Topic 3 – Non-bank Financial Institutions Flashcards Preview

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Flashcards in Topic 3 – Non-bank Financial Institutions Deck (76)
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1

There exists a wide range of NBFIs which are able to compete within a modern financial system.
These include:

- Investment Banks
- Life and General Insurance Offices
- Superannuation Funds
- Finance Companies and General Financiers
- Building Societies(ADIs)
- Credit Cooperatives(ADIs)
- Cash management trusts and Unit Trusts

2

Investment Banks

- not licenced under APRA,
- Are officially classified as ‘money market corporations’.
- Account for 1.9% of total assets in March 2010 and declined since then to 0.4% (December 2018).
- Investment banks grew as specialist finance facilitators.
Examples: Macquarie Group, UBS, Credit Suisse, Citi Bank, etc.

3

Investment Banks Sources of Funds

Borrowing in the short-term money market
Mainly offshore money market securities

4

Investment Banks Uses of Funds

- Limited lending to clients (extensively includes corporations and government)
- usually on short-term basis
- May at times also provide financial services to high-net-worth individuals.

5

Investment Banks and Financial Innovators

- The development of sophisticated off-balance-sheet products and advisory services.
- Principal income is the fee income

6

Off-balance-sheet business for Investment Banks

Operate as Foreign Exchange dealers
Act as an Underwriter of new share and bond issues
Placement services
Risk Management
Advise corporate clients on Mergers and Acquisitions
Project finance

7

Off-balance-sheet business for Investment Banks (Operate as Foreign Exchange dealers)

quote both bid (buy) and offer (sell) prices on all major currencies
E.g.: AUD/USD 0.7518- 22
The price maker dealer will buy 1 AUD for USD 0.7518 and sell 1 AUD for USD 0.7522

8

Off-balance-sheet business for Investment Banks (Act as an Underwriter of new share and bond issues)

advise and provide UNDERWRITING arrangements for clients making new debt and equity issues.

9

Off-balance-sheet business for Investment Banks (Placement services)

Assist clients to place large parcels of debt and equity securities to institutional investors.

10

Off-balance-sheet business for Investment Banks (Risk Management)

Analyze and identify clients’ financial, business and operational risk exposures
- Risk may include interest rates foreign exchange, liquidity, credit, investment, fraud and disaster risk exposures.
advise clients on alternative risk management strategies
provide risk management products to support advice
example: derivatives

11

Off-balance-sheet business for Investment Banks (Advise corporate clients on Mergers and Acquisitions)

- identify potential merger targets;
- evaluate merger proposals for clients;
- may act for the acquiring corporation;
- develop takeover funding strategies;
- may defend for the target corporation.

12

Off-balance-sheet business for Investment Banks

Lending for large projects where loan repayments are based on projected cash flows
- conduct feasibility studies;
- advise on project viability and funding structures
- bring potential project partners together
- manage the financial implementation of a project

13

underwriting

service whereby the investment bank agrees to buy new securities issued by a client that are not bought by investors.

14

Managed Funds

Provide direct access to wholesale investment markets for pooled savings of individuals

15

Benefits of Managed Funds

Professional expertise,
administrative efficiency,
Economies of scale,
better diversification platform.

16

Managed Investments Act 1998 (Cwlth) requires

Responsible entity (trustee and manager)
Trust deed

17

Trust deed

legal document detailing the sources, uses, and disbursement of funds in a trust

18

There are four main categories of Managed Funds

Public Unit trust funds
Superannuation funds
Cash management trust
Hedge funds

19

Managed funds could also be categorized by the investment risk profile

Capital Guaranteed
Capital Stable
Balanced Growth
Managed Growth or Capital Growth

20

Capital Guaranteed

The value of contributions to the fund are guaranteed, but future earnings are not

21

Capital Stable

Contributions are mostly protected as the fund invests in low-risk securities

22

Balanced Growth

Investments target longer-term income streams supported by limited capital growth

23

Managed Growth or Capital Growth

Invests to obtain greater return through capital growth and lower income streams

24

Public Unit Trusts

- Investors purchase a share in the trust in the form of a ‘unit’
- The trustee pools the funds received from investors and invests them
- Unit holders receive a return in the form of capital gain or income

Can be either:
- Listed Trusts or Unlisted Trusts

25

Listed Trusts

units quoted and sold on the ASX (highly liquid) – 34%

26

Unlisted Trusts

units bought and sold by trustee (less liquid) – 66%

27

Type of unit trusts

Property trusts (31%);
Equity trusts (47%);
Mortgage trusts (4%);
Other (including Fixed interest trusts) (18% approx.).

28

Superannuation Funds

Represents long-term savings accumulated to fund an individual’s retirement.

Sector is rapidly expanding due to the implementation of the compulsory superannuation guarantee contribution (SGC).

Total superannuation assets nearly $2.8 trillion as at December 2018 (28% of total financial assets).

29

Types of superannuation funds

Corporate
Industry
Public sector
Retail
SMSF
Compulsory Superannuation Funds
Rollover Funds

30

Superannuation Uses of Funds

- highly diverse investments
- large proportion in equities and unit trusts
- Approx. 20% invested overseas