Institutional Financial Management: Functions and Crises Report

This report provides an in-depth analysis of institutional financial management, focusing on the roles of financial intermediaries and central banks in economic development. It examines the functions of central banks such as the Bank of England and the Federal Reserve, including their roles as bankers to the government and control over money supply, price stability, and open market operations. The report also delves into the impact of the 2007-2008 financial crisis, particularly the collapse of the mortgage-backed securities market and its effects on the global economy. Furthermore, the report explores the balance sheets of commercial banks, detailing their liabilities (capital, deposits, borrowings) and assets (cash, investments). The report highlights how financial intermediaries support economic growth through programs like employment and entrepreneurial development, and the importance of technology in the financial sector. This analysis provides a comprehensive overview of the financial system's structure, functions, and challenges.

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·Institutional Financial Management
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Table of Contents
Introduction................................................................................................................................. 2
Q-1.......................................................................................................................................... 3
Q-2.......................................................................................................................................... 4
Q-3.......................................................................................................................................... 6
Q-4.......................................................................................................................................... 7
Q-5. ........................................................................................................................................ 8
Q-6.......................................................................................................................................... 9
Conclusion................................................................................................................................... 9
References................................................................................................................................... 1
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·Introduction
Financial institution and intermediaries are played a prominent role in the success of a
economy. These financial institution are promote and support to maintaining and developing a
economy. These financial institution involves banks, mutual funds, investment companies,
insurance companies, international financial institution etc. The purpose of this report is to
identify and analyses the various functions of a central bank in the developing a economy
(Orlitzky, 2011). It also analyses that how financial crises 2007-2008 affects the global market
and the market of mortgage backed securities. Apart from that it also analyse that how a
company can raise their funds from various sources with the help of investment banks.
l壱Q-1.
Ans. Financial intermediaries is a institution which to support the saving/investment cycle in
the economy. It is a type of middleman between saver and borrower. It played a significant role
to develop a sound economy of the country (Lounsbury, 2008). It include commercial banks,
Insurance companies, cooperative banks, mutual funds and other financial institution. There are
various roles which is played by these financial institution for the economy are as follows:
Self-employment programme: Employment is any country significant for their economy. An
employment growth rate in the economy is symbol of economic development. These financial
institutions provide finance to them for starting their business employment. So that these
employment programme can generate more income and production in the economy (Cornett, and
at al., 2007).
Entrepreneurial Development Programmes: These programme can help to developing
entrepreneurial skill and provide finance to their business activities. There are various
programmes which supported by these intermediaries.
Integrated Rural development scheme: There are various rural development initiative supported
by these financial intermediaries. These institutions provide financial assistance to the people
from the rural areas through providing them loans to start their economic activities with a
affordable interest rate.
Housing Finance: These financial intermediaries are also provide affordable housing loans to the
people. They are collecting money form people as a saving and than this money can be used to
landing these money as housing loan.

Priority Sector: There are various priority sector which is set by the government. These priority
sectors in UK includes to support entrepreneurial skills, providing loan in rural areas, provide
financial assistance and support to small and medium business.
Backward area Development: These financial institutions also help to development of backward
area. In order to prevent regional and economic disparities in the economy, they provide
advancing loans to different sectors and industries (Barzelay, and Gallego, 2006). It also benefits
to these financial intermediaries is that government also give some amount of tax benefits to
them which increase the profitability.
Introduction of Electronic system: Technology is a key area which can support the economy.
These financial institutions can also support to creating and developing a electric system in the
economy.
l壱Q-2.
Answer. Key functions of bank of England: There are various function and role of bank of
England. There are following function are as follows:
Bankers to the government: The key function of this bank is to help government account with
the bank. Government payment are made by the banks only it also received the money from
other as a government authority. The bank hold large number of accounts of government
securities. The short term and long term lending are made by this bank only.
The bankers' bank: This bank are the banker of all commercial banks in UK. All domestic banks
have an account with the bank of England. This banks hold a substantial amount of these banks.
Bankers to other central banks: Bank of England have various accounts for outside or overseas
central banks and international financial institutions for the international payment settlement.
Exchange control: The bank another function is to control on foreign exchange and maintain the
balance of payment. These exchange control are not applied on the resident of UK for settlement
their payment in the country (Liang, and at el., 2007).
Agent for the Government: The bank also responsible to maintain the treasury management
system in the economy. They responsible for to effective exchange control in the economy.
Four functions of federal reserve: There are following functions of Federal reserve:
Control on the money supply: The bank played an important role in the money supply in the
economy. It is main function of the bank is to maintain the sound financial position of the
country through full and effective control over the money supply.

