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In financial economics
Financial economics

Financial economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment" ....
, a financial institution is an institution
Institution

Institutions are social structure and social mechanism of social order and cooperation governing the behavior of a set of individuals. Institutions are identified with a social purpose and permanence, transcending individual human lives and intentions, and with the making and enforcing of rules governing cooperative human behavior....
 that provides financial services
Financial services

Financial services refer to Service provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money....
 for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries.

Broadly speaking, there are three major types of financial institution:
  1. Deposit
    Deposit account

    A deposit account is a Current account at a banking institution that allows money to be deposited and withdrawn by the account holder, with the transactions and resulting balance being recorded on the bank's books....
    -taking institutions that accept and manage deposits and make loans (this category includes banks
    Bank

    A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money....
    , credit unions, trust companies, and mortgage loan
    Mortgage loan

    A mortgage loan is a loan secured by real property through the use of a note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which security interest the loan....
     companies);
  2. Insurance companies and pension funds; and
  3. Brokers, underwriters and investment funds
    Collective investment scheme

    A collective investment scheme is a way of investment money with other people to participate in a wider range of investments than those feasible for most individual investors, and to share the costs of doing so....
    .


Most financial institutions are highly regulated
Financial regulation

Financial regulations are a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system....
 by government
Government

Government is the body within any organization that has the authority to make and the power to enforce laws, regulations, or rules. Typically, the government refers to a civil government -- local, provincial, or national -- but commercial, academic, religious, or other formal organizations are also administered by governing bodies....
 bodies.

ncial institutions provide service as intermediaries of the capital and debt markets.






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In financial economics
Financial economics

Financial economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment" ....
, a financial institution is an institution
Institution

Institutions are social structure and social mechanism of social order and cooperation governing the behavior of a set of individuals. Institutions are identified with a social purpose and permanence, transcending individual human lives and intentions, and with the making and enforcing of rules governing cooperative human behavior....
 that provides financial services
Financial services

Financial services refer to Service provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money....
 for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries.

Broadly speaking, there are three major types of financial institution:
  1. Deposit
    Deposit account

    A deposit account is a Current account at a banking institution that allows money to be deposited and withdrawn by the account holder, with the transactions and resulting balance being recorded on the bank's books....
    -taking institutions that accept and manage deposits and make loans (this category includes banks
    Bank

    A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money....
    , credit unions, trust companies, and mortgage loan
    Mortgage loan

    A mortgage loan is a loan secured by real property through the use of a note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which security interest the loan....
     companies);
  2. Insurance companies and pension funds; and
  3. Brokers, underwriters and investment funds
    Collective investment scheme

    A collective investment scheme is a way of investment money with other people to participate in a wider range of investments than those feasible for most individual investors, and to share the costs of doing so....
    .


Most financial institutions are highly regulated
Financial regulation

Financial regulations are a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system....
 by government
Government

Government is the body within any organization that has the authority to make and the power to enforce laws, regulations, or rules. Typically, the government refers to a civil government -- local, provincial, or national -- but commercial, academic, religious, or other formal organizations are also administered by governing bodies....
 bodies.

Function

Financial institutions provide 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 money through the economy. To do so, savings are pooled to mitigate the risk brought to provide funds for loans. Such is the primary means for depository institutions to develop revenue. Should the yield curve
Yield curve

In finance, the yield curve is the relation between the interest rate and the time to Maturity of the debt for a given borrower in a given currency....
 become inverse, firms in this arena will offer additional fee-generating services including securities underwriting, and prime brokerage.

Corporate valuation

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

Dividends-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

FCFF-Debt+Cash=FCFE

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.

Governance

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
    • FFIEC
    • Comptroller of the Currency- National Banks
    • FDIC-State "non-member" banks
    • NCUA-Credit Unions
    • Federal Reserve- Fed "member" Banks
    • Office of Thrift Supervision - National Savings & Loan Association
    • State governments each often regulate and charter financial institutions
  • Norway
    • Financial Supervisory Authority of Norway
      Financial Supervisory Authority of Norway

      The Financial Supervisory Authority of Norway is a Norway etat responsible for financial regulation within Norway based on law and regulations from Storting, the Norwegian Ministry of Finance and international accounting standards....
  • Hong Kong
    • Hong Kong Monetary Authority
      Hong Kong Monetary Authority

      The Hong Kong Monetary Authority or HKMA is Hong Kong's central banking institution . It is a government authority founded on 1 April 1993 via the consolidation of "Office of the Exchange Fund" and the "Office of the Commissioner of Banking"....
  • Russia
    • Central Bank of Russia

See also

  • Bank
    Bank

    A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money....
  • Credit union
    Credit union

    A credit union is a Cooperative banking financial institution that is owned and controlled by its members, and operated for the purpose of promoting thrift, providing credit at reasonable rates, and providing other financial services to its members....
  • Financial economics
    Financial economics

    Financial economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment" ....
  • Savings and loan association
    Savings and loan association

    A savings and loan association, also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage loans....
  • Consumer Credit Act 1974
    Consumer Credit Act 1974

    The Consumer Credit Act 1974 is a consumer protection law in the United Kingdom. Until 6 April 2008, it required certain businesses to obtain Consumer credit licences and protected individuals receiving credit up to ?25,000....
     (UK law)