Ngân hàng, tín dụng - Chapter 13: Nondepository financial institutions

1Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 13 Nondepository Financial Institutions Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-2 Learning Objectives • Understand thee broad range and function of nondepository financial institutions • Describe the tools of insurance companies • Define the types and obligations of pension funds • Distinguish finance companies and alternative financing institutions such as venture capital funds, hedge funds, and mezzanine debt funds Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-3 Life Insurance Companies • The first life insurance company in the U.S. was established before the Revolutionary War and is still in existence • Structured as either stock companies (owned and controlled by shareholders) or mutual associations (ownership and control rests with the policyholders) • Supervised and regulated almost entirely by the states in which they operate 2Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-4 Life Insurance Companies (Cont.) • Regulation of life insurance companies includes: – Sales practices – Premium rates – Allowable investments • Usually overseen by a state insurance commissioner, who might also be the state banking commissioner Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-5 Life Insurance Companies (Cont.) • Types of life insurance policies: – Whole Life Insurance • Constant premium that is paid through entire life of policy • Build up cash reserves or savings which can be withdrawn as borrowing or outright by canceling the policy • Savings component pays a money market rate of interest that changes with market conditions Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-6 Life Insurance Companies (Cont.) • Types of life insurance policies: (Cont.) – Term Life Insurance • Pure insurance with no cash reserve or savings element • Premiums are relatively low at first but increase with the age of the insured individual – Universal (variable) Life • Variation on whole life policy • “Unbundle” the term insurance and tax-deferred savings component • Owner can elect how to allocate the savings component among a menu of investment options, thereby potentially earning above money market rates 3Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-7 Life Insurance Companies (Cont.) • Based on actuarial tables, life insurance companies have ability to predict cash flow • Typically insurance companies use excess funds to buy long-term corporate bonds and commercial mortgages – Higher yields – Unlikely of having to sell prior to maturity • However, lately they have branched out into riskier ventures such as common stock and real estate Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-8 Pension Funds • Individuals need pension plans to supplement Social Security benefits • Most pension fund assets are in employer-sponsored plans • Defined Benefit Plan – Retirement benefits are defined by the plan – Employer contributions are adjusted to meet the benefits and insure the plan is fully funded—enough funds to meet future obligations Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-9 Pension Funds (Cont.) • Defined Benefit Plan (Cont.) – Vesting—retirement benefits remain with the employee if they leave the firm and is based on length of employment – Employee Retirement Income Security Act (ERISA)— establishes minimum reporting, disclosure, vesting, funding and investment standards to safeguard employee pension rights – Pension Benefit Guaranty Corporation—guarantees some benefits in defined benefit plans if company is unable to meet its accrued pension liabilities 4Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-10 Pension Funds (Cont.) • Defined Contribution Plan – Contributions are defined by the plan – Contribution may be made by employees or employers or a combination of the two – Employee contributions are tax deferred—taxes payable when funds are withdrawn – Benefits depend on the performance of the assets in the plan – Avoids the problems of vesting and funding – Individual employee has the ability to choose the assets in which to invest – Most common are 403(b) and 401(k) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-11 Pension Funds (Cont.) • Defined contribution plans are the type favored by most employers, although some employers offer both plans • In addition to employer-sponsored plans, some individuals are given tax incentives to set up their own pension plans – Keogh Plans—self-employed individuals – Individual Retirement Accounts (IRAs)—working people who are not covered by company-sponsored pension plans Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-12 Property and Casualty Insurance Companies • Because of uncertainty of liability in this type of insurance, unable to plan their future cash requirements • Tend to invest in tax-free municipal bonds and liquid short-term securities – Lower yields – Highly liquid • Regulated and supervised by the states in which they operate 5Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-13 Property and Casualty Insurance Companies (Cont.) • State insurance commissions set ranges for rates, enforce operating standards, and exercise overall supervision over company policies • Little federal involvement in regulating these companies Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-14 Mutual Funds • Money Market Mutual funds have been prominent on the American financial scene since the 1970s • However, stock market mutual funds (Mutual Funds) have been in existence since the 1950s. • A mutual fund pools the funds of many people and managers invest the money in a diversified portfolio of securities to achieve some stated objective Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-15 Mutual Funds (Cont.) • Open-end Mutual Fund – Sell redeemable shares in the fund to the general public – Shares represent a proportionate ownership in a portfolio held by the fund – Shareholder can go directly to fund and buy