With an understanding of what financial assets are and the role of financial assets and financial markets, we can now identify who the players are in the financial markets. By this we mean the entities that issue financial assets and the entities that invest in financial assets. We will focus on one particular group of market players, called financial intermediaries, because of the key economic functions that they perform in financial markets. In addition to reviewing their economic function, we will set forth the basic asset/liability problem faced by managers of financial intermediaries.
There are entities that issue financial assets, both debt instruments and equity instruments. There are investors who purchase these financial assets. This does not mean that these two groups are mutually exclusive—it is common for an entity to both issue a financial asset and at the same time invest in a different financial asset.
A simple classification of these entities is as follows: (1) central governments; (2) agencies of central governments; (3) municipal governments; (4) supranationals; (5) nonfinancial businesses; (6) financial enterprises; and (7) households. Central governments borrow funds for a wide variety of reasons. Many central governments establish agencies to raise funds to perform specific functions. Most countries have municipalities or provinces that raise funds in the capital market. A supranational institution is an organization that is formed by two or more central governments through international treaties. Businesses are classified into nonfinancial and financial businesses. These entities borrow funds in the debt market and raise funds in the equity market. Nonfinancial businesses are divided into three categories: corporations, farms, and nonfarm/noncorporate businesses. The first category includes corporations that manufacture products (e.g., cars, steel, computers) and/or provide nonfinancial services (e.g., transportation, utilities, computer programming). In the last category are businesses that produce the same products or provide the same services but are not incorporated.
Financial businesses, more popularly referred to as financial institutions, provide services related to one or more of the following:
1. Transforming financial assets acquired through the market and constituting them into a different and more preferable type of asset—which becomes their liability. This is the function performed by financial intermediaries, the most important type of financial institution.
2. Exchanging financial assets on behalf of customers. 3. Exchanging financial assets for their own account. 4. Assisting in the creation of financial assets for their customers and then
selling those financial assets to other market participants. 5. Providing investment advice to other market participants. 6. Managing the portfolios of other market participants.
Financial intermediaries include: depository institutions that acquire the bulk of their funds by offering their liabilities to the public mostly in the form of deposits; insurance companies (life and property and casualty companies); pension funds; and finance companies. The second and third services in the list above are the broker and dealer functions. The fourth service is referred to as securities underwriting. Typically, a financial institution that provides an underwriting service also provides a broker- age and/or dealer service.
Some nonfinancial businesses have subsidiaries that provide financial services. For example, many large manufacturing firms have subsidiaries that provide financing for the parent company’s customer. These financial institutions are called captive finance companies.
Tags: assets, Business, financial assets, Market partcipants