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Banking and Financial Institution

CENTRAL . CDS = NCDs & BANK NNCDS ULTIMATE Interbank ULTIMATE . CDS BORROWERS debt LENDERS deficit economic BANKS . CDS = (surplus economic units) NCDs & units) Interbank Shares debt NNCDS . CDS HOUSEHOLD Debt = NMD Debt BANKS INVESTMENT HOUSEHOLD SECTOR SECTOR VEHICLES Shares = MD & NMD . Investment CORPORATE Debt = MD (CP, BAs, OF Is: Cls vehicle CORPORATE SECTOR bonds) & NMD DFIs, SPVS, . Debt = MD (CP, bonds) securities SECTOR Finance & NMD CISS PIs) GOVERNMENT . Debt = MD (bills, bonds) Co's, etc GOVERNMENT SECTOR Als SECTOR . Shares . Debt FOREIGN Shares FOREIGN SECTOR Debt = MD (CP, bonds) SECTOR . Shares Debt MD = marketable debt; NMD = non-marketable debt; CP = commercial paper, BAs= bankers' acceptances; CDs = certificates of deposit (= deposits ); NCDs = negotiable certificates of deposit; NNCDs = non-negotiable certificates of deposit; foreign sector issues foreign shares and foreign MD (foreign CP & foreign bonds); PI = participation interest (units) Figure 3: financial intermediaries & instruments / securities There are two categories of financial instruments: . Debt (and deposits). . Shares.Banking: An Introduction Essence of banking The main financial intermediaries that exist in most countries and their relationships with one another are presented in Figure 2. A useful of classification of them is presented in Box 1. Note that the non- deposit intermediaries may also be seen as investment vehicles. Their products (= their liabilities), which can be called participation interests (PIs), are designed as investments for the household sector (and in some cases other financial intermediaries). 1.3.4 Financial instruments The third element is financial instruments. They are also called securities; borrowers issue securities. They are therefore evidences of debt or shares. They also represent claims on the issuers / borrowers. Ultimate lenders exchange money (deposits) for securities and ultimate borrowers exchange (issue new) securities for money. Financial intermediaries issue their own securities (e.g. deposits) and hold the securities of the ultimate borrowers (e.g. treasury bills). As you know, the banks have a special and unique role in this market for money in that they are able to create money (bank deposits) by making new loans (buying new securities). Securities offer a return that is fixed (fixed-interest debt) or variable (variable-rate debt and share dividends). The capital amount of shares and debt is paid back after a period (bonds and preference shares) or not ever (perpetual bonds and shares). Securities are also either marketable of non-marketable. This is discussed in more detail in the next section. Box 1: financial intermediaries MAINSTREAM FINANCIAL INTERMEDIARIES DEPOSIT INTERMEDIARIES Central bank (CB) Private sector banks NON-DEPOSIT INTERMEDIARIES (INVESTMENT VEHICLES) Contractual intermediaries (CIs) Insurers Retirement funds (pension funds, provident funds, retirement annuities) Collective investment schemes (CISs) Securities unit trusts (SUTs) Property unit trusts (PUTs) Exchange traded funds (ETFs) Alternative investments (Als) Hedge funds (HFs) Private equity funds (PEF's) QUASI-FINANCIAL INTERMEDIARIES (QFIs) Development finance institutions (DFIs) Special purpose vehicles (SPVs) Finance companies Investment trusts / companies Micro lenders