Page 528 - Introduction to Business

502 PART 5 Finance

EXHIBIT 14.8
Largest Financial Institutions in the World

Commercial Banks Insurance Companies
1. Mizuho Holdings, Japan 1. Allianz, Germany
2. Citigroup, U.S. 2. ING Group, Netherlands
3. Deutsche Bank, Germany 3. AXA, France
4. Sumitomo Mitsui Banking 4. Nippon Life Insurance, Japan
Corporation, Japan 5. American International Group, U.S.
5. UBS, Switzerland
6. BNP Paribas, France Securities Firms
7. JP Morgan Chase, U.S. 1. Morgan Stanley Dean Witter Discover, U.S.
8. HSBC, U.K. 2. Merrill Lynch, U.S.
9. Bayerische Hypo-und 3. Credit Suisse First Boston, U.S.
Vereinsbank, Germany 4. Nomura Securities, Japan
10. Bank of America, U.S. 5. Lehman Brothers Holdings, U.S.

Source: Staff, Global Finance, October 2002, p. 69; “Swiss Re, Sigma No,”
http://www.internationalinsurance.org/default.htm, June 2001.

and sell nonfinancial products and services, such as computers or airline
services. It should be mentioned, however, that some countries allow firms to
engage in both finance and commerce. For example, Germany permits
universal banking enabling commercial banks to have nonfinancial operations.

• Regulation. Due to their importance to the national economy in terms of
allocating financial capital to business firms and consumers, financial
institutions are heavily regulated at the federal and state levels. Some examples
of federal regulators are: United States—Federal Reserve System, Federal
Deposit Insurance Corporation (FDIC), and Securities and Exchange
Commission; Japan—Ministry of Finance (MOF) and Bank of Japan (BOJ);
Germany—Deutsche Bundesbank; and United Kingdom—Bank of England.
These regulatory agencies have excellent websites with information about their
respective financial systems.
• Financial assets and liabilities. Financial firms have relatively small fixed
assets—land, buildings, and equipment—due to the fact that almost all their
assets and liabilities are financial in nature. Since the value of financial con-
tracts is greatly affected by movements in interest rates, the profitability of
financial firms is sensitive to interest rate changes. Generally speaking, high
interest rates in financial markets tend to lower profits of financial institutions,
while low interest rates tend to increase their profits.
• Low equity capital. Financial institutions have little equity capital and high use
of debt or financial leverage compared to nonfinancial firms. Most nonfinan-
cial firms finance their assets using between 30 to 50 percent debt; by contrast,
financial firms typically use 90 percent or more debt. With less than 10 percent
equity capital on their balance sheets, financial firms must be careful not to
have large unexpected losses. This small margin for mistakes in operations has
resulted in the reserve for losses. The reserve for losses account is intended to
absorb expected losses on loans, securities, and so on. Only unexpected losses
over and above the reserve for losses are absorbed by equity capital. The
reserve for losses is found in the capital section of the balance sheet alongside
equity and long-term debt.
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