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Introduction:
1. What are financial assets?
2. What are financial markets?
Financial Institution I:
1. Financial intermediaries
2. Depository institutions
3. Nondepository institutions
1
Dr. YEO Wee Yong for FIN3103 (Semester I 2015/2016)
Introduction
Introduction
Introduction
1.2.2.2. Equity
Payment is based on earnings
Examples:
Introduction
Introduction
Introduction
Introduction
Introduction
Introduction
10
Introduction
Introduction
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Financial Institutions I
What are financial institutions?
Institutions or business entities which provide
financial services
13
Financial Institutions I
1.
Financial intermediaries
Financial intermediaries
Financial intermediation: Intermediate between
suppliers and demanders of funds
Maturity intermediation
Denomination intermediation
Risk intermediation
14
Financial Institutions I
2.
Depository institutions
Commercial banks
Full banks (33)
locally- incorporated
DBS Bank
Oversea-Chinese Banking Corp
United Overseas Bank
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Financial Institutions I
2.
Depository institutions
Commercial banks
Full banks (33)
28 branches of foreign-incorporated banks
10 QFB: 25 places of business (10
branches), share ATMs among themselves,
tap ATMs of local banks
A&Z Banking Group, BNP Paribas,
Citibank (Singapore), HSBC, ICICI Bank,
MayBank, Standard Chartered Bank
(Singapore), State Bank of India, Bank of
China, Industrial and Commercial Bank of
China
The retail arm of 2 has been incorporated
locally so far: Citibank Singapore Limited
and Standard Chartered Bank Singapore
Limited
16
Financial Institutions I
2.
Depository institutions
Commercial banks
Wholesale banks (55):
Formerly known as restricted banks
No S$ retail banking
Offshore banks (38): Most transaction in ACU very
limited DBU business
Savings banks
POSB: 1972
Encourage savings
No Forex activity
No deposits from corporate
No financing of foreign trade
Restricted lending activities: Credit POSB
Bought over by DBS on Nov 1998
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Financial Institutions I
2.
Depository institutions
Savings and loan associations (US)
S & L crisis in the 80s
Short term deposits
Long term fixed mortgage loans
Fluctuation of interest rates
Lifting of deposit rate ceiling (Regulation Q)
Increase risk of loan portfolio
Decrease in real estate prices => default
18
Financial Institutions I
2.
Depository institutions
Credit Unions (US)
No corporate stock ownership
Owner by members: mutuals
Deposits => shares
Membership limited to groups having a common
bond of occupation or association
Finance companies (Singapore)
No checking account
No unsecured personal loan > S$5,000
Restricted (capital > $100 m) dealing in foreign
currency, gold or other precious metal
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Financial Institutions I
3.
Nondepository institutions
Insurance companies
Human
Term life (no payment unless death within policy
period)
Whole life
Critical illnesses, permanent disability
Endowment
Health
Hospital
Accident
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Financial Institutions I
3.
Nondepository institutions
Insurance companies
Property
Houses
Cars
Boats
Liability
Product
Professional
Third party
Exotic
Dancers legs
Pianist fingers
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Financial Institutions I
3.
Nondepository institutions
Insurance companies
Revenues and costs
Initial premium income is invested
Payments to the insured are contingent on
potential future events
Risk
Timing and magnitude of payments are
uncertain: The randomness of natural disasters
Long lag between receipts and payments
22
Financial Institutions I
3.
Nondepository institutions
Pension funds
Pension plans: by government, employers, unions
Defined contribution plans: specify the amount
(or percentage) contributed by employer and
employees. Amount payable at retirement is
not guaranteed but depends on the results of
the investments.
Defined benefit plans: The amount payable is
guaranteed
Insured vs non-insured:
Portable vs non-portable: whether the
employee will lose the benefits if he leave the
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company
Financial Institutions I
3.
Nondepository institutions
Pension funds
CPF
Defined contribution plan
Portable
Contributions: Cap at $5,000 (80th percentile)
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Contribution
Contribution
Total
By
By Employer
Contribution
Employee
(% of wage)
(% of wage)
(% of wage)
Credited Into
Ordinary
Account
%
Special
Account
%
Medisave
Account
%
35 & below
16
20
36
23
Above
35 - 45
16
20
36
21
Above
45 - 50
16
20
36
19
Above
50 - 55
14
18.5
32.5
13.5
9.5
9.5
Above
55 - 60
10.5
13
23.5
12
9.5
Above
60 - 65
7.5
14.5
3.5
1.5
9.5
6.5
11.5
9.5
Above 65
25
Contribution
Contribution
Total
By
By Employer
Contribution
Employee
(% of wage)
(% of wage)
(% of wage)
Credited Into
Ordinary
Account
%
Special
Account
%
Medisave
Account
%
35 & below
17
20
37
23
Above
35 - 45
17
20
37
21
Above
45 - 50
17
20
37
19
10
Above
50 - 55
16
19
35
14
10.5
10.5
Above
55 - 60
12
13
25
12
2.5
10.5
Above
60 - 65
8.5
7.5
16
3.5
10.5
Above 65
7.5
12.5
10.5
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Financial Institutions I
3.
