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In financial economics, a 'financial institution' acts as an agent that provides financial services for its clients. Financial institutions generally fall under financial regulation from a government authority. Common types of financial institutions include banks, building societies, credit unions, stock brokerages, asset management firms, and similar businesses.

Contents

Function

Corporate valuation

See also

Function

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 accounts are pooled to mitigate the risk brought by individual account holders (see adverse selection) in order to provide funds for loans. Such is the primary means for depository institutions to develop revenue. Should the yield curve become inverse, firms in this arena will offer additional fee-generating services including securities underwriting, sales & trading, 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 a 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 :'

See also

★ Banking institution

★ Financial economics

★ Bank

★ Consumer Credit Act 1974 (UK law)
'Investment Banks (Financial Institutions Group)'

★ ThinkEquity Partners, LLC

★ Indigo Capital Holding Inc. (New York)

★ Sandler O'Neill

★ Keefe, Bruyette & Woods

★ Fox-Pitt, Kelton

★ Ryan Beck & Co. bought by Stifel Nicolaus

★ Hovde Financial LLC
Howe Barnes Hoefer & Arnett Inc.
Hales & Co. Inc. bought by Arch Capital (Mgmt Buyout)