Part 1. Financial Corporations. Insurance Corporations and Pension Funds. Investment Funds. Financial Auxiliaries. Part 2. Selected Financial Stability Terms. Basel Capital Accord. Basel Committee on Banking Supervision. Basel Concordat. Basel II. Bid-Ask Spread. CAMELS Framework. Capital Adequacy Ratio. Capital and Reserves. Committee on Payment and Settlement Systems. Consolidation. Contagion....
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Part 1. Financial Corporations
1. This appendix provides more detailed definitions of certain types of institutions in the financial corporations sector than is provided in Chapter 2.
Insurance Corporations and Pension Funds.
Insurance corporations consist of incorporated, mutual, and other entities whose principal function is to provide life, accident, sickness, fire, and other types of insurance to individual units or groups of units through the pooling of risk. Because of the different risks to be managed, insurance companies can be subdivided into nonlife (casualty) insurance companies and life insurance companies, which include commercially provided pension and annuity services. For nonlife insurance companies, payment to a policy- holder depends on an event occurring that triggers a claim. In contrast, for life insurance companies there is a certainty that a claim will occur, and the payment of premiums may be viewed as savings that are withdrawn when claims are made. Usually the expectation is that there is a considerable lapse of time between the initiation of a life insurance policy and the payment of a claim
Pension funds are constituted in such a way that they are separate institutional units from the units that create them. They are established for the purpose of providing benefits on retirement for specific groups of employees and, perhaps, their dependents. These funds have their own assets and liabilities, and engage in financial transactions on the market on their own account. As with life insurance policies, pension fund liabilities tend to be long term in nature
4. Pension funds are organized and directed by private or government employers, or jointly by individual employers and their employees. They are funded by the employees and/or employers through regular contributions and from income earned from financial assets. In the
Guide, pension funds do not include pension arrangements for the employees of private or government entities that do not maintain a separately organized fund, nor do they include arrangements organized by nongovernmental employees and for which the reserves of the fund are simply added to that employer's own reserves or invested in securities issued by that employer
5. While maintaining a pool of liquid assets, because of the long-term nature of their liabilities, pension funds and insurance companies (particularly life insurance companies) usually invest in longer-term security market instruments, both bonds and equities, or in real estate. This investment behavior helps support the development of capital markets, both in terms of breadth and depth, and thus contributes to the broadening of the financing base for borrowers
Securities dealers include individuals or firms that specialize in security market transactions by (1) assisting firms in issuing new securities through the underwriting and market placement of new security issues and (2) trading in new or outstanding securities on their own account. Only underwriters and dealers that act as financial intermediaries are classified within this category. Security brokers and other units that arrange trades between security buyers and sellers but do not purchase and hold securities on their own account are classified as financial auxiliaries
7. By their nature, securities dealers facilitate both primary and secondary market activity in securities. In particular, these institutions can help provide liquidity to markets, both by encouraging borrower and investor activity-not least through the provision of
Investment funds are institutional units, excluding pension funds, that consolidate investor funds for the purpose of acquiring financial assets. Examples are mutual funds, including money market funds; investment trusts; unit trusts; and other collective investment units. Investors usually purchase shares in the fund that represent a fixed proportion of the fund
9 In investment funds, professional fund managers make the selection of assets, thereby providing individual investors with an opportunity to invest in a diversified and professionally managed portfolio of securities without the need for detailed knowledge of the individual companies issuing the stocks and bonds. Usually, the type(s) of investment undertaken are specified, and the investment funds' managers must adequately inform investors about the risks and expenses associated with investment in specific funds, not least because the value of some types of funds can be highly variable
10. The liquidity of investment funds can vary considerably. Some types of funds are illiquid or have limited liquidity. Such funds are more likely to be investing in longer-term securities. In other cases, shares issued by investment funds are as (or nearly as) liquid as deposits and other liabilities issued by depository corporations. Money market funds are included in this latter category. Because of the liquidity of their liabilities, they tend to invest in short-term debt instruments, such as certificates of deposit and commercial paper
Other Financial Intermediaries.
Finance companies are primarily engaged in the extension of credit to nonfinancial corporations and households. Many finance companies are captive subsidiaries that raise funds to be used by the parent corporations. Captive finance companies that are separate institutional units and that do not issue deposits or close substitutes for deposits should be classified as other financial intermediaries. Finance companies that are not separate should be included as part of the parent corporations in the appropriate subsector
Financial leasing companies engage in financing the purchase of tangible assets. The leasing company is the legal owner of the goods, but ownership is effectively conveyed de facto to the lessee, who incurs all benefits, costs, and risks associated with ownership of the assets
Vehicle companies are financial entities created to be holders of securitized assets or assets that have been removed from the balance sheets of corporations or government units as part of the restructuring of these units. Many are organized as trusts or special purpose vehicles created solely to hold specific portfolios of assets or liabilities
Specialized financial intermediaries include financial holding corporations, companies that provide short-term financing for corporate mergers and takeovers (but do not take deposits), export/import finance firms, factors or factoring companies, venture capital and development capital firms, and pawnshops that predominantly engage in lending rather than retailing.
Financial auxiliaries consist of those resident corporations and quasi corporations that engage primarily in activities closely related to financial intermediation but that do not themselves perform an intermediation role.
Public exchanges and securities markets are organized exchanges and entities such as security depository companies, accounting and clearinghouses, and other companies providing exchange-related services. Depositories and electronic clearing systems operated by financial corporations fall into this category, as do national self-regulatory organizations that regulate or supervise exchanges and related units
Brokers and agents are individuals or firms that arrange, execute, or otherwise facilitate client transactions in financial assets. Included are brokers and agents handling the purchase and sale of securities or other financial contracts for clients, and financial advisory services that provide specialized services to brokers and their customers. Because many brokerage firms also trade in financial securities or financial derivatives on the firm's own account, it can be difficult to distinguish the brokers and agents from the underwriters and dealers (who are classified as financial intermediaries). By convention, this grouping includes only brokers and agents that clearly specialize in brokerage and related activities rather than the intermediation activities generally undertaken by underwriters and dealers
Foreign exchange companies comprise units that buy and sell foreign exchange in retail or wholesale markets.
Financial guarantee corporations insure customers against losses to specified financial corporations or against financial loss on specific contracts. Guarantors must have the financial capability to fulfill potential obligations. They also typically agree- usually for a fee-to ensure that investors receive payment on securities or other financial contracts. In addition, the financial guarantee corporations grouping includes specialized corporations that protect depositors and investors against the failure of individual financial corporations. Distinguishing precisely between financial guarantee corporations and insurance corporations is difficult. Guarantee corporations
Insurance and pension auxiliaries include agents, adjusters, and salvage administrators. The unique nature and, in some countries, the large scale of activity of these units justify their separate identification
21. ... Other financial auxiliaries comprise all other auxiliaries not classified elsewhere. The grouping includes independent units affiliated with the government and established to regulate financial institutions. The System of National Accounts 1993 (1993 SNA) recommends classifying these units as part of the central bank subsector. However, these units are not intermediaries, and the activities of some units (such as securities commissioners or insurance regulators) have little relationship to well-recognized central bank activities. Therefore, the Guide recommends classification of these units in the financial auxiliaries subsector. Also classified in this category are financial units that facilitate
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