Institutional Financial Management: Banks, Fed, and Financial Crisis

This report comprehensively examines institutional financial management, focusing on the roles of financial intermediaries, including banks, pension funds, and investment institutes, in economic development. It explores the functions of the Bank of England and the Federal Reserve, detailing their significance in maintaining economic stability and implementing monetary policies. The report also analyzes the structure and operations of the Federal Reserve, including its influence on inflation, interest rates, and the money supply. Furthermore, it addresses the 2007-08 financial crisis, highlighting its causes, systematic risk, and impact on commercial banks, including their assets, liabilities, and access to temporary funds through various markets and the discount window. The report also touches on the Dodd-Frank Wall Street Reform and Consumer Protection Act and its role in strengthening the Federal Reserve's power and protecting the economy from future crises.

Institutional
Financial
Management

TABLE OF CONTENTS
INTRODUCTION..............................................................................................................1
ASSESSMENT 1..............................................................................................................1
CONCLUSION................................................................................................................. 9
REFERENCES...............................................................................................................10

INTRODUCTION
Finance is the lifeblood of every organization that assist in making optimum
transactions and carrying out its business activities in appropriate manner. The financial
crisis is a stark reminder that transparency and disclosure are crucial in today's global
market. Main aim of the present report is to present the functioning of financial
intermediaries as well as the services provided by them (Brigham and Ehrhardt, 2013).
It also highlights the key functioning of the Bank of England as well as the Federal
reserve system.
ASSESSMENT 1
Introduction
Banks play an imperious role in the development and growth of the economy of
UK. For these purpose several financial intermediaries have been established so as to
assist the firm in borrowing the money from it. Some of the essential role that a financial
intermediary play in the benefit for the nation have been highlighted underneath:
Role of Financial Institution in development of economy:
These have recently been involved in creating self employment programmes
which is the major sign of development of nation (McCahery, Sautner and Starks,
2016). These institutes are usually in the form of banks, pension funds, investment
institutes, insurance company and building society. They provide finance to the
individuals so as to conduct the said programmes as well as raise the income and
production which in turn leads to the growth and development projects.
In the present 21st century, wherein the political parties are unable to remove
poverty from the country, these banks are laying significant efforts to remove the same.
Therefore, it can be stated that financial intermediaries play a vital role in removing the
poverty situation from the rural or backward areas through significantly laying efforts in
introducing new schemes in which the agricultural sector can be benefited (Hotson and
Mills, 2015).
There are varied firms that have been declared bankrupted. Therefore, in order
to remove their crises as well as to revive the enterprise back to the healthy one, these
banks provided assistance in varied forms. They allow them to reallocate their
resources and also assist them with guidance to manage their operations.
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Likewise, pension institutes play an imperative role which aids in economic
development of the nation. Herein these firms are involved in pooling the amount from
the organization that assist the retired persons in managing their rest of life with the
amount that is accumulated (Murphy and Senior, 2013).
Conclusion
Therefore, it can be stated that all the financial intermediaries play a vital role in
the economic development process of UK.
Introduction
Bank of England and Federal reserve system are the major central banks of the
United Kingdom and United States respectively. The main purpose or role of both the
institutes have been enumerated underneath.
Role of Bank of England
The bank of England is crucially important to the UK as it assist the economy of
the nation to remain stable and also upheld the England policies. I plays varied roles
which comprises of bankers to the government (Andréadès, 2013). Herein, the bank
operates and manages the large accounts as well as securities of the government an
acts a central exchequer. Alike all other banks, it also provides financial assistance to
the citizens of the UK and plays a role of banks. It is also supreme to rest other financial
institutes and is known as the lender of last resort.
Key functions of Federal Reserve
The Fed is engaged in varied function which involves controlling the inflation
rates through changing the monetary policy of the US. Currently it has aimed to set
inflation target at 2 % as well as unemployment rate in the nation to 5.8%. It is also
involved in protecting the rights of the consumers through regulating as well as
supervising the other commercial banks in nation (Eichengreen and Flandreau, 2012).
Fed also manages and controls the potential crises in the economy through creating
stabilization in financial market. Last but not the least, it also engaged in rendering the
services to another banks such as foreign and US government.
Conclusion
Therefore, it can be said that both the banks assist the government in creating
stability in its operations as well as economy.
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Introduction
Federal reserve commonly known as Fed, is the most compelling body or
institute of the US in the global market. It is neither owned or managed by the
government but still the functions performed by the provincial is highly significant and
aids in maintaining stability in the economy (Berger, Imbierowicz and Rauch, 2016).
