Understanding Finance from scratch

Chapter 16 Who is in charge of handling our "money" - learn something about financial institutions every day (3)
However, with the introduction of the concept of market operations by policy banks, the benefits are increasing day by day. Due to the intersection of commercial banks and policy banks in the field of loan business, there has been a controversy that "policy banks have meddled in the business field of commercial banks". concern.In addition, some problems have also been exposed in the development of policy banks, mainly in the excessive growth of the three policy banks' liabilities, the unreasonable proportion of liabilities and capital, and the partial overlap and overlap of policy financial institutions and commercial financial institutions. .The development of the three policy banks is also uneven.Some policy banks lack restraint and incentive mechanisms, their branches are unreasonable, their management chains are very long, and their operating costs are high.Some policy banks lack an interest compensation mechanism and an effective risk prevention mechanism. The gap in reserves is very large, and the potential risks are also huge.So where will policy banks go?
There are currently three main views in society: one is reinforcement theory, which believes that policy finance is indispensable and irreplaceable, and that policy banks should concentrate on policy-related business and implement the government’s intentions; the other is reservation theory, which believes that policy The core of the reform of independent banks is to strengthen assessment and supervision, and urge them to complete policy tasks in a market-oriented manner; the third is the theory of transformation, which believes that it should follow the model of Guozi Development Bank and completely take the road of commercialization.

In any case, policy banks have indeed played a positive role in promoting my country's economic development. Despite such and other problems, we still hope that policy banks can turn around in the reform and become the mainstay of financial development.

Insurance company: intangible insurance tangible protection

There is a large timber company in a certain place. The company’s raw materials (timber) have been stacked in a large warehouse in the suburbs for a long time, with a value of more than 1000 million yuan. The company is afraid of fire or theft, so it has insured 1000 million yuan of enterprise property insurance. Pay the property insurance company a fee of 3 yuan.

In the event of a fire or theft, the business passes the loss on to the insurance company.The insurance company compensates the enterprise according to the loss of the enterprise within 1000 million yuan, and the enterprise thus protects its own interests.This is the value of insurance companies.

Think about it, how do insurance companies make money?Will insurance companies fail too?
As an old rule, before interpreting an insurance company, first clarify the definition of an insurance company.What is an insurance company?It is a company that sells insurance contracts and provides risk protection.There are two types of insurance companies: life insurance companies and property insurance companies.

No matter what type of insurance company it is, it must have sufficient funds to prepare.For example, our country stipulates that for the establishment of an insurance company, the minimum registered capital is RMB 2 million, and the minimum registered capital of an insurance company must be paid-in monetary capital.When the business scale expands and the insurance company continues to develop, the underwriting capacity of the reinsurance market cannot meet the business development needs of the insurance company, and the insurance company will have to increase capital.Therefore, capital is not only necessary for the survival and development of a single insurance company, but also necessary for ensuring the competitive advantage of a country's insurance industry in an open market.

Insurance companies also have a problem of restrictions on operating areas.In our country, financial regulatory agencies will make regulations on the operating areas of financial companies, and insurance companies are no exception.At present, my country's insurance companies are divided into two categories, one is national companies, and the other is regional companies.In addition, whether it is a national company or a regional company, the establishment of a new branch needs to be reported to the China Insurance Regulatory Commission for approval.At present, only five insurance companies in my country, including the People's Insurance Company of China, China Life Insurance Company, China Reinsurance Company, China Pacific Insurance Company and Ping An Insurance Company of China, are truly national companies.

Many people are curious about how insurance companies make money.An insurance company is an enterprise engaged in insurance business, operating according to the principle of commercialization, and pursuing profits.So how do insurance companies make money?Many people think that insurance companies must make money by collecting premiums every year.In fact, this is not entirely the case. Premium income is not the main source of profit for insurance companies.

The first way for insurance companies to make money: underwriting profits.A customer pays insurance premiums once or several times in a certain period of time, and the insurance company collects the insurance premiums paid by a large number of customers. Once an insured accident occurs, the insurance company pays the agreed indemnity.If the indemnity payment of the insurance company is less than the insurance premium income from the beginning to the end, the difference becomes the "underwriting profit" of the insurance company.

For example, a large number of scattered house owners purchase insurance policies and pay insurance premiums to the insurance company. If an insured accident occurs, the insurer honors the insurance liability according to the insurance terms.For some policy holders, the insurance benefits they get due to the occurrence of the insured event are much higher than the premiums he paid, while others may not receive compensation at all because the insured event did not occur during the entire insurance period .Taken together, insurance companies pay less in total claims than they receive in premiums, and the difference forms expenses and profits.

The second way: self-investment to earn profits.The return on investment is the highest, and insurance companies can invest insurance funds to earn profits.Return on investment is an important source of profit for insurance companies. It can be said that for most insurance companies, return on investment is the only source of profit.For example, if an insurance company has to pay claims in excess of 10% of premium income, and the insurance company earns a return of 20% of premium income through investment, then the insurance company will make a 10% profit.However, since many insurance companies believe that investing in risk-free government bonds or other low-risk and low-return investment projects is a prudent choice, it is very important to control the percentage of claims that exceed insurance premium income below the investment rate of return, because in this way Insurance companies will not lose money.

