson.

Saunders, A. and Cornett M. (2009) Financial Markets and Institutions, 4th edn, McGraw-Hill.

Revision Questions

  1. What is the difference between ‘life insurance’ and ‘general insurance’?
  2. What are the differences between an investment trust/investment company and a unit trust/mutual trust?
  3. Briefly explain the main roles played by venture capitalists in the financial system.
  4. Outline four types of risk that commercial banks face.
  5. Explain some of the advantages to an employee of joining a company pension scheme over investing in the stock market directly.

Multiple Choice Questions

Click here to launch multiple choice questions for chapter 3.