Due to complete secrecy or confidentiality in its operations, some of the people even
term its as a secret reserve. Some of the ways in which it manages its operations have
been enumerated hereunder.
Role of Federal Reserve in influencing Economy
Before analysing how he Fed functions, it is imperative to understand its
structure which assist in making varied decisions. It has mainly three parts wherein first
constitutes of the Board of governors which is responsible for regulating the monetary
policy. It is a team of seven members wherein these are responsible for setting reserve
requirements for another member banks as well as determining the discount rates
(Farag, Harland and Nixon, 2013). Thereafter, the open market committee is engaged in
setting the fund rates for Fed which in turn determines the interest rates as well. Last
but not the least in order to supervise and manage the commercial bank policies federal
reserve bank has been established.
In order to manage the inflation rates of the nation, the bank is involved in
lowering the interest rates so as to allow the business enterprise in engaging and
conducting more and more production. While on the other hand, when the government
wants to manage the supply of money, it increases the interest rates so as to control the
amount of funds. Higher the interest rates, less will be the credit availed by the citizens
of UK (Stowell, 2012). Moreover, the open market operation tool is used by the Fed so
as to monitor the fund rates of the federal reserve. It sets it closer to the target of the
Fed and engages itself in buying of securities which ha an equal effect as printing
money.
Apart from the above discussed functions, the Fed also play a crucial role in
buying US treasuries from the Federal provincial. It is also known as the bakers banks
as each and every reserve bank is involved in storing currency, managing loans for its
customers and processing checks which needs reserve requirement. Furthermore,
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these loans are managed and supervised via discount window. The discount rates that
are charged to manage them is lower than the Fed rates. Some of the financial
intermediaries avoid discount window due to the stigma attached which states that
these cannot avail loans from another banks (Savor and Wilson, 2016). Therefore,
federal government is often referred to as lender of last resort.
Every bank of the UK is regarded to hold at least 10% of its reserves in cash at
the end of each day. This is done in order to ensure that sufficient currency is available
with the financial intermediaries in order to deal with the urgent situations (Radić,
Fiordelisi and Girardone, 2012). Rest all currency can be lended to the needy person in
terms of loans or other securities. These rates are lower for the small banks due to their
operations in the backwards areas. This is the system of reserve requirement made by
the Fed. Herein, if the financial institutes are not possessing sufficient amount at the
end of the day then these intermediaries are involved in purchasing the reserves from
another banks through the process of selling securities in the Fed rates set by the
Federal reserve.
Furthermore, the recent reform act namely Dodd-Frank Wall Street is used by the
government in order to strengthen the power of the federal provincial. This act was
enacted in order to preserve the interest of the society as well as protect the economy
from destructing (Hwang and et.al, 2013). It has been analysed that several banks are
not able to meet or manage their cash reserve and provide excess of loan which result
in creating debt. Therefore, the reform was presented wherein the banks that are not
able to manage its operations are transmitted in the supervision of federal provincial.
They are asked to maintain a much higher reserve ratio so as to prevent it from failing
or losing.
Conclusion
From the above description it can be analysed that the Federal government plays
a very imperious role in influencing the economy of United Kingdom. Several other
functions of Fed have been identified along with its effective functioning. The said bank
manages its reserve through the process of discount lending or commonly known as
discount window. Along with that the relevance of reserve requirement is also been
enumerated with reference to its functioning. It has also been assessed that the open
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market operations are managed through charging a Fed rate which is determined with
the FOMC.
Introduction
It has been assessed that the crises that has been faced by the US in the year
2007- 08 were the global financial issues which caused huge loss to the said nation. it
was the period of great depression which caused systematic risk (Fiordelisi and
Marqués-Ibañez, 2013). it can be defined as a situation of widespread of peril which
caused harmed to the financial institutions as well as diversified the market into small
segments. it is also referred stock price fluctuations.
Financial crises of 2007- 08
The financial crises was caused due to increased amount of mortgage rates
been charged by the house. Moreover, the high firms have destroyed due to the
bankruptcy and government assisted them through issues US treasury so as to
preserve the economy from collapsing. Furthermore, the concern for systematic risk
arises due to the use of short term debt so as to finance its holding for the long term
prospect (Role of Financial Intermediaries in Economic Development, 2016).
Additionally, these firms were highly interdependent on each other rather than non
financial institutes.
Conclusion
Therefore, from the above discussion it can be analysed that the possible
disruption of counterparties in tangled dealings caused systematic risk. Moreover, the
country was severely affected the entire economy as well as disrupted large enterprise.