Price stability: Another important function of the bank is to maintain the price stability in the
country. Because price stability support and promote the economic development in the economy.
It is the main focus of federal reserve to facilitate and promote favourable environment to
developing a good business environment (Mahoney, and Roberts, 2007,).
To promote efficiency: This is one of the another important function of the bank. It is
responsible to increase the efficiency in the market and financial system. For that it can increase
or decrease the interest rate to make a financial system sound and increase the credit delivery
system through introducing new instruments and tool of money market.
Promotional and development functions: The bank encouraging to commercial banks to increase
their branches in rural and under-developing area and promote the banking system in the
economy.
Federal reserve is responsible to maintaining and developing a sound economy of the country.
For that they have to control the money supply in the economy. Open market operation is a
facility where the government securities are purchased and sales in the market by the bank.
These government securities involves treasury bills, treasury note, government bonds and other
securities. It is used to control the money supply in the market. If the federal banks buys these
government securities in the open market, the money supply immediately increased (Wright, and
Rwabizambuga, 2006). The bank can also sell these securities which can leads to decrease the
money supply. These changes are multiple effects in the economy. Because if the money supply
goes down it can changes in the interest rate. And any fluctuation in the interest rate can affects
the multiple decisions in the economy. Because interest rate directly related to the savings and
investment in the economy. There are various interest rate which affects the banking operation in
the country. These decisions are directly influence to the growth rate of an economy.
Reserve requirement is another important tool which is used by the federal reserve. This
approach tells about that what proportion of money of customer' s deposits and saving hold by
the bank. . The biggest benefit to the commercial bank of setting aside a reserve is that this bank
will have enough cash on hand to cover the withdrawals of money that consumers might need on
a regular basis. The main objectives is to take this money as reserve is to maintain and effective
control over the money supply in the economy (Julian, and Ofori-dankwa, 2013). It is most
appropriate and powerful tool which can help to immediate change in the economy. We can
understand with an example, if the fed reserve changes its reserve requirements from 5% to

10%. it means banks are required double money out of every deposit. They cannot loaned this
money in the economy. It also means that there is low money supply in the market and it leads to
increase the interest rate and as a result to decrease in the economic output. If the fed reserve
reduce their reserve requirement from 10% to 5% it means to increase the money supply and
decrease the interest rate. It leads to increase the economic output.
After a long time growth and development in the financial institutions specially banks and other
firms began to found that they faces significant losses on investment particularly in the home
mortgage securities in the year 2007-08. These losses triggered a full flagged global financial
crises. Because lender demanded higher interest rate to the borrowers. Systematic risk refers to
the possibility that a triggering event, such as the failure of an individual firm, will seriously
impair other firms or markets and harm the broader economy. This type of risk is a major
concern of all the central banks in the decision making process (Ma, and Tayles, 2009). The
main causes of 2008 crises is the houses bubble. The economist held belief that prices of home
do not down and they suppose that financial and housing market will grow up in near future. The
rate of house was increased in the starting of 21st century. And the people felt that the value of
these houses not decline in the near future. but that they would also continue to rise indefinitely.
It was the reason to increase in the sale of mortgage backed securities. The decline in the
housing prices which directly affects on the mortgage backed securities. Unfortunately in the
year 2008, the prices of home begin down and reach at a depression level. According to a rating
agency the prices of home decline 20% in 2008, which was on the peak in 2006. once the price
began to down, the owner of homes to sell their homes for a good profit found unable to do so. It
was lead to a dramatic bubble and collapse was the sub prime this market (Campbell, 2007). The
home owner can not afford the higher payment to the banks and other financial institutions. It
was led to the Trouble in mortgage backed securities market. As the down in the home prices
and increasing the number of home owners found themselves to unable to pay their mortgage
payments. This condition led to a mortgage defaults at a higher level.
l壱Q-3.
Ans. A commercial banks is financial intermediaries deal mainly in financial assets and
liabilities. There are various assets and liabilities which is shown in the banks balance sheet.
Liabilities of Bank: Liabilities are the important for a banks. These are paid by the banks to it
consumers, and borrowers and other financial institus. There are following liabilities of a bank-

