Institutional Financial Management (Essay Sample)

Institutional Financial Management
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Financial institutions can be termed as those firms that provide financial services together with advice regarding financial matters to the clients. These institutions are generally regulated by the law which deals with financial matters in the government authority. The various types of the financial institution include the commercial banks, the credit unions and the stock brokerage firms. Moreover, other financial institutions include the Asset Management Firms and Insurance Companies. Additionally, Building societies and retailers are also included in the list of the financial institution.
There are various roles of these financial institutions. Generally, they act as intermediaries between the capital markets and the debt markets. These services provided by these institutions depend on its type. In addition, these institutions are responsible for transferring funds from investors to the companies. It can be deduced from this point that they are the key entities that regulated the money flow in the economy (Saunders, & Cornett, 2015).
The services provided by the commercial banks include giving out insurance services and mortgages to its clients, in addition, they give out loan to their clients as well. They also provide credit cards services. Brokerage firms consequently provide services such as insurance services and securities to its clients; moreover, they provide mortgages and loan in addition to providing money market services together with cheque writing for its clients.
Insurance companies as well provide insurance services and securities for its clients. In addition, they participate in buying and selling of the real estate. They also provide mortgages and loans for its clients. Stock brokerage firms invest in the stock market on behalf of its clients. Asset management firms provide management services of various securities for clients and assets to meet the investor’s goals. They also offer advice and decisions to organizations and individuals (Saunders, & Cornett, 2015).
In its functionality, the Federal Reserve’s works by regulating the money circulation and its supply. It has the powers to influence the interest rates to be applied in the commercial banks. In addition, it affects the mortgage payments for millions of families. In this regards, it has the impacts on dictating the boom and collapse of the financial markets. In comparing the Bank of England and the Federal Reserve, it is quite coherent that Federal reserve’s do not publicly trade its corporation unlike the Bank of England. In this regard, the Federal Reserve is not required in Securities and Exchange Commission reports that are mostly attributed to shareholders (Pilbeam, 2010).
The Bank of England has a mission to promote the good citizens of England by maintaining the monetary and financial stability. The main roles of this bank emanate from maintaining the public confidence with regards to the money in the economic cycle. In this regard, the bank is responsible for designing and issuing durable and high-quality bank notes that contain advanced features of security fo easy checking of counterfeits.
Moreover, it has the responsibility of protecting the value of money over time so as to ensure that the business can plan and invest, in addition, this will ensure that the businesses spend their funds in confidence. Consequently, it plays a very significant role in maintaining the financial stability that in turn will gain the public trust and confidence from the financial institutions and markets. It also has the mandate of su[ervising and regulating other financial institutions.
Furthermore, the Bank of England regulates and oversees the payments for the government and clearing the settlements systems obligated to the government. At times, they perform money-lending functions for the financial institutions while seeking to resolve the failing financial institutions (Thomas, 2012).
The Federal Reserve, on the other hand, acts as the England Central Bank and is mandated to promote the maximum employment by stabilizing the prices in the economy regarding long-term rates of interests. Additionally, they provide and regulate effective forms of the payment system. Also they carry out direct supervision and regulation of the banking operations and conducting monetary policies. It is also mandated to influence the applicable discount rates and the reserve requirement by acting as leaders to the financial institutions such as the commercial banks.
Monetary policies can either be expansionary or contractionary. Expansionary seeks to accelerate the growth of the economy while on the other hand contractionary policy seeks to restrict the growth of the economy. Expansionary measures sought to combat the challenges of unemployment during the recession times. This was done by the Federal Reserve by applying methods such as lowering the interest rates of loans being given out by the commercial banks to the citizens. This was in the hope that it will entice the business owners to expand. The impact of this whole expansionary activity carried out by the Federal Reserve increase the money supply available in the economy since most people afforded to borrow loans from banks (Pilbeam, 2010).
The impact of expansionary activities conducted by the Federal Reserve’s in the credit availability sought that the credit is affordable to each and every citizen. Since the interest rates were lowered during this exercise, it implies that the business men and ordinary individual accessed this loans with easy negotiations and much more affordable. The result is that the banks had to give out a lot of money to the residents in terms of loans and made them had no more to offer to the public. In essence, it was like releasing all the funds available to the residents for use. The impact is that there was no more available credit to be given to the businessmen who needed to top up their credit for their business.
The impact of this activity in the market rates was found to be negative. Logically, since almost everybody had the ability to borrow money from the banks and have it at the low-interest rates, it means the spending power thrives in. The demand of good grew drastically with everybody willing and able to purchase the items they needed at any prices set by the business men. Businessmen being opportunistic in nature had to increase the prices of their products so that they can make as many profits as they can. The result is that they all decided to increase the prices of all the essential commodities so that they can utilize the chances. This led to inflation. Inflation thus became the nature of the day that saw everything raising its value to approximately two hundred percent of the original selling price (Thomas, 2012).
For the prices of securities such as the bonds, it rose to almost triple their original prices. This is due to the reason being the people who were interested in buying and selling these securities as well had the money and since the nature of the businessmen is to maximize profit when they get the chance, they also raised the prices of these bonds so that they buyers can pay more and thus ending up making a lot of profits. In short, the impact of the activities of Federal Reserve’s in expansionary activities saw everything increasing in the prices which ended up causing inflation in almost every commodity being traded.
For money market under restrictions, it can be noted that it is regulated by market forces, the forces of demand and supply. To understand this better, people hold money for different reasons which can then have impact on these forces. People may hold money for so that they can spend it on daily requirements such as the groceries or paying their rent. One may also decide to hold money for unforeseen contingencies such as in case one may fall sick (Choudhry, 2003).
Moreover, some people hold money to gather for future needs. This is in expectation of the likely future drop in the prices of the commodities. In addition, some risks might occur, and people need money for precautionary purposes. But generally, money in the economy is being regulated by the Federal Reserve to ensure that the financial situation is stabilized. In this regards, some restrictions can be induced regarding the same. For the money market, increasing the interest of the lending rates will have an impact in the money cycling in the economy.
It can be deduced that, as the interest rate is increased by the commercial banks as directed by the Federal Reserve’s is increased, the money demanded will have a response with that regards. In essence, when the interest rate increases, then the money demanded is reduced. This implies that the rate of requesting for a loan is very expensive and thus cannot be afforded by many. This makes people have no ability to purchase some commodities that cause the price s to drop to a level where it can be afforded. In general, the act of restricting the money market helps in curbing the increase in the inflation rate.
As it is the case that the Treasury bills are as well used for the regulation of the flow of money in the economy, it can be effectively used by the Federal Reserve to achieve this function. For instance, when the money circling the economy is too little to cover the daily requirements of the citizens, then the Treasury can opt to buy these bills to the public. The result is that the public can now access the money and use it in the purchases of their needs. Holding the treasury bills by the public means that it is an investment for them and have a opportunity cost for holding such (Quintyn, 2004).
From the diagram, it can be derived that if the prices of the Treasury bills are high, the demand will be ...