In fact, the profit of an insurance company should be earned mainly through investment, and it is very rare in the insurance industry in most countries to make money from underwriting profits.For example, in the United States, the insurance business of property and casualty insurance companies lost 2003 billion yuan in the five years before 23, but the total profit during this period was 4 million yuan, which is due to investment income.

In China, the cost of the life insurance industry is mainly realized by long-term life insurance.In the insurance industry, life insurance companies can make considerable profits every year.Long-term life insurance or saving life insurance has different insurance income and payment methods from general insurance, so its profit method is also different from general insurance.In some countries with mature insurance markets, life insurance companies have much lower chances of loss than general insurance companies.The nature of a long-term insurance contract is like a "single deposit, lump sum" savings deposit.Insurance companies may sign contracts with customers for as long as 20 years, or until the insured is 60 years old, or even 100 years old.The two parties plan to withdraw the amount at maturity, that is, the life insurance amount (insured amount).Customers make regular contributions during the contract period, that is, pay premiums.The amount of insurance is generally greater than the total premium, and there are returns.In fact, its long-term average rate of return is similar to bank deposit rates.In order to guarantee future repayment needs, insurance companies have already made "deposit" arrangements for customers with "zero deposit and full payment", and most of the "deposits" are placed in some long-term bonds.

Although different policyholders have made the same payment term commitment to the insurance company, because each customer has a different age when signing the contract with the insurance company, and their life span is different, some elderly people have a higher chance of failing to complete the payment Therefore, insurance companies will charge more surcharges (that is, higher premiums) to customers in older age groups to make up for the possibility of passing away before receiving enough "deposits" (premiums).Due to the large number of policyholders and the relatively stable death rate, it is easier for insurance companies to obtain relevant data, and they can also accurately and fairly calculate premium rates for different age groups.Life insurance companies can accurately grasp the time of repayment. Therefore, compared with ordinary insurance companies, they can draw up sufficient premium rates without taking too many risks, and at the same time, they can also achieve expected profits.

So, is the insurance company sure about making money but not losing money?Does the insurance company have any risk?

The first is pricing risk. Pricing risk is the risk caused by the underpricing of insurance companies.Insurance companies must accurately calculate the probability of insured risks and determine the insurance premium rate.If insurance rates are set too low, insurance companies will be unable to make ends meet.In addition, insurance liability accidents are probabilistic events that may or may not occur. If they do not occur, the cost of the policy seems to be zero. This makes many insurance companies feel lucky in their operations, resulting in underwriting quality risks.

The second is interest rate risk, which is the risk brought by interest rate fluctuations to insurance companies.For example, the life insurance business in the insurance business has a particularly long operating period, and the insurance premium is collected in advance, and the insurance premium is paid after a few years.Moreover, life insurance rates are determined in a special way, based on predetermined interest rates, mortality rates and business expense rates, among which predetermined interest rates are very important discount factors, so life insurance businesses often face high interest rate risks.If the predetermined interest rate is higher than the bank interest rate, it means that the life insurance capital cost of the insurance company is higher than the bank interest rate, which will obviously squeeze the profit of the insurance company.In addition, fluctuations in interest rates will also cause a decline in the market value of the insurance company's investment assets, which will have a negative impact on the insurance company.

In addition, there is asset risk.Asset risk refers to the risk that an insurance company will have a reduction in the value of its assets.For example, borrowers of insurance company funds may default, and investment assets of insurance companies may decline in market value due to factors such as asset price fluctuations.Falling asset values ​​can affect the solvency of insurers.

There is another question that is of great concern to all of us: Will insurance companies also fail?

First of all, our country has adopted the most stringent regulatory measures for insurance companies. 20% of the registered capital of insurance companies must be deposited in designated banks and only used for debt repayment.Second, the existence of reinsurance companies further reduces the risk of bankruptcy of insurance companies.Reinsurance is an arrangement in which risk is shared across the underwriter system so that both the insured and the primary insurer become financially safer.For example, an insurance company underwrites satellite launch insurance.After the insurer accepts the special insurance, they will face great risks. Once the satellite launch fails, the company with small capital is likely to go bankrupt.But the insurance company can apply to the reinsurance company, so that if a claim is required, the risk can be shared.

Investment Banking: The End of an Era
2008年是华尔街的多事之秋。2008年9月15日至21日是华尔街历史上最黑暗的一周。雷曼兄弟申请破产保护、美林被美洲银行收购、摩根士丹利与高盛宣布转为银行控股公司。再加上2008年3月被摩根大通收购的贝尔斯登，曾经风光无限的华尔街五大投行集体消失。对于熟悉美国金融体系的专业人士来说，如此巨变可谓“天翻地覆”！
So, what is the position of investment banks in the entire financial ecological chain?What about the future of investment banking?

Investment bankers are the people who have white shoes, blue “blood,” emerald rings, and custom-made Italian shoes; they go to church every week and sit in the front row ;never wear anything but handmade dark suits and tuxedos...they are aristocrats in the financial world, just as investment banks are in the financial world.

