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John Isaac

Abstract

Traditionally, the core functions of banking were to (1) accept money from, and collect checks for, customers; (2) honor checks for orders drawn on them by customers; (3) keep current accounts, or something of that kind, in which customers’ debits and credits are entered; and, of course, (4) lend. Banks derived their income largely from the margin between the interest rates they paid on money deposited with them and the interest rates they charged on money lent by them.

Robin Oliver

Abstract

Insurers are important financial intermediaries. They play a significant role in the financial system as vehicles for savings (policy premiums are not used immediately to meet claims; they are instead invested, earning policyholders a return when they either collect on claims or have their premiums reduced) and risk pooling (insurers pool the risks of different policyholders, so that those whose insured risk eventuates are compensated in part out of premiums paid by those who do not file claims). The insurance office itself provides an intermediary service. It underwrites some of the residual risk of the risk pooling and may assume some of the savings risk. An example of the latter is a traditional, nonparticipating annuity where the insurer guarantees the annuity payment irrespective of the investment performance of the fund from which the annuity is financed.

Mr. John R King

Abstract

This paper discusses issues that arise in designing an appropriate tax regime for three broad types of financial institutions that typically play major roles in securities markets—securities firms, investment funds, and pension funds. The focus is on taxes levied on the income or profits of these institutions, rather than indirect taxes on the financial products that they sell.

Howell H. Zee

Abstract

The term “innovative financial instruments” is generally taken to mean financial derivatives. A financial derivative (henceforth, simply derivative) is a financial instrument whose price depends on, or is derived from, the price of another asset. The asset underlying a derivative could be a commodity (for example, wheat), a financial asset (for example, a stock), or another derivative. There are two basic building blocks that can be used to construct derivatives: futures contracts traded in exchanges (or forward contracts traded in the over-the-counter market) and options contacts. Derivatives can be used for either hedging or speculative purposes (or both). Some elementary concepts related to derivatives are reviewed in the appendix to this paper.1