MAB - Types of Financial Institutions Lesson
Types of Financial Institutions
Financial Institutions are grouped into two types: depository and non-depository. In each group, several types of institutions exist, providing different services.
Depository Institutions
Depository Institutions obtain funds from the public and use them to finance the loans and investments that provide the majority of their income. Each type of institution along with the services they provide is listed below.
Commercial Banks are privately owned corporations that provide the services we commonly think of banks as providing: checking accounts, savings accounts, and