Nonbanking Financial Institutions

 

Financial institutions act as sources and users of funds. Given this fact, many institutions that do not provide banking services qualify as financial institutions. These include insurance companies, pension funds, large brokerage houses,and commercial and consumer finance companies.

Insurance companies. Insurance companies were originally created by groups (such as trade unions and religious groups) who pooled their resources to provide some financial protection for members and families should the member become disabled or die. The first life insurance company in the United States, Presbyterian Ministers' Fund in Philadelphia, was established in 1759. Today insurance companies accept premium payments from policyholders and provide various types of protection. Insurance companies use the funds generatedthrough premium payments to provide long-term loans to corporations, to provide commercial real estate loans, and to purchase government bonds. Property and casualty insurance companies are regulated by stats and operate in a similar fashion to life insurance companies.

Pension funds. Pension funds can be set up by a company, union or nonprofit organization to provide for the retirement needs of its members or employees. To meet these needs, the fund uses a pool of money created by contributions of the members, the employer or both. They invest these funds in long-term mortgages on commercial property, business loans, government bonds, and common stock in major firms. In addition, company pension funds will typically invest a portion of the fund in the company's own stock.

State, local, and federal governments have set up pension funds for their employees. A very important public pension plan is social security (Old Age and Survivors Insurance Fund), which covers virtually all individuals employed in the private sector as well as disabled persons and children under 18 whose parents are deceased. The fund was originally set up to supplement individual savings and other pension funds as a means of support for retired persons. It is administered through the federal government and applies to most employees. The federal government collects social security funds from employers and deducts them from employee checks. These funds are used to pay benefits to the retired, the disabled, and young children of deceased parents.

The social security system recently faced a serious crisis. Concerned that the fund would not be sufficient to pay current benefits, the government increased social security taxes for both employees and employers. This action appears to have solved the immediate problem, as the fund now has a sizable surplus. However, many experts fear there will not be sufficient funds to pay future benefits.

The reason for this concern is the change in the makeup of the American work force. The average age of U.S. citizens is increasing and, with the current, low birth rate, will continue to increase. As a result, the number of people requiring benefits (especially retirement benefits) is increasing, while the number of people contributing to the fund (working) is decreasing. This means that in the future fewer people will be paying into the social security fund and more people will be withdrawing funds from it. The result could be a serious shortfall.

Large brokerage houses. Brokerage firms buy and sell stocks, bonds, and other assets for their customers. They have also started to provide other financial services. Many brokerages have created accounts for their customers, such as Merrill Lynch's Cash Management Account and Paine Webber's Cash-Fund, which pay interest on deposits and allow clients to write checks, borrow money, and withdraw cash.

Commercial and consumer finance companies. By issuing commercial paper (large corporate promissory notes) or stocks and bonds, finance companies acquire funds. They use the funds to make loans appropriate to consumer and business needs. Finance companies typically charge a higher rate of interest because of the higher risk of the loans that they make. These companies also frequently require some sort of collateral for loans. Businesses may be required to pledge their inventory as security for the loan, and individual may have to put up an automobile or some interest in stocks as security.

Commercial and consumer finance companies get the money they lend by selling bonds in their corporation and through loans from other corporations. In recent years, finance companies, such as Household Finance Corporation and General Motors Acceptance Corporations, have become increasingly competitive with commercial banks. They are now often able to offer attractive loans with longer-term payback.

 

1. What institutions qualify as financial institutions without providing banking services?

2. What was the purpose of crediting the first insurance companies?

3. What organizations can set up pension funds?

4. What types of protection do insurance companies provide?

5. Explain how pension funds meet the retirement needs of their members or employees?

6. What can you say about pension funds set up by the state, local and federal governments?

7. How does federal government administer social security funds?

8. What problems did security system recently face?

9. What is the reason for them and what are the future perspectives?

10. What are the main services offered by brokerage firms?

11. In what way do commercial and consumer finance companies acquire funds and use them?

12. Why do you think finance companies have become increasingly competitive with commercial banks?

 

X. Complete the sentences:

 

1. A person who can be employed is …

2. A person employs other is …

3. A person who is unable to do something is …

4. A person who has recently died is …

5. A person who gave up his work, position, business reaching old age is …

 

XI. Match the words and the word combinations given on the left with their dictionary definitions given on the right:

 

a) collateral b) brokerage house c) government bond d) life insurance e) commercial company f) promissory note g) inventory h) social security i) policy holder j) casualty insurance k) payback l) premium payment m) consumer finance company n) policy o) check p) commercial paper

1) A sum of money payable to seriously injured or killed in an accident. 2) The possessor of an insurance policy. 3) A financial institution for business credit. 4) Stocks of raw materials, work in progress and finished goods. 5) Security that includes goods, intangibles, paper (negotiable instruments and documents of titles) and proceeds. 6) Government provisions for helping people who are unemployed, ill, disabled. 7) The period over which the cumulative net revenue from an investment project equals the original investment. 8) A form of interest-bearing security issued by central or local government. 9) An unsecured note issued by companies from short-term borrowing purposes, which is one-name paper. 10) An instrument recording a promise to buy a specific sum of money by a given date. 11) A sum of money payable in case of loss of life. 12) A firm of broker-dealers (USA). 13) A contract for insurance. 14) A sum of money paid either once (single) or continuously (regular). 15) A company, which makes loans to individuals. 16) An order written by the drawer to a commercial bank or central bank to pay on demand a specific sum to a bearer or a named person or company.

 

XII. Explain the following word combinations and use them in your own sentences:

 

1) to pool the resources

2) to accept premium payments

3) to provide long-term loans to

4) to provide commercial real estate loans

5) to purchase government bonds

6) to set up pension fund

7) to pay benefits to

8) to provide financial protection

9) to collect social security funds from

10) to pay interest on deposit

11) to offer attractive loan

12) to charge interest

13) to lend on collateral

14) to withdraw funds from

 

XIII. Role play:

 

1. You are a finance company manager and you were asked for a loan.

 

2. Consider the things you will worry about the loan and the questions you will want to be answered. You should give particular consideration to:

- whether you will have sufficient funds to make this loan;

- whether you think the customer will be able to repay loan and interest;

- whether you would offer all or part of what is being asked;

- whether you need any further evidence of the credit worthiness of your customer and how you would get it;

- what sort of security would you accept;

- what kind of term would you offer.

 

3. Conduct the interview:

a) if you refuse the loan, write to the client setting out the reasons why you have done so;

b) if you grant the loan, write to the client setting out the precise terms of the loan.