Investment bank is actually an American vocabulary. In other countries and regions, investment banks have different titles: they are called "merchant banks" in the UK, and "securities companies" in other countries and regions.It should be pointed out that although they are both called "banks", commercial banks and investment banks are actually two different financial institutions.In traditional finance textbooks, "banks" operate indirect financing business, earning profits through the interest gap between depositors' deposits and corporate loans; while investment banks operate direct financing business. It does not accept deposits or grant loans, but provides companies with the issuance of stocks, bonds, or restructuring and liquidation services, and draws commissions from them.

But what makes many investors curious is how did investment banks come about?In the United States, investment banks often come from two sources: one is decomposed from commercial banks, a typical example is Morgan Stanley; the other is developed from securities brokers, a typical example is Merrill Lynch.Looking back, the separation of investment banks and commercial banks in the United States first occurred after the great stock market crash in 1929. At that time, the federal government believed that investment banking business had high risks and prohibited commercial banks from using depositors’ funds to participate in investment banking business. As a result, a large number of comprehensive Banks were forced to decompose into commercial banks and investment banks. The most typical example is the decomposition of Morgan Bank into Morgan Stanley engaged in investment banking business and JP. Morgan engaged in commercial banking business.However, this situation did not happen in Europe. European governments have not promulgated such restrictions. Investment banking business is generally completed by commercial banks, such as Deutsche Bank, ABN Amro, UBS, Credit Suisse, etc.Interestingly, this approach not only did not cause a financial crisis in Europe, but to a certain extent enhanced financing efficiency and reduced the risk of the financial system.

Investment banks have attracted worldwide attention for their strong profitability.Taking the most common stock issuance business as an example, investment banks generally charge a commission of 7%. That is to say, if a client issues stocks worth 100 billion U.S. dollars, the investment bank will eat up 7 million U.S. dollars.

In the business of corporate mergers and acquisitions, investment banks also make a lot of money. Since the 19s, the United States has experienced at least four waves of corporate mergers and acquisitions, which have provided investment banks with a considerable source of income.In recent years, there have been super mergers worth tens of billions or even hundreds of billions of dollars in Europe and the United States, such as AOL's merger with Time Warner, Vodafone's merger with Mannesmann, and HP's merger with Compaq, all of which are fueled by investment banks.Because the merger business is highly technical and profitable, it is generally considered the core business of investment banks, and bankers engaged in this business are the hottest figures in the entire financial field.

It should also be pointed out that the unique business model of investment banks is also an important reason for their high profits.First of all, investment banks focus on wholesale business.Except for brokerage business, investment banking business is basically a wholesale business.Second, investment banks are mainly knowledge-intensive businesses.Essentially, investment banking is part of the financial consulting industry.Financial consulting is not only an independent investment banking business, but also the intellectual basis for other investment banking businesses.For example, in order to assist issuers to issue securities, they first need to assist them in designing securities, which requires comprehensive and in-depth research and analysis.In fact, research and analysis capabilities, rather than capital and sales strength, are the core competitiveness of investment banks.Of course, capital and sales strength cannot be ignored.For example, in order to assist a company in mergers and acquisitions, it is also necessary to assist it in necessary market operations.This requires sufficient capital and sales force.However, whether it is securities underwriting, securities trading, or company mergers and acquisitions, it is inseparable from the strategizing of investment bankers.For well-skilled investment bankers, market operations such as financing and marketing are not difficult problems.

When we talk about investment banks, we always think of Goldman Sachs, Morgan Stanley, etc. In fact, China also has investment banks, but they are called differently.In Japan and China, financial institutions with investment banking functions are called "securities companies". In addition to underwriting stocks and bonds for companies, taking care of corporate mergers and restructuring, and bankruptcy liquidation, they are also responsible for securities analysis and securities brokerage. Role.The largest securities companies in Japan, such as Toyo Securities, and the largest securities companies in China, such as Shenyin & Wanguo, not only acted as brokers for corporate financing, but also acted as brokers for large and small investors to buy and sell stocks.Therefore, China's large securities companies are actually equivalent to American investment banks, but people often do not notice this.

In March 2008, Bear Stearns, the fifth largest investment bank in the United States, was acquired by JPMorgan Chase nearly half a year after it was on the verge of bankruptcy. Wall Street once again broke the surprising news: Merrill Lynch, the third largest investment bank in the United States, was acquired by Bank of America for nearly 3 billion. US dollar acquisition, Lehman Brothers, the fourth largest investment bank in the United States, went bankrupt due to the "abortion" of acquisition negotiations.Only Goldman Sachs and Morgan Stanley are left among the top five investment banks on Wall Street.The U.S. Federal Reserve announced late Sunday night that it approved the transformation of Goldman Sachs and Morgan Stanley, the last two investment banks that have survived the U.S. financial crisis, into bank holding companies.This news also means that the golden age of independent investment banks dominating Wall Street for more than 440 years has come to an end, and U.S. financial institutions are facing the largest and most thorough restructuring since the Great Depression in the 20s.

(End of this chapter)