In fact, the financial industry is a very broad concept. Not only are there many subordinate industries, but the business is also complicated. Even in the financial industry, there is a phenomenon of interlacing like a mountain. Banks, trusts, funds, securities, insurance, financial leasing, asset management, auto finance, internet finance … so many industries belong to financial institutions. Some of these financial institutions, such as banks, are engaged in assets, liabilities and intermediary business, making money by credit spreads. Some, such as securities and funds, profit from securities underwriting, brokerage business and investment business. Some, such as life insurance and property insurance, mainly focus on economic security business. There are also trusts, entrusted by people, to manage money on behalf of customers. Even in the field of Internet finance, it includes P2P, crowdfunding, third-party payment, online financial management and other sub-industries.
Although financial products are complex, no matter how they change, they will remain unchanged, because financial business can never be separated from three basic tools. This paper will interpret the "three magic weapons" of the financial industry one by one.
Unlike the real economy, the financial industry is a very special industry, because financial institutions can make little or no money, but they can make money with other people's money. This is actually the use of a most basic financial tool-financial leverage.
"Give me a fulcrum and I can pry up the whole earth." Archimedes, an ancient Greek scientist, exaggeratedly explained the significance of lever in physics. Compared with physical leverage, the leverage of financial institutions is completely virtual, but its role is equally huge. Financial institutions use a small amount of their own funds to incite larger social idle funds, and finally achieve the goal of being small and broad. Commercial banks are the most typical users of financial leverage. If the total assets of an enterprise are 3 trillion yuan and the owner's equity is 300 billion yuan, then the leverage ratio (also called leverage multiple or equity multiplier) is 10 times. In other words, commercial banks have leveraged 1 unit's own capital to 10 times the total social capital. Under the premise of the same rate of return, with the expansion of the total amount of funds, operating income is also rising year-on-year. Finally, financial institutions can get high net profit after returning the cost of raised funds. According to DuPont's analysis, as long as the leverage ratio rises, the return on equity may increase exponentially. This also explains why the financial industry can make so much money.
In addition to commercial banks, various financial institutions also skillfully use financial leverage to manipulate other people's money to make money. PE, Public Offering of Fund, financial leasing and even P2P in Internet finance are no exception.
Of course, financial leverage intensifies the risk and greatly increases the possibility of insolvency. Therefore, the Basel Accord stipulates that the minimum capital adequacy ratio of commercial banks should be kept above 8%, which actually means that the leverage ratio of commercial banks should not be higher than 12.5.
If the financial leverage is small and wide in space, then the fund pool is a mismatch in time. In layman's terms, it is to continuously drain water into the pool and at the same time continuously drain water under the pool, but at the same time there is always enough water in the pool. Investors are like water pipes, and borrowers are like water pipes. The amount of water in the pool is the position of financial institutions.
The fund pool model is controversial until today, because the fund pool will bring serious liquidity risk. The so-called liquidity risk is actually the mismatch of assets and liabilities in financial institutions, which leads to the shortage of free cash flow. In extreme cases, financial institutions will be insolvent and eventually go bankrupt. This is why commercial banks all over the world are most afraid to hear the word "run".
Under the premise of controllable liquidity risk, the advantages of the fund pool are very obvious. First of all, financial institutions can use the time difference to invest liabilities of different lengths in a fixed-term field. Secondly, financial institutions can achieve arbitrage by obtaining idle low-cost funds and combining investment structure. At the same time, financial institutions can package accounts receivable into small cash pools, carry out asset securitization business, convert long-term assets into short-term cash flows, improve asset liquidity and realize risk reporting. To sum up, whether it is the asset management business of insurance and securities industry, or the deposit and loan and wealth management business of commercial banks, it is the application of fund pool and financial leverage in actual combat.
Regarding the pool of funds, it must be pointed out that there is a kind of financial institution that is strictly restricted, and that is the P2P industry. The China Banking Regulatory Commission has clearly put forward the "four red lines" of P2P, one of which is to prohibit the fund pool. P2P is essentially a platform for peer-to-peer lending and information, with low risk tolerance. Once the fund pool is used, it will bring many risks, including not only liquidity risk, but also moral hazard. From the point of view of P2P companies running, without exception, they all adopt the fund pool model, that is, investors put money on the platform, and then the company decides who to lend it to. Since there are far fewer investable projects than investors at present, P2P platform will fabricate many projects by using the fund pool, thus realizing its Ponzi scheme.
Perhaps you will be surprised, isn't uncertainty what is usually called risk? But you must understand that risk is not equal to danger. In the eyes of some financiers, risk can bring benefits. In fact, personal investment in buying and selling stocks is to make money by taking advantage of the uncertainty of future stock prices, but at present, many retail investors only focus on making more capital gains when stock prices rise. In addition, uncertainty has more complex and in-depth applications in the following fields.
Let's look at the insurance industry first. Insurance contract is also called lucky contract, because the price paid by one party to the contract is only an opportunity. For the insured, he may get much more income than the insurance premium paid, but he may not get any income; For the insurer, the premium he pays may be far greater than the premium he collects, but he may also collect the premium without taking the responsibility to pay it. The fluky nature of the insurance contract is determined by the accidental occurrence of the insurance accident, that is, it is uncertain whether the risks insured by the insurer or the conditions for paying the insurance benefits agreed in the insurance contract occur. If the actual risk occurrence rate in the field of life insurance is lower than the expected risk occurrence rate, that is, when the actual number of deaths is less than the expected number of deaths, the surplus brought to the insurer is bad profit.
Followed by financial options. As a kind of financial derivative, financial option brings the uncertainty of income and loss to the extreme. For the buyer of financial options, whether it is a call option or a put option, the gains are infinite and the losses are limited. On the contrary, the seller of options has limited gains and unlimited losses. This also confirms that financial options themselves belong to the attribute of zero-sum game. Another name for uncertainty in the financial sector is option.
Finally, let's take a look at the gambling agreement regarded as a classic by investment bankers. Gambling agreement usually refers to the agreement reached by the investor and the transferor on the uncertain future when they reach a merger agreement. If the agreed conditions appear, investors can exercise a right; If the agreed conditions do not appear, the assignor will exercise a right. The gambling agreement is actually a kind of compensation that the investor (usually an investment bank) requires the transferor to bring losses to the investor due to poor management in the future. Although investors invest in enterprises according to the principle of * * * *, the gambling agreement is still essentially for investors to use uncertainty to obtain income.
The above three cases can not exhaust the application of uncertainty in the financial field, but simply outline a basic concept, that is, financial institutions rely on the most favorable uncertainty to obtain profits through professional analysis and technical consideration.
Conclusion: No matter how many new games are created by the financial industry, no matter how complicated the financial products are, they are all designed based on the combination and variation of the three most basic financial instruments.