THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 320

CHAPTER 12 Nonbank Financial Institutions LEA RNI NG OB JECTI VES After studying this chapter you should be able to identify the difference between banks and nonbank financial institutions (insurance companies, pension funds, finance companies, mutual funds, and investment banks) explain the regulation of nonbank financial institutions in the context of asymmetric information problems report how recent financial-sector legislation is expected to lead to larger and increasingly complex financial groups, engaging in a full gamut of financial activities PRE VI EW Banking is not the only type of financial intermediation you are likely to encounter You might decide to purchase insurance, take out an instalment loan, or buy a share of stock In each of these transactions you will be engaged in nonbank finance and will deal with nonbank financial institutions In our economy, nonbank finance also plays an important role in channelling funds from lendersavers to borrower-spenders Furthermore, the process of financial innovation we discussed in Chapter 11 has increased the importance of nonbank finance and is blurring the distinction between different financial institutions This chapter examines in more detail how institutions engaged in nonbank finance operate, how they are regulated, and recent trends in nonbank finance IN SU RAN CE Every day we face the possibility of the occurrence of certain catastrophic events that could lead to large financial losses A spouse s earnings might disappear due to death or illness; a car accident might result in costly repair bills or payments to an injured party Because financial losses from crises could be large relative to our financial resources, we protect ourselves against them by purchasing insurance coverage that will pay a sum of money if catastrophic events occur Life insurance companies sell policies that provide income if a person dies, is incapacitated by illness, or retires Property and casualty companies specialize in policies that pay for losses incurred as a result of accidents, fire, or theft 288