- Financial institution
financial economics, a financial institution acts as an agent that provides financial servicesfor its clients or members. Financial institutions generally fall under financial regulationfrom a governmentauthority. Common types of financial institutions include banks, building societies, credit unions, stock brokerages, asset management firms, and similar businesses.
Financial institutions provide a service as intermediaries of the capital and debt markets. They are responsible for transferring funds from investors to companies, in need of those funds. The presence of financial institutions facilitate the flow of monies through the economy. To do so, savings are pooled to mitigate the risk broughtovide funds for loans. Such is the primary means for depository institutions to develop revenue. Should the
yield curvebecome inverse, firms in this arena will offer additional fee-generating services including securities underwriting, and prime brokerage.
Relative metrics :"Price/Equity""Price/Book Value"
Use Equity Multiples (as opposed to Enterprise Multiples). In order to consider how valuing a Financial Institution's balance sheet is different from a non-Financial firm. Consider how an industrials firm wields capital machinery (asset) and the loans (liabilities) it used to finance that asset. The line is blurred in Financial Institutions, which must hold deposit accounts (liabilities) to fuel the issuance of loans (assets). The same accounts are considered loans as they are held in ownership not of the bank, but of the individual client.
Dividend Discount Model :Earnings-per-share
Discounted Cash Flow (DCF) Model :You'll need the FCFE (Free Cash Flow for Equity), which is the amount of money that is returned to shareholders. Calculate an FCFF (Free Cash Flow to the Firm):EBIT (1-tax rate) -Capital Expenditures+ (Depreciation & Amortization) - (Net increase in working capital)= FCFF
Use the Capital Asset Pricing Model, not the Weighted Average Cost of Capital (for the same reasons one uses Equity Multiples in relative valuation) to determine the cost of equity (the return required by shareholders in order to make the decision to invest in a financial institutions)
Excess Return Model :A model where valuation is expressed as the sum of capital invested currently in the firm and the present value of dollar excess returns that the firm expects to make in the future. [http://pages.stern.nyu.edu/~adamodar/pdfiles/papers/finfirm.pdf]
Governance is a critical issue for financial institutions as they operate in a substantially regulated environment. Some of the key governing bodies are:
* United States
** State governments each often regulate and charter financial institutions
Financial Supervisory Authority of Norway
Savings and loan association
Consumer Credit Act 1974(UK law)
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Look at other dictionaries:
financial institution — Under Title 11 U.S.C. Section 101: (22) The term financial institution means (A) a Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally insured… … Glossary of Bankruptcy
financial institution — n. A business that deals in money, such as a bank or trust company, a thrift institution, a currency exchange, a securities trading company, a credit card company, an insurance company, etc. The Essential Law Dictionary. Sphinx Publishing, An… … Law dictionary
financial institution — An enterprise such as a bank whose primary business and function is to collect money from the public and invest it in financial assets such as stocks and bonds. Bloomberg Financial Dictionary * * * financial institution financial institution ➔… … Financial and business terms
financial institution — noun an institution (public or private) that collects funds (from the public or other institutions) and invests them in financial assets • Syn: ↑financial organization, ↑financial organisation • Hypernyms: ↑institution, ↑establishment • Hyponyms … Useful english dictionary
Financial Institution - FI — An establishment that focuses on dealing with financial transactions, such as investments, loans and deposits. Conventionally, financial institutions are composed of organizations such as banks, trust companies, insurance companies and investment … Investment dictionary
financial institution — Any organization whose core activity is to provide financial services or advice in relation to financial products. Financial institutions include state bodies, such as central banks, and private companies, such as banks, building societies, and… … Accounting dictionary
financial institution — An organization whose core activity is to provide financial services or advice in relation to financial products. Financial institutions include state bodies, such as central banks, and private companies, such as banks, savings and loan… … Big dictionary of business and management
financial institution — fi.nancial insti tution n technical a business organization that lends and borrows money, for example a bank ▪ All the big financial institutions cut their interest rates today … Dictionary of contemporary English
Financial institution — An ISO term. An organisation primarily established to offer and perform services specifically related to the provision of financial [monetary] services … International financial encyclopaedia
financial institution — noun (C) technical a business organization that lends and borrows money, for example a bank: All the big financial institutions cut their interest rates today … Longman dictionary of contemporary English