Q11. What is financial intermediary and what are the advantages enjoyed by market participants from this?
Q12. Define depository institutions and describe its different types
Q13. What do you mean by liquidity management and what are its different strategies?
Q14. Why are financial institutions concerned with liquidity? Or, Importance of liquidity of commercial bank
Q12. Define depository institutions and describe its different types
Q13. What do you mean by liquidity management and what are its different strategies?
Q14. Why are financial institutions concerned with liquidity? Or, Importance of liquidity of commercial bank
Q15. What is an insurance company and what are its various types?
Q11. What is financial intermediary and what are the advantages enjoyed by market participants from this?
The most important contribution of financial intermediaries is a steady and relatively inexpensive flow of funds from saver to final users or investors. Financial intermediaries include depository institutions, such as, commercial banks, savings and loan associations, savings banks and credit unions, which acquire the bulk of their funds by offering their liabilities to the public mostly in the form of deposit. Beside this insurance companies and pension funds are also act as financial intermediaries.
Advantages enjoyed by market participants:
1. Investors can get more choices concerning maturity for their investments & borrowers can get more choices for the length of their debt obligations
2. Borrowers can get longer term loan at a lower cost
3. Attaining cost-effective diversification
4. Lower cost accrue to the benefit of the investor
5. Markets participants get the benefit of using cheques, credit cards, debit cards & electronic transfer of funds through financial intermediaries
Q12. Define depository institutions and describe its different types
Depository Institutions are financial institutions those accepts deposits. These deposits represent the liabilities of the deposit-accepting institution. With the funds raised through deposits and other funding sources, depository institutions both make direct loans to various entities and invest in securities. Their income is derived from two sources: a) the income generated from the loans they make and the securities they purchase, and b) fee income.
The various types of depository institutions are:
1. Commercial Banks: It provides numerous services in financial system. The services can classify into i) individual banking, ii) institutional banking, and iii) global banking.
2. Credit unions: They are commonly known as cooperative societies. The purpose of credit union is to service their members’ saving and borrowing needs.
3. Savings and loan associations (S&Ls): The basic aspects behind to providing of funds for financing the purchase of homes. The collateral for the loans would be the home being financed. S&Ls are either mutually owned or have corporate stock ownership.
4. Saving Banks: this can be mutually owned (in which case they are called mutual savings banks) or stockholder owned. The principal assets of savings banks are residential mortgages and the principal source of founds is deposits.
Q13. What do you mean by liquidity management and what are its different strategies?
Liquidity management refers to those activities within a financial institution to ensure that holdings of liquid assets (e.g. cash, bank deposits and other financial assets) are sufficient to meet its obligations as they fall due, including unexpected transactions. Banks are primarily in the business of raising deposits and making loans that transform liquid liabilities into liquid assets. It has two broad aspects:
a. Asset Liquidity: It measures the ease with which a bank can convert its assets into cash.
b. Market Liquidity: It measures ability to raise capital form other market participants at short notice.
The main strategies that bank takes positively for an effective liquidity management are as follows:
1. Each bank has to formulate a suitable but specific liquidity policy
2. Based on the past information or data, ALCO or liquidity mgt committee must bring desired changes in the composition of assets and liabilities.
3. Continuous customer relationship with large borrowers, depositors and other liability holders etc will help the bank to secure required funds during liquidity crisis.
4. Bank should prepare contingency plan including arrangement for line of credit with large banks and suppliers of credit adverse liquidity position arising from banks specific crisis or general market crisis.
5. The internal norms/limits may be fixed for certain type of transaction that will have an adverse impact or liquidity position. For example: i) borrowing from call money market as well as from repo market, ii) Desired ratios for short-term liabilities to short term assets, loans to total deposits.
Q14. Why are financial institutions concerned with liquidity? Or, Importance of liquidity of commercial bank
Liquidity, or the ability to fund increases in assets and meet obligations as they come due, is crucial to the ongoing viability of any banking organization. Therefore, managing liquidity is among the most important activities conducted by banks. Sound liquidity management can reduce the probability of serious problems.
So, banks must visualize and evaluate liquidity needs under different business scenarios. Liquidity represents the ability to deal with shortage of funds and surplus of funds. Irrespective of size of a bank, adequate liquidity is essential to meet commitments when due and to undertake new transaction when desirable.
Considering the importance of managing liquidity risk, each bank is required to have a suitable policy in this regard which must cover objectives of liquidity management, framework for assessing and managing liquidity, funding strategies and internal norms including delegation of authority etc.
Q15. What is an insurance company and what are its various types?
A company that offers insurance policies to the public, either by selling directly to an individual or through another source such as an employee's benefit plan. An insurance company is usually comprised of multiple insurance agents. An insurance company can specialize in one type of insurance, such as life insurance, health insurance, or auto insurance, or offer multiple types of insurance.
Types of Insurance Company:
1. Life insurance: It pays the beneficiary of the life insurance policy in the event of the death of the insured.
2. Health Insurance: the risk insured is medical treatments that the company pays the insured all or a portion of the cost of the medical treatments.
3. Property and casualty insurance: the risk insured by property and casualty insurance companies is damage to various types of properties.
