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15 F 378 Pp11 Essay

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Financial Services Industry
Finance Companies

• Finance Companies:
– Size, structure and composition
– Services the industry provides
– Regulation
– Global issues

Finance Companies: Overview
• Activities similar to banks, but no depository function. • Initially owned by manufacturers (captive finance companies) e.g. GMAC Canada
• Relatively unregulated
• Face default risk and liquidity risk
• Market niche advantages: may specialize in installment loans (e.g. automobile loans) or may be diversified, providing consumer loans and financing to corporations, especially through factoring
• Major source of income comes from the loan interests
• Commercial paper is key funding source
• Act as intermediaries in the money market: borrow large and loan small

Types of Finance Companies
• (1) Sales finance institutions (captive finance companies): finance a firm’s sales through in-house credit or credit card – Ford Motor Credit Canada, GE Canada

• (2) Personal credit institutions: serve high-risk borrowers or refinance other debt
– HSBC Finance Corporation Canada

• (3) Business credit institutions: equipment leasing, assetbased financing (factoring), floor plan loans(auto inventory loans)
– CIT Canada

Balance Sheet and Trends
• Primary asset of a typical finance company is the loan
• Assets (Use of Finance Company Funds):
– Consumer loans (36%)
– Business loans (54%)
– Mortgages (10%)

• Increases in real estate loans and other assets.
• Growth in leasing.
• Finance companies face credit risk, interest rate risk and liquidity ...

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