- CFA Exams
- 2025 Level II
- Topic 3. Financial Statement Analysis
- Learning Module 13. Analysis of Financial Institutions
- Subject 1. Introduction to Financial Institutions
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Subject 1. Introduction to Financial Institutions PDF Download
Financial institutions serve as intermediaries between providers and recipients of capital. Their systemic importance results in heavy regulation of their activities.
Systemic risk refers to the risk of impairment in some part of the financial system that then has the potential to spread throughout other parts of the financial system and thereby to negatively affect the entire economy. Systemic risk was a major contributor to the financial crisis of 2008. In a word, banks are too big to fail.
Banks are heavily regulated. The Basel Committee' regulatory framework for banks includes minimum capital requirements, minimum liquidity requirements and stable funding requirements.
Another distinct feature of financial institutions is that their productive assets are predominantly financial assets, such as loans and securities, creating greater direct exposures to a set of risks, such as credit risk, liquidity risk, market risk, and interest rate risk. In general, the values of their assets are relatively close to fair market values.
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