4. Liability insurance: the risk insured against is litigation or the risk of lawsuits against the insured due to actions by the insured or others.
5. Disability insurance: It insured against the inability of employed persons to earn an income in either their own occupation or any others.
6. Long-term care insurance: It insured as custodian care for the aged who become concerned about outliving their assets and being unable to care for themselves as they age.
The most important contribution of financial intermediaries is a steady and relatively inexpensive flow of funds from saver to final users or investors. Financial intermediaries include depository institutions, such as, commercial banks, savings and loan associations, savings banks and credit unions, which acquire the bulk of their funds by offering their liabilities to the public mostly in the form of deposit. Beside this insurance companies and pension funds are also act as financial intermediaries.
Advantages enjoyed by market participants:
1. Investors can get more choices concerning maturity for their investments & borrowers can get more choices for the length of their debt obligations
2. Borrowers can get longer term loan at a lower cost
3. Attaining cost-effective diversification
4. Lower cost accrue to the benefit of the investor
5. Markets participants get the benefit of using cheques, credit cards, debit cards & electronic transfer of funds through financial intermediaries
Q12. Define depository institutions and describe its different types
Depository Institutions are financial institutions those accepts deposits. These deposits represent the liabilities of the deposit-accepting institution. With the funds raised through deposits and other funding sources, depository institutions both make direct loans to various entities and invest in securities. Their income is derived from two sources: a) the income generated from the loans they make and the securities they purchase, and b) fee income.
The various types of depository institutions are:
1. Commercial Banks: It provides numerous services in financial system. The services can classify into i) individual banking, ii) institutional banking, and iii) global banking.
2. Credit unions: They are commonly known as cooperative societies. The purpose of credit union is to service their members’ saving and borrowing needs.
3. Savings and loan associations (S&Ls): The basic aspects behind to providing of funds for financing the purchase of homes. The collateral for the loans would be the home being financed. S&Ls are either mutually owned or have corporate stock ownership.
4. Saving Banks: this can be mutually owned (in which case they are called mutual savings banks) or stockholder owned. The principal assets of savings banks are residential mortgages and the principal source of founds is deposits.
Q13. What do you mean by liquidity management and what are its different strategies?
Liquidity management refers to those activities within a financial institution to ensure that holdings of liquid assets (e.g. cash, bank deposits and other financial assets) are sufficient to meet its obligations as they fall due, including unexpected transactions. Banks are primarily in the business of raising deposits and making loans that transform liquid liabilities into liquid assets. It has two broad aspects:
a. Asset Liquidity: It measures the ease with which a bank can convert its assets into cash.
b. Market Liquidity: It measures ability to raise capital form other market participants at short notice.
The main strategies that bank takes positively for an effective liquidity management are as follows:
1. Each bank has to formulate a suitable but specific liquidity policy
2. Based on the past information or data, ALCO or liquidity mgt committee must bring desired changes in the composition of assets and liabilities.
3. Continuous customer relationship with large borrowers, depositors and other liability holders etc will help the bank to secure required funds during liquidity crisis.
4. Bank should prepare contingency plan including arrangement for line of credit with large banks and suppliers of credit adverse liquidity position arising from banks specific crisis or general market crisis.
5. The internal norms/limits may be fixed for certain type of transaction that will have an adverse impact or liquidity position. For example: i) borrowing from call money market as well as from repo market, ii) Desired ratios for short-term liabilities to short term assets, loans to total deposits.
Q14. Why are financial institutions concerned with liquidity? Or, Importance of liquidity of commercial bank
Liquidity, or the ability to fund increases in assets and meet obligations as they come due, is crucial to the ongoing viability of any banking organization. Therefore, managing liquidity is among the most important activities conducted by banks. Sound liquidity management can reduce the probability of serious problems.
So, banks must visualize and evaluate liquidity needs under different business scenarios. Liquidity represents the ability to deal with shortage of funds and surplus of funds. Irrespective of size of a bank, adequate liquidity is essential to meet commitments when due and to undertake new transaction when desirable.
Considering the importance of managing liquidity risk, each bank is required to have a suitable policy in this regard which must cover objectives of liquidity management, framework for assessing and managing liquidity, funding strategies and internal norms including delegation of authority etc.
Q15. What is an insurance company and what are its various types?
A company that offers insurance policies to the public, either by selling directly to an individual or through another source such as an employee's benefit plan. An insurance company is usually comprised of multiple insurance agents. An insurance company can specialize in one type of insurance, such as life insurance, health insurance, or auto insurance, or offer multiple types of insurance.
Types of Insurance Company:
1. Life insurance: It pays the beneficiary of the life insurance policy in the event of the death of the insured.
2. Health Insurance: the risk insured is medical treatments that the company pays the insured all or a portion of the cost of the medical treatments.
3. Property and casualty insurance: the risk insured by property and casualty insurance companies is damage to various types of properties.
4. Liability insurance: the risk insured against is litigation or the risk of lawsuits against the insured due to actions by the insured or others.
5. Disability insurance: It insured against the inability of employed persons to earn an income in either their own occupation or any others.
6. Long-term care insurance: It insured as custodian care for the aged who become concerned about outliving their assets and being unable to care for themselves as they age.
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