 |  Money and Capital Markets: Financial Institutions and Instruments in a Global Marketplace, 8/e Peter Rose,
Texas A & M University
Mutual Funds, Pension Funds, Insurance Companies, Finance Companies, and Other Financial Institutions
Chapter SummaryThis chapter has examined the services offered by and the portfolio characteristics of a variety
of different financial institutions, including mutual funds or investment companies,
pension funds, life and property-casualty insurance companies, finance companies, security firms, mortgage banks, real estate investment trusts, leasing companies, venture capital
firms, and financial conglomerates of various types.
- Several of the financial institutions discussed in this chapter—particularly pension funds
and insurance companies—provide risk protection for their customers against death, ill
health, negligence, loss of property, and the danger of outliving one’s savings in retirement.
In addition, pension funds, insurance companies, and most of the other financial-service
institutions examined in this chapter make loans in the money and capital
markets to businesses, individuals, and governments. They are predominantly capital
market institutions, focused mainly upon providing long-term credit.
- The most rapidly growing financial institution of the past decade has been the investment
company—most often referred to as a mutual fund. Investment companies sell
shares to the public and use the proceeds of those sales to buy various types of stocks,
bonds, and other securities. Shareholders in a mutual fund receive earnings based on the
performance of the securities held by the company. Mutual funds have grown rapidly in
recent years, in part because they offer small savers access to the financial marketplace,
provide professional funds management and portfolio diversification, and supply liquidity
if a customer needs to quickly convert his or her investments into cash.
- Among the more rapidly growing sectors in this financial-services field are finance
companies, which provide credit to businesses and households. Finance companies too
are merging into fewer but larger firms with a growing menu of loans and other financial
services. However, this financial-services industry is also developing numerous
small-loan companies (in the form of pawn shops, title loan companies, and check-cashing
facilities) that cater to individuals and families, particularly those credit customers
presenting higher risk.
- The chapter concludes its survey of major financial institutions with an overview of
such key industries as real estate investment trusts (REITs) and mortgage banks that
serve the home loan industry and also provide funds for commercial building projects.
Another key sector is security brokers and dealers who make it possible for corporations,
governments, and other institutions in need of funds to reach the security markets
and raise new capital. Finally, financial support of businesses stemming from leasing
companies and venture capital companies has been rising in recent years, particularly
for new firms and rapidly growing enterprises that have limited sources of funding
available to them.
- All of the financial institutions discussed in this chapter are undergoing major changes
in the form of consolidation of smaller financial-service firms into larger financial-service
providers. Not only are financial firms in the same industry growing larger,
but many are reaching across several industries and combining different service
providers under one corporate umbrella—a phenomenon known as convergence. This
convergence trend has been helped along by new government legislation (such as the Financial
Services Modernization (Gramm-Leach-Bliley) Act passed in the United States
in 1999).
- In an effort to lower production costs and reduce risk exposure most financial institutions
are diversifying their services—developing and adding new services in order to
reduce the overall risk exposure of their revenues and net earnings. One result of
this service diversification trend is to make more and more financial companies look
alike (homogenization) because they are offering many of the same services as their
neighbors.
- Changes in the technology of information gathering and distribution have had a greater
impact on financial institutions than most other industries, permitting these institutions
to serve their customers with greater accuracy and speed over wider geographic areas.
New computer-based technology has allowed financial-service firms to reduce their personnel
expenses and become less labor-intensive, but more capital-intensive in their
production and service distribution activities.
- More financial-service institutions have become international in their focus, reaching
across national borders with their services. This trend toward globalization has contributed
to the emergence of much larger financial institutions and broader financial service
menus. Globalization has also encouraged government regulatory agencies in
various countries to reach out to each other and cooperate in their oversight of the activities
and performance of the financial-services sector.
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2003 McGraw-Hill Higher Education