Introduction
Unlike any other organization, commercial banks have entirely different sorts of
assets and liabilities. This is so because these usually transact in financial assets.
Some of its assets and liabilities have been enumerated underneath.
Major Assets and Liabilities of Commercial Banks
The list of some of the major liabilities of the firm includes capital, deposits,
reserves borrowings and other liabilities (Salehi, 2008). Capital can be deemed as the
amount of money invested by the shareholders in the Banks. When a financial
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intermediary accumulates its extensive profits or retained in the organization than it can
be termed as reserves. Every organization require funds to carry out its operations and
they are borrowed from different sources. likewise, these institutes also borrow funds
from Fed or Bank of England (Amadeo, 2016). Some of its most prominent assets
include cash, investments, money at short call notice, advances, loans and trade credit
bills. as he banks are only involved in providing financial assistance to the other
enterprise or institutes, therefore loans are regarded as the assets for the
intermediaries. When banks discounts trade credits and overdrafts bills of the services
user at discounted rates then it is deemed as an asset for the company as it earns
revenue from it.
Relative Alternatives
There are several circumstances in which the commercial banks may require
temporary funds to meet its current reserve requirement. For this purpose, the financial
intermediaries may avail it from the discount window, federal fund market and
Euromarket. The functioning of these have already been explained above (Brigham and
Ehrhardt, 2013). Therefore, commercial banks can avail funds in urgent situations from
these bodies.
Conclusion
It is clearly understood that there are varied types of assets and liabilities of
commercial banks. Similarly to the any other organization, it also faces the need to
allocate reserves to meet its prevailing market requirement. For this purpose, these
institutes take loan from the above enumerated bodies which is the major supplier of
finance.
Introduction
Mortgage backed securities or MBS is a type of investment likewise to that of
mutual fund or stock bonds. It is a form of derivative wherein a promise is made to
repay the amount of value that lies beneath the asset (McCahery, Sautner and Starks,
2016). it is not the actual mortgage but it refers to the bundle of security that is provided
to the investor.
Contribution of Mortgage backed securities
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This system has significantly contributed towards the rise of financial crises in the
year 2008. With the invention going around in the world, the MBS has also
revolutionized. this can be ascertained as in the past years, mortgages were used by
the people so as to purchase the homes (Hotson and Mills, 2015). With the boom in the
real estate activities, it has been assessed that the mortgage institutes and other banks
laid no emphasise on the down payment and provided loans without any money. This
has further caused the citizens to enter into those transactions which are not affordable
by them. This in turn created a situation of debt for them without realising the actual
impact of the same. The bankers and other institutions knew that they can sold the
loans without paying any consequence of the same. The situation has spread like a
blooming bubble which got busted in the year 2006 resulting in the sub-prime mortgage
crises. These mortgage backed securities were owned by the many of the financial
institutions, investors as well as pension funds which further resulted in losses for them.
This is what has created the financial crises of 2008 (Murphy and Senior, 2013).
Conclusion
Therefore, it can be said that the Mortgage Backed Securities was a devastating
reform which caused the global crises of 2008 and took the whole economy into crises.
Furthermore, it has been assessed that the people with low financial position or income
were also involved in purchasing these bundles as it was provided with no money.
Introduction
The main objective of the financial intermediaries is to facilitate the general public
by providing them with varied sorts of services in form of deposits, loans, issuing funds
and other services. These are either owned or managed by the private or public
organization depending upon the size of operations (Andréadès, 2013). There are two
kinds of financial institution whose functions have been enumerated underneath.
Function of Insurance company
The depository institutes are concerned with collection of funds as well as
disbursements of cash in form of loans to the businesspersons or private individuals.
They also perform certain other functions which is entirely different from that of the non-
depository institutes such as insurance companies. The firm upholds deposits of the
citizens and also issues credit to them in form of varied loans, mortgages or trade
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credits in order to conduct their business operations as well purchase gold, land, house
or other necessary items. In contrast to the above, non depository firms such as
insurance company is involved in accumulating the funds from the sale of policies or
services to the public (Andréadès, 2013). They are engaged in making profits by selling
them as well as mitigating the loss from the customers or businesspersons. Additionally,
the benefits derived from these services are to prevent oneself from harm or hazards in
terms of non-profit systems or interest or dividends.
