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I. Financial Institutions
depository institutions
acquire funds mostly from deposits nondepository institutions acquire funds from other sources
raise funds FOR direct investment their assets stock, bonds, loans raise funds BY indirect investment issue their own liabilities accept deposits, sell insurance policies sell mutual funds shares
Type I Liabilities
Type II Liabilities
Type IV Liabilities
creation of new financial assets new ways to use financial assets dramatic in past 30 years
advances in technology
rapid flow of information rapid calculation of risks and prices rapid trading competition among institutions for products for strategies
circumvent
regulations, tax laws NOW accounts in 1970s selling short against the box sophistication of market professionals devise & use complex securities price complex securities
Asset securitization
take individual loans pool them together issue & sell securities w/ cash flow
back by the loan pool payments
old way: bank originates mortgage bank holds mortgage & collects payments until loan is paid new way: bank originates mortgage bank sells mortgage to Fannie Mae bank gets fee for servicing mortgage Fannie Mae issues securities
advantages
process pool of loans is diversified (less risk) loans are more liquid easier to get cheaper to get