Capital and Reserve: It includes the share capital which is contributed by the shareholders. And
reserve are those amount which is undistributed profits of banks which is accumulated to their
working lives. Apart from that a banks also make a secret reserve to strengthening their financial
position.
Deposits: Deposits are another liabilities of the banks. It includes the savings of the public.
Therefore, to the extent the promotion and mobilisation of savings is a necessary prerequisite for
stepping up the rate of economic growth, mobilisation by banks in real terms must be given its
due weight.
Borrowings: commercial banks sometimes borrowings money from other banks and other
financial institutions as a loan. The banks are paid a amount on their loans. Therefore it is a
liabilities of a commercial bank.
Other liabilities: There are other liabilities includes bills payable. These liabilities have to pay by
the banks.
Assets of the bank: Commercial banks also a business firms. They are profit making business
entities. Therefore a bank also mobilize their funds in to investment and other aspects. So that
they can earn profits which is a core objectives of a business.
Cash: It includes cash in hand and cash with other banks. These banks hold their money with the
central bank of a country. Such cash balances are part of the assets of bank.
Money at call at short notice: It includes those money or capital which lent to other financial
institution like banks, stock brokers and other firms (Aggarwal, and at al., 2011). Commercial
banks sometimes place their surplus money with these institutions with a short notice. This
capital also the part of their assets.
Investment: Investment are the other source of income of commercial banks. These banks invest
their money in to different investment such as government securities, other approved securities.
Government securities involves treasury note, treasury bills, certificate of deposits, and other
investment. These investment also called short term assets of the company. Because the bank can
sold these securities in short period.
Loans and advances: These are also part of assets of the bank. It involves cash credit, overdrafts,
demand loans, term loans and other loans and advances. These are income source of the banks
which helps to generate money in terms of return on investment.

There are various alternative source of funds of a banks. A commercial bank can borrowings
money from the international financial institutions. It involves international monitory fund,
world banks and other financial institutions. Repurchase agreements also a alternative source of
funds (Chung, and Zhang, 2011). It is a type of short term borrowing where the banks buys these
securities and whenever money is required they can sell these securities in the short term basis.
l壱Q-4.
Ans. It is type of asset backed securities which is secured by mortgage or a group of mortgage.
These securities are sold by the third parties. The role of mortgage backed securities can be
explained through a following process:
Housing bubble: The economist held belief that prices of home do not down and they suppose
that financial and housing market will grow up in near future. The rate of house was increased in
the starting of 21st century. And the people felt that the value of these houses not decline in the
near future. but that they would also continue to rise indefinitely. It was the reason to increase in
the sale of mortgage backed securities (Campello, and at al., 2011).
Home price decline: Unfortunately in the year 2007 and 2008, the prices of home begin down
and reach at a depression level. According to a rating agency the prices of home decline 20% in
2008, which was on the peak in 2006. once the price began to down, the owner of homes to sell
their homes for a good profit found unable to do so. It was lead to a dramatic bubble and
collapse was the sub prime this market. The home owner can not afford the higher payment to
the banks and other financial institutions.
Trouble in mortgage backed securities market: As the down in the home prices and increasing
the number of home owners found themselves to unable to pay their mortgage payments. This
condition led to a mortgage defaults at a higher level.
l壱Q-5.
Ans. The primary function of a insurance company are totally different with a depository
institution. There are following primary functions are as follows:
Insurance provides certainty: The main function of a insurance company is to provide certainty
toward a uncertain losses (Orlitzky, 2011).. These uncertain losses can be reduced through
effective planning and management. A insurance can relieves of person in these kind of

