The Major Types of Financial Institutions
*Identify the major types of financial institutions and their significance in the financial system. Describe how the institutions were affected by the 2008-2009 financial crisis.
*Describe how interest rate changes affect the savings rate in the United States. How do banks adjust interest rates on deposits and loans? What would your targeted personal savings rate be postgraduation and why? How does the textbook describe the â€œlife stages of the individual saver,â€ and what stage are you in?
*Identify the different types of yield curves, and explain what they indicate for the U.S economy. What is the current shape of the yield curve, and why is it shaped that way?
Identify the major types of financial institutions and their significance in the financial system. Describe how the institutions were affected by the 2008-2009 financial crisis
The key types of financial institutions include insurance companies and depository or commercial banks. Insurance companies assist businesses and individuals transfer their risks of loss. Commercial banks offer limited financial advice to individuals and businesses, lending, and deposit accounts (Booth et al., 2020). Financial institutions are important to the financial system because they provide a marketplace with money and assets so that capital can be efficiently allocated where it is most beneficial (Booth et al., 2020). Moreover, their key role entails providing liquidity to the economy and permitting a higher level of economic activity in a nation.
During the financial crisis, interbank lending froze, credit to businesses and consumers started drying up, and banks lost their money due to mortgage defaults. Regulations were passed in the United States before the financial crisis hit in 2008 that pressured financial institutions to allow more customers to purchase homes (Schoen, 2017). Subsequently, many foreign financial institutions bought collateralized U.S debt as subprime mortgage loans. These loans were then sold to banks globally after being bundled into collateralized debt obligations (Schoen, 2017). During the financial crisis, an increasing number of United States consumers defaulted on their mortgage loans, resulting in the country’s banks and other global banks losing money on these loans (Schoen, 2017). Moreover, interbank lending stopped, and it became more challenging for businesses and consumers to get credit.
Booth, L., Cleary, W. S., & Rakita, I. (2020). Introduction to corporate finance. John Wiley & Sons. https://books.google.com/books?hl=en&lr=&id=EXLLDwAAQBAJ&oi=fnd&pg=PA1&dq=introduction+to+finance&ots=iLvqcxKPen&sig=VMhirt9IMJMajU_pEwt-y6IsBh4
Schoen, E. J. (2017). The 2007–2009 financial crisis: An erosion of ethics: A case study. Journal of Business Ethics, 146(4), 805-830. https://doi.org/10.1007/s10551-016-3052-7
Describe how interest rate changes affect the savings rate in the United States. How do banks adjust interest rates on deposits and loans? What would your targeted personal savings rate be post-graduation and why? How does the textbook describe the life stages of the individual saver and what stage are you in?
When interest rates decrease, consumers will see a decrease in variable-rate student loans, small business loans, home equity lines of credit, and credit card rates. For a saver, this translates to lower returns on certificates of deposit and savings accounts. Over time, interest rates affect the cost of borrowing money, so borrowing becomes cheaper with lower interest rates (Bean & FCIA, 2017). This allows individuals to invest, save and spend more freely. Conversely, borrowing becomes increasingly costly when interest rates increase, which can reign in spending in favor of saving.
The U.S Federal Reserve Bank influences interest rates by selling and buying “risk-free” U.S Federal agency and Treasury securities, demanding bank reserve requirements, and setting specific rates to affect the deposits banks or financial institutions hold at the Fed (Bean & FCIA, 2017). Banks may then consider the velocity and demand for money in the U.S or internationally, the expectations for inflation levels, and stock market levels to set their interest rates.
The U.S personal saving rate is defined as personal savings as a percentage of an individual’s disposable income (Bean & FCIA, 2017). My target personal savings rate would be around 6-10%. This depends on if there are other costs to take care of post-graduation. The different stages of the individual life saver are the formative/ education stage, family or career-building stage, and pre-retirement years or stage. I am currently at the formative or education stage.
Bean, M. A., & FCIA, F. (2017). Determinants of Interest Rates. Education and Examination Committee of the Society of Actuaries. Financial Mathematics Study Note. https://www.soa.org/globalassets/assets/Files/Edu/2017/fm-determinants-interest-rates.pdf