Analyzing Types of Banks and Non-Bank Financial Intermediation

This report delves into the realm of banking and financial intermediation, analyzing the roles and functions of various financial institutions. It begins by differentiating between banks and non-bank financial institutions (NBFIs), highlighting the services they offer and the competitive landscape they inhabit. The report explores critical concepts such as adverse selection and moral hazard, illustrating their implications within the context of financial intermediation, particularly concerning investment banks and companies. It examines the impact of deregulation and technological advancements on banking competition, outlining both the advantages and disadvantages. Furthermore, the report investigates mutual funds as financial intermediaries, explaining their role in exploiting economies of scale to reduce transaction costs. Finally, it addresses the dynamics of banking panics and the potential for other financial intermediaries to capitalize on bank runs by attracting funds from ex-depositors. The report concludes with a comprehensive overview of the financial system and its components.

Running head: TYPES OF BANKS AND NON-BANK FINANCIAL INTERMEDIATION 1
Types of Banks and Non-Bank Financial Intermediation
Name
Institutional Affiliation

TYPES OF BANKS AND NON-BANK FINANCIAL INTERMEDIATION 2
#1
Non-bank financial institution (NBFI) is referred to a financial institution that does not
allow both collective and individual to deposit because it does not have a full banking license.
NBFI offers alternative Services like an investment, money transmission, financial consulting,
brokering, risk pooling and checks to cash (Grillet-Aubert, Haquin, Jackson, Killeen, &
Weistroffer, 2016). Non-bank financial institutions include current exchanges, microloan
organizations, pawnshops, venture capitalists, and insurance firms. Services that are not required
in banks, provide a competition to banks, sectors or groups are offered by these financial
institutions.
#2
Adverse selection and moral hazard are used when one party is at a disadvantage
situation in a market economic, risk management and insurance. Adverse selection is where one
party has important and different information than the other (Goacher, Curwen, Apps, Boocock,
& Drake, 2017). The disadvantage applies to the party with less information than the party with
more information. These can bring lack of good services, prices, and quantity of goods in a
market economy. Moral hazard is when a party provides wrong information of an asset for his
own benefit without considering the consequences. Moral hazard in most of private companies
insure some parties. Adverse selection can be associated in a long-term contract whereby it is
beneficial to one party.

TYPES OF BANKS AND NON-BANK FINANCIAL INTERMEDIATION 3
#3
Many banks provide a role in financial system services to individuals and firms. They
have competition in the provision of these institutional services. Banks offers package deals
while non-bank financial institutional reduces the services and they specialize in groups and
sectors. NBFI increases industry competition to the advantage of gaining a piece of information.
Financial system protects life investment in this intermediation by providing an alternative
solution to the economic savings which can be a capital investment.
#4
There are two types of mutual funds closed-end and open-end funds. Open-end funds
allow an individual to invest in a new share. Closed-end funds allows shareholders to sell their
assets in a fixed number from the stock exchange (Liang, & Reichert, 2012). By investing the
collected money in corporate securities mutual funds act as financial intermediaries.
#5
Non-bank financial intermediary prefers to grow their funds and manage a long-term plan
from security exchange. However, general public deposits are not acceptable in NBFI. The
parties in need of funds are divided the capital by financial intermediaries from the parties with
an excess capital (Véron, 2013). Financial intermediaries are beneficial to all savers because they
can make their capital into larger investments by pooling their funds.
#6
The primary function of an insurance is a payment made for an insured individual over a
certain loss. The insurance provides a guarantee payment and protection from the happening

TYPES OF BANKS AND NON-BANK FINANCIAL INTERMEDIATION 4
risks. Adverse selection problems occur from customers who need to apply for an insurance.
With the adverse selection, only high consumers can pay a greater premium for insurance which
can be a loss to some companies. However, most companies can benefit by increasing the
premium for high risk customers

TYPES OF BANKS AND NON-BANK FINANCIAL INTERMEDIATION 5
References
Grillet-Aubert, L., Haquin, J. B., Jackson, C., Killeen, N., & Weistroffer, C. (2016). Assessing
shadow banking–non-bank financial intermediation in Europe (No. 10). ESRB Occasional Paper
Series.
Goacher, D. J., Curwen, P. J., Apps, R., Boocock, G., & Drake, L. (2017). British non-bank
financial intermediaries. Routledge.
Liang, H. Y., & Reichert, A. K. (2012). The impact of banks and non-bank financial institutions
on economic growth. The Service Industries Journal, 32(5), 699-717.
Véron, N. (2013). Bank versus non-bank credit in the United States, Europe and China (No.
2013/07). Bruegel Policy Contribution.