difficulties. But in a depository institution there is no such arrangement. A person can deposit
their money as saving for the future.
Insurance provides protection: The another primary function of a insurance company is to
provide protection against any uncertain events. Because in the absence of insurance a person
can suffer from a risk in near future. But in a depository institution like bank they provide
protection to their money which is saved by the consumers.
Risk-Sharing: Risk is uncertain, therefore losses can arises from the risk. In insurance a risk is
shared by the group of people so that the losses can be recovered from these people. A
depository institution there are no such facilities to recovery from such losses.
The life insurance company and annuity products create the cash disbursements for the company
in the near future. It is one of the complex and competitive task to make an effective and
appropriate planning. Because a poor planning can affects the performance and profitability of
the company. Annuity products involves pension products, mortgage and other annuity products.
After the maturity of these products the company requires to pay a lump sum amount on these
products. Therefore these can be affects on the financial position in the near future which is not
good for the company (Lounsbury, 2008).
l壱Q-6.
Ans. A investment banks played a prominent role as a advisor and mediator between the
companies and individuals. These bankers working in loan finance to support and help those
companies who wants to raise money from the financial institutions. In this process the
investment banker advice to their client about their loans. These loan can be secured, unsecured
or backed by the securities. Another way to raising funds is that these investment banks make
plan for issuing IPO (Initial public offering) so that they can collect money from the investors.
These bankers also advised to a company to sale their asset which is not useful for the company.
So that they can get funds from there also. The government securities are also the best to raise
fund for the short time. Sometimes companies are buy the government securities which includes
treasury bills, government bond, treasury note and other securities which can be easily sold in
the market and can get money from there. The bankers also advise to the companies regarding to
raising funds for them (Barzelay, and Gallego, 2006). There are international financial
institutions and higher authorities also available. A company can borrow their money from them
also. These institution provide loan to then with a lower interest rate. Another option to raise

money is that issuing preferred stock. In these stock the shareholder have special status in the
event of financial crises of a company. Another important way to raise finance or funds is to
selling common stock. For this, it is required that a company are in sound financial position if
they wants to raise money.
·Conclusion
As per the above mentioned report it has been described that financial intermediaries are
significant for development of a economy. The role and functions of a central bank make and
create a favourable environment for the economic activities. Apart form that it also described
that how mortgage backed securities causes for the global financial crises. The role of
investment banks to help companies for raising the funds from various sources.
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·References
Books and Journals
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Barzelay, M. and Gallego, R., 2006. From “new institutionalism” to “institutional
processualism”: advancing knowledge about public management policy change.
Governance. 19(4). pp.531-557.
Campbell, J.L., 2007. Why would corporations behave in socially responsible ways? An
institutional theory of corporate social responsibility. Academy of management Review.
32(3). pp.946-967.
Campello, M., and at al., 2011. Liquidity management and corporate investment during a
financial crisis. Review of Financial Studies. 24(6). pp.1944-1979.
Chung, K.H. and Zhang, H., 2011. Corporate governance and institutional ownership. Journal of
Financial and Quantitative Analysis. 46(01). pp.247-273.
Cornett, M.M, and at al., 2007. The impact of institutional ownership on corporate operating
performance.Journal of Banking & Finance. 31(6). pp.1771-1794.
Julian, S.D. and Ofori-dankwa, J.C., 2013. Financial resource availability and corporate social
responsibility expenditures in a sub-Saharan economy: The institutional difference
hypothesis. Strategic Management Journal. 34(11). pp.1314-1330.
Liang, H., and at el., 2007. Assimilation of enterprise systems: the effect of institutional
pressures and the mediating role of top management. MIS quarterly, pp.59-87.
Lounsbury, M., 2008. Institutional rationality and practice variation: New directions in the
institutional analysis of practice. Accounting, Organizations and Society. 33(4). pp.349-
361.
Ma, Y. and Tayles, M., 2009. On the emergence of strategic management accounting: an
institutional perspective. Accounting and Business Research. 39(5). pp.473-495.
Mahoney, L. and Roberts, R.W., 2007, September. Corporate social performance, financial
performance and institutional ownership in Canadian firms. In Accounting forum. (Vol.
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Orlitzky, M., 2011. Institutional logics in the study of organizations: The social construction of
the relationship between corporate social and financial performance. Business Ethics
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Wright, C. and Rwabizambuga, A., 2006. Institutional pressures, corporate reputation, and
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Online
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