This chapter examined the services offered by and the portfolio characteristics
of a
wide 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 chapterparticularly
pension funds and insurance companiesprovide risk protection
for their customers against death, ill health, negligence, loss of property,
and the danger of outliving ones 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.
- Among the most rapidly growing financial institutions of the past decade
have been investment companiesmost often referred to as mutual
funds. 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 better 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-service 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-service
industry is also developing numerous small-loan companies (in the form of
pawnshops, title loan companies, rent-to-own stores, and check-cashing facilities)
that cater to individuals and families, particularly those credit customers
presenting greater risk of loan default.
- One of the most exciting and potentially rewarding financial-service industries
is investment banking. Investment bankers assist corporations and governments
in raising new capital by purchasing their clients stocks, bonds, and
other securities and reselling those same securities to other investors. In
addition to security underwriting services, investment bankers supply technical
advice to businesses interested in pursuing mergers and acquisitions or entering
into new product lines or new market areas.
- 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, which 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 the public to buy and sell
securities to adjust the quality and yield of their investment portfolios.
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 industries
and combining different service providers under one corporate umbrellaa
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 servicesdeveloping and adding new
services in order to reduce the overall risk exposure to 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 service production and
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-service sector.
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