There are various financial intermediaries within the financial industry. Some intermediaries largely offer depository or savings services while others offer services focusing on insurance and financial securities. Despite the differences in services offered, all of these intermediaries act as middlemen, bridging the gap between savers/lenders and borrowers (Adrian & Shin, 2011; Bodie, Kane, & Marcus, 2011). This paper will discuss the commonalities and differences between the operating activities of securities firms and depository institutions. Additionally, the balance sheet structure of securities firms will be evaluated in comparison to those of other financial intermediaries. Finally, the different major regulatory organizations concerned with daily operations in the securities industry will be analyzed and evaluated to assess their position in the effective running of market operations.
The operating activities of depository institutions and securities firms have some similarities and differences. For one, both depository institutions and securities firms act as intermediaries as they provide retail services to their customers (Saunders & Cornett, 2011). For example, commercial banks mostly make loans for consumers and real estate while savings institutions typically specialize in residential mortgages (Saunders & Cornett, 2011). Similarly, securities firms focus on retail services such as “the purchase, sale, and brokerage of existing securities” (Saunders & Cornett, 2011, p. 104).
In contrast, depository institutions are able to accept deposits from their customers to make various types of loans while securities firms are non-depository institutions that are paid fees to perform services for customers (Saunders & Cornett, 2011). Securities firms participate in investing, market making, trading, cash management, investment banking, mergers and acquisitions, and other service function activities for a fee (Saunders & Cornett, 2011).
Another difference in the operation of depository institutions and securities firms is that of funding. Depository institutions require funding from customer deposits to create loans (Saunders & Cornett, 2011). On the other hand, securities firms produce profits without the requirement of an investment in assets or funding from liabilities on the part of the firm (Saunders & Cornett, 2011).
Balance sheets contain an organization’s assets, liabilities, and equity as of a specific date (ex. May 31, 2010). The balance sheet follows the formula of assets = liabilities + equity, and the formula must balance. Essentially, what a company owns (assets) must be sufficient to satisfy its debts (liabilities) plus what its owners have invested (equity). The type of assets and liabilities differ among firms depending on the type of business operated, financial intermediaries are no exception. Financial intermediaries tend to actively manage their balance sheets as compared to other non-financial...