What makes our financial System robust?

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What makes our financial System robust?

Yesterday I wrote: A financial system includes three very important pieces in the “puzzle”.  …….. The system includes a range of financial institutions, a range of financial instruments and various markets that allow the free flow of funds.

What type of financial institutions do we have here in Australia?  Not just banks!

Most people have conducted business one way or another with a bank mainly. There is a wide range of financial institutions operating here. Most institutions have similar products, by taking money from those who have surplus and lend it to those who need, hopefully to generate productive income and boost the economy.

Financial institutions can be categorised as follows:

  • Depository financial institutions
  • Investment banks and merchant banks
  • Contractual savings institutions
  • Finance companies and general financiers
  • Unit trusts

Depository financial institutions get most of their money from deposits from savers. The money can be either on demand deposits or on term deposits. These institutions are well known to all of us. They are the banks, building societies and credit cooperatives. They lend the money to borrowers.

Investment banks and merchant banks generally focus on providing advice to corporate and government entities. Mergers and acquisitions form an important part of their business. They are also involved in portfolio restructuring and financial risk management and assist clients on how to raise funds from the capital markets.

Contractual savings institutions are life insurance offices, general insurers and superannuation funds. Their liabilities are mainly contracts which specify that in return for periodic payments made to the institution, the institution will make specified payout to the holder of the contract if and when an event specified in the contract occurs (death, sickness, accidents, etc).

Finance companies and general financiers raise funds by issuing financial instruments such as commercial paper, medium term notes and bonds in the money markets and the capital markets. For example, leases and loans of some types.

Unit trusts are formed under a trust deed and are controlled and managed by a trustee or responsible entity.  Unit trusts attract funds by inviting the public to purchase units in a trust and by pooling the capital.

See Part 3 in my next editorial