additional shares or redeem shares at their net asset value (NAV) – No-load Funds--Sold directly to public at the current NVA – Load Funds—Sold through brokers and buyer pays a sales commission 6Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-16 Mutual Funds (Cont.) • Closed-end Investment Companies – Issue a limited number of shares – Mutual fund company does not redeem their own shares on demand – Shares of closed-end funds are traded in the stock market through a third party Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-17 Mutual Funds (Cont.) • Mutual funds are regulated by the Securities and Exchange Commission (SEC) • Primary objective of regulation is the enforcement of reporting and disclosure requirements to protect the investor • Many investors are attracted to families of mutual funds – Number of mutual funds operated under one management umbrella – Investors can easily transfer money among funds within the family Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-18 Finance Companies • Consumer Finance Companies – Make consumer loans – Specialty Finance Companies—specialize in credit card financing • Commercial finance Companies – Make commercial loans usually on a secured (collateralized) basis – Loans not as risky as consumer loans • Since lending is short-term, these companies borrow substantial amounts in commercial paper market 7Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-19 Finance Companies (Cont.) • Historically finance companies have played an important role in financing growing undercapitalized companies • Commercial finance companies originated the concept of leveraged buyout (LBOs) which relies heavily on debt to pay for acquisition of a company • Captive Finance Companies—Finance purchase of commercial and retail oriented businesses such as General Motors products (GMAC) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-20 Securities Brokers and Dealers and Investment Banks • These financial institutions play a crucial role in the distribution and trading of huge amounts of securities • Investment banks – Sell and distribute new stocks and bonds directly from issuing corporations to original purchasers – League Tables rank investment banks by the volume of securities they underwrite – Underwriting is typically conducted through a syndicate which includes many investment banks and brokerage firms Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-21 Securities Brokers and Dealers and Investment Banks (Cont.) • Investment banks (Cont.) – Investment banks derive a substantial amount of income from offering advice to firms involved in mergers and acquisitions • What price one firm should pay for another • How the transaction should be structured • Provide strategic advice in hostile takeovers—when one firm seeks to acquire another against the other’s wishes 8Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-22 Securities Brokers and Dealers and Investment Banks (Cont.) • Brokers and Dealers – Involved in the secondary market, trading “used” or already outstanding securities – Brokers match buyers and sellers and earn a commission – Dealers commit their own capital in the buying and selling of securities and hope to make profit on the transaction Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-23 Securities Brokers and Dealers and Investment Banks (Cont.) • Brokers and Dealers (Cont.) – Many of the nationwide stock exchange firms act as investment bankers, dealers, and brokers – A number of large stock exchange firms have branched out to provide new types of financial services previously out of their operating charter – Commercial banks, investment banks, and broker dealers have now combined under single holding company umbrellas Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-24 Venture Capital Funds, Mezzanine Debt Funds, and Hedge Funds • Venture capital funds, mezzanine debt funds, and hedge funds are usually not available to public investors and not registered with SEC • Funding comes from wealthy individuals or other financial institutions, possibly sponsored by brokerage firms and banks • Both venture capital funds and mezzanine debt funds provide an important source of funding to small and midsize companies • Financing by both venture and mezzanine funds is non- traded and held until maturity 9Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-25 Venture Capital Funds, Mezzanine Debt Funds, and Hedge Funds (Cont.) • Venture Capital Funds – Invest funds in start-up companies – Traditional bank financing for these firms in the early stage of growth would be very limited – The Venture Capital Fund receives a substantial equity stake in the firm – Although many start-up companies will fail, significant profit on those that are successful – Receives profits when it takes the successful company public in an initial public offering (IPO). Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-26 Venture Capital Funds, Mezzanine Debt Funds, and Hedge Funds (Cont.) • Mezzanine Debt Funds – Provide debt funds to small and midsize companies – Issue convertible debt and subordinated debt – Sometimes simply invest in a combination of high-yielding debt and equity issued by the same company – Used to provide long-term funds, sometimes part of a management-buyout financing package Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-27 Banks Versus Nondepository Institutions • Many nondepository institutions offer services that compete directly with banks • Traditionally many of the different markets were segmented, however, today they often compete for the same business • The Gramm-Leach-Bliley Act of 1999 allowed the creation of financial holding companies (FHCs) that can own commercial banks, investment banks, and insurance underwriters 10 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-28 Banks Versus Nondepository Institutions (Cont.) • The creation of FHCs brings the United States much closer to the universal banking regulatory model adopted by the European Union