Money, Banking, and Finance Chapter 11

Nonbank Financial Institutions

a financial institution that performs a number of services similar to those offered by banks but that is not a licensed bank and is not subject to banking regulations

• An industry that has been growing in size and importance relative to banking

• Activities do not directly affect the money supply

• Loans from these entities, unlike transactions using bank accounts, are not liquid  “nonmoney assets”

Nonbank Financial Institutions

• Collective investment vehicle or pooled fund
• an investment vehicle that pools investments from many different sources, making investment decisions for them all as a group
• Index fund
• a type of pooled fund that tries to replicate a common stock or bond market index. As this fund does not require active management by a manager, fees are usually lower than in other types of pooled funds
• Hedge fund
• a type of pooled fund that often engages in highly speculative investments and to which access is generally restricted to wealthy clients

Nonbank Financial Institutions

• Pension fund
• a fund with the exclusive purpose of paying retirement benefits
• Insurance company
• a company that pays to cover all or part of the cost of specific risks against which individuals and companies chose to insure themselves
• Reinsurer
• a company that sells insurance to insurance companies to share the risk in case of large damages caused e.g. through natural disasters.

Nonbank Financial Institutions

• Securities broker
• an agent responsible for finding a buyer for sellers of different securities, thereby offering enhanced liquidity to the seller
• Building society
• a financial institution which collects savings from its customers and offers them at preferential rates to other customers so that they can buy or build a residence
• Shadow bank
• credit intermediation that involves entities and activities outside the regular banking system