what is a financial institution

what is a financial institution

1 year ago 67
Nature

A financial institution, also known as a banking institution, is a business entity that provides services as intermediaries for different types of financial monetary transactions. Financial institutions are essential because they provide a marketplace for money and assets so that capital can be efficiently allocated to where it is most useful. There are three major types of financial institutions:

  • Depository institutions – deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies;
  • Contractual institutions – insurance companies and pension funds;
  • Investment institutions – investment banks, underwriters, and other different types of financial entities managing investments.

Financial institutions can be distinguished broadly into two categories according to ownership structure:

  • Public financial institutions – owned by governments;
  • Private financial institutions – owned by private individuals or companies.

Financial institutions are heavily regulated in most countries because they are critical parts of countries economies, due to economies dependence on them to grow the money supply via fractional-reserve banking. Regulatory structures differ in each country, but typically involve prudential regulation as well as consumer protection and market stability. Some countries have one consolidated agency that regulates all financial institutions while others have separate agencies for different types of institutions such as banks, insurance companies, and brokers.

The major categories of financial institutions are:

  • Central banks;
  • Retail and commercial banks;
  • Credit unions;
  • Savings and loan associations;
  • Investment banks;
  • Brokerage firms;
  • Mortgage lenders.

Different financial institutions have different purposes and offer different services. For example, commercial banks deal with loans and deposits, while investment banks advise businesses and governmental entities on how to meet their financial challenges and provide them with a broader expertise on concrete operations.

When choosing a financial institution, it is important to consider certain criteria such as online banking, high yield accounts, and FDIC insurance.

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