How can you explain this? Please explain in Taglish. Please give an example po na related sa topic para po mas lalong maintindihan. Thank you!

Banking and Financial Institution

Banking: An Introduction Essence of banking The members of these sectors may be either lenders or borrowers or both at the same time. For example, a member of the household sector may have a mortgage bond (= borrower by the issue of a non- marketable debt instrument) and at the same time hold a balance on your accounts at the bank (= a lender; a holder of money). 1.3.3 Financial intermediaries The second element is financial intermediaries. As seen in Figure 1, lending and borrowing takes place either directly between ultimate lenders and borrowers [e.g. when an individual buys a share (also called equity or stock) issued by a company], or indirectly via financial intermediaries. Financial intermediaries essentially solve the differences (or conflicts) that exist between ultimate lenders and borrowers in terms of their requirements: size, risk, return, term of loan, etc. An example: your friend Johnny (a member of household sector) has LCC' 10 000 he would like to lend out (= invest) for 30 days at low risk. You (a member of household sector) would like to borrow LCC 20 000 for 365 days to buy a car. You don't mind who you borrow from, because you represent the risk, not the lender. Your and Johnny's requirements don't match at all; direct financing won't work. He places his LCC 10 000 on deposit with a prime bank for 30 days and you borrow LCC 20 000 from the bank for 365 days. You and Johnny are both in high spirits; the bank satisfied your different requirements. Financial intermediaries exist not only because of the divergence of requirements of lenders and borrowers, but for the specialised services they provide, such as insurance policies (insurance companies), retirement fund products (retirement funds), investment products (securities unit trusts, exchange traded funds), overdraft and deposit facilities (banks), and so on. The banks also provide a payments system, the system we don't see but rely much on. The central bank provides an interbank settlement system (as we will see later). CENTRAL BANK ULTIMATE BORROWERS Interbank ULTIMATE debt Deposits LENDERS BANKS HOUSE HOLD SECTOR Deal Interbank debt Deposits HOUSEHOLD INVESTMENT SECTOR CORPORATE Debi & shares BANKS VEHICLES SECTOR Debt & shares CORPORATE OFIS: SECTOR GOVERNMENT Debt DFIs. SPVS. Debt CISS Investment SECTOR vehicle securities GOVERNMENT Finance co's (Pis) SECTOR FOREIGN Investment co's SECTOR Debt & shares Debi & shares FOREIGN SECTOR Debt & shares Figure 2: financial intermediariesBanking: An Introduction Essence of banking In essence, banks are straightforward institutions: they take existing deposits (and loans to a small degree) and loan these funds, and, at the same time, make new loans and create new deposits (new money). However, while their basic function may be simple, the risks they assume are not, and this makes them complex. This text aims to cover banking in a comprehensible manner, and the following are the sections: . Essence of banking. Money creation. Risks in banking. . Bank models & prudential requirements. This section serves as introduction to banking and offers the following sections: . The financial system. Principles of banking. . The balance sheet of a bank. 1.3 The financial system 1.3.1 Introduction Direct investment/ financing ULTIMATE ULTIMATE BORROWERS Securities LENDERS (deficit economic (surplus economic units units ) Surplus funds HOUSEHOLD HOUSEHOLD SECTOR SECTOR CORPORATE CORPORATE SECTOR FINANCIAL SECTOR Securities Securities GOVERNMENT INTERMEDIARIES GOVERNMENT SECTOR SECTOR Surplus funds Surplus funds FOREIGN FOREIGN SECTOR SECTOR Indirect investment/ financing Figure 1: simplified financial system