System of life insurance or annuity products
In order to create easy cash disbursements by the insurance companies, it
issues several annuity products or life insurance polices so as the lump sum payment of
the same. There are several other policies presented by the insurance company in
which these policies get matured at a particular period of time and they need to repay
the amount in single transaction (Eichengreen and Flandreau, 2012). However annuity
products have been used by the company so as to prevent the lump-sum payment and
provide the amount in small transactions and on timely interval.
Conclusion
From the above discussion it is clear that insurance services are the form of non-
depository firms that deal in selling of policies. They establish new methods and policies
through which cash can be easily managed. Therefore, the life insurance and several
other annuity systems have been used by them in regards to prevent lump-sum
payment.
Introduction
A private company that is involved in providing assistance to the government and
other institutions in regards to manage its operations and finance is deemed under the
head invest banks (Berger, Imbierowicz and Rauch, 2016). These banks play significant
role in the development of the company and assisting hem to face financial challenges
which have been discussed hereunder.
Assistance of investment banks towards raising finance
The investment banks issues securities and also assist the businessperson in
raising their capital with the means of underwriting securities. It also acts as an advisory
firm to the middlemen and assist them with the knowledge and insight of mergers and
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acquisition which can also result in beneficial for the company. Along with that advises
are rendered in order to manage its funds in the most prominent manner. Trading and
sales was also one of the major services offered by these institutes wherein it was
involved in gambling of its own securities. These practices have recently been banned
due to the Volcker rule (Farag, Harland and Nixon, 2013). Furthermore, an expert has
been appointed by the investment bank wherein it provides advises to the middleman in
assisting them to manage the assets of the company. it also renders them with the
correct mix of debt instruments, stocks and real estates which aids in setting a unique
goal. Apart from the above discussed services and financial assistance, the firm also
provides with the wealth management system wherein the insight regarding the fund
allocation and saving its for future prospect such as retirement is also being presented
(Stowell, 2012).
Conclusion
It can be summed up by saying that the investment bank assist several small as
well as large businessperson in managing their operations through effective allocation
of resources.
CONCLUSION
The report presents varied aspects of financial management systems and
policies that assist the large enterprise as well as the entire economy from upcoming
the crises that has been faced by the UK in the year 2007- 08 (Radić, Fiordelisi and
Girardone, 2012). The study also suggest the ways and measures to manage the
losses that are faced by the businesspersons.
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REFERENCES
Books and Journals
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in bank failures during the recent financial crisis. Journal of Money, Credit and
Banking. 48(4). pp.729-770.
Brigham, E. F. and Ehrhardt, M. C., 2013. Financial management: Theory & practice.
Cengage Learning.
Eichengreen, B. and Flandreau, M., 2012. The Federal Reserve, the Bank of England,
and the rise of the dollar as an international currency, 1914–1939.Open
Economies Review. 23(1). pp.57-87.
Farag, M., Harland, D. and Nixon, D., 2013. Bank capital and liquidity. Bank of England
Quarterly Bulletin. pp.Q3.
Fiordelisi, F. and Marqués-Ibañez, D., 2013. Is bank default risk systematic?.Journal of
Banking & Finance. 37(6). pp.2000-2010.
Hotson, A. C. and Mills, T. C., 2015. London’s Market for Bullion and Specie in the
Eighteenth Century: The Roles of the London Mint and the Bank of England in
the Stabilization of Prices. In Money, Prices and Wages (pp. 211-227). Palgrave
Macmillan UK.
Hwang, E. and et.al, 2013. Determinants of stock market comovements among US and
emerging economies during the US financial crisis. Economic Modelling. 35.
pp.338-348.
McCahery, J. A., Sautner, Z. and Starks, L. T., 2016. Behind the scenes: The corporate
governance preferences of institutional investors. The Journal of Finance.
Murphy, E. and Senior, S., 2013. Changes to the Bank of England. Bank of England
Quarterly Bulletin. pp.Q1.
Radić, N., Fiordelisi, F. and Girardone, C., 2012. Efficiency and risk-taking in pre-crisis
investment banks. Journal of Financial Services Research. 41(1-2). pp.81-101.
Savor, P. and Wilson, M., 2016. Earnings announcements and systematic risk. The
Journal of Finance. 71(1). pp.83-138.
Stowell, D., 2012. Investment banks, hedge funds, and private equity. Academic Press.
Online
Amadeo, K., 2016. Federal Reserve System: Its 4 Functions and How It Works.
[Online]. Available through: <https://www.thebalance.com/the-federal-reserve-
system-and-its-function-3306001>. [Accessed on 7th December 2016].
Role of Financial Intermediaries in Economic Development. 2016. [Online]. Available
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economic-development/>. [Accessed on 7th December 2016].
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