Nondepository institutions
Singapore CPF:
Interest rates:
Ordinary Account: market-related interest
rate based on the 12-month fixed deposit
and month-end savings rates of the major
local banks.
From 1 Jan 2008: Special Account,
Medisave Account and Retirement Account
is pegged to the 12-mth ave yield of the
10-yr SGS + 1%.
To help members adjust to the floating
interest rate, a 4% floor will be maintained
for the first two years.
Ordinary account:
Others:
First $ ,000 (up to $20,000 from Ordinary 27
Account) will earn % more
Financial Institutions I
3.
Nondepository institutions
Singapore CPF:
Withdrawal at 55 (less CPF Minimum Sum)
Retirement Sum: OA + SA = RA = $161,000
from July 2015 (no more foreseeable
increment)
Retirement Sum will be paid monthly from
the age of 65 until it is exhausted (in about
years)
Currently, Singapore citizens and PRs will be
automatically enrolled in CPF LIFE Scheme,
at 65 (if a certain amount is met in the
Retirement Account),
Pay throughout remaining life
Basic Plan or Standard Plan
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Financial Institutions I
3.
Nondepository institutions
Investment banks and merchant banks
Underwriting of securities
Glass Steagall Act replealed by Gramm Leach
Bliley Act (Nov 12, 1999)
1933 Glass Steagall Act to curb conflict of
interest
Example:
Do you think the repeal of the Glass Steagall
Act contributed to the current financial crisis?
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Financial Institutions I
3.
Nondepository institutions
Investment banks and merchant banks
Main function: Help corporations to raise funds
IPOs:
Helping companies to issue equity shares to
the general public for the first time
Private placement:
Sell (or place) securities to selected investors
Merges and Acquisitions:
Find candidates: e.g. white horse
Valuation
Advice on method of payment: cash, shares,
both
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Financial Institutions I
3.
Nondepository institutions
Investment banks and merchant banks
Creation and trading of financial products
Options, futures, swaps, etc
Asset securitization:
Issue securities backed by a pool of assets
Everything can be securitized:
Securities Trading:
Making the market
Arbitrage: riskless and risky
Speculation
Help clients in block trading and program
trading
Provide research
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Financial Institutions I
3.
Nondepository institutions
Other financial institutions
Mutual Funds
Open-ended: buys and sells (at NAV = (market
cap - liabilities) per share) an unlimited number
of shares
Closed-ended: sell a limited number of shares
once which can be traded
Unit trust:
Similar to closed-end funds in that the number
of unit certificate is fixed
Assets are placed with trustee
Fixed termination date
Specific collection of assets
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No professional fund managers
Financial Institutions I
3.
Nondepository institutions
Other financial institutions
Hedge Funds
Private partnership
Located offshore for tax and regulatory
purposes
Operate through private placement to rich
individuals and institutions
Short overvalued (as a hedge for market
going down) and long undervalued
Investment techniques, including short
positions and leverage (a lot of derivatives
trading)
Leverage to amplify returns
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Financial Institutions I
3.
Nondepository institutions
Other financial institutions
Hedge Funds
Risk appetite
Compare to mutual fund
Investors:
Regulations:
Redemption:
Transparency:
Hedge Funds Hall of fame:
LTCM: Merton and Scholes
Bear Stearns: High-Grade Structured Credit
Fund and Stearns High-Grade Structured
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Credit Enhanced Leveraged Fund (June 2007)
Financial Institutions I
3.
Nondepository institutions
Other financial institutions
Private Equity Funds
Private partnership
General Partner: a private equity firm holding
the control power
Limited Partner: institutions or wealthy
individuals (passive partners)
Types of investments: Equity investments
Leverage buy-outs: buying a major equity stake
Venture capital: major stake in less mature firm
Growth Capital: minor stake in more major firm
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Financial Institutions I
3.
Nondepository institutions
Other financial institutions
Private Equity Funds
Big names: Blackstone Group, Carlyle Group,
Goldman Sachs, TPG, KKR, Bain Capital,
Apollo Global Management
The Blackstone Group is now listed in NYSE
($4 billion IPO) on July 22, 2007
KKR has tried to list a month later but failed
Later listed in Euronext
Transferred listing to NYSE in July 15,
2010
Carlyle Group went public on May 3, 2012
Financial Institutions I
3.
Nondepository institutions
Other financial institutions
SWF: Sovereign Wealth Fund
State-owned investment funds
Gain attention lately due to high profile
purchase amid the credit crisis
Examples: Singapore (Temasek and GIC),
Middle East (Qatar, Bahrain, Dubai, Abdu
Dhabi), China
Investments: Citibank, UBS, Morgan Stanley,
Merrill Lynch, Chrysler Tower
Causing concerns due to lack of transparency
Various meetings between SWF and
government officials to iron out issue
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Financial Institutions I
3.
Nondepository institutions
Other financial institutions
SWF: Sovereign Wealth Fund
High profile failures!!!
Total estimated losses in 2008???
US$
billion (from US$
to S$
Most has recovered since then
Estimates AUM at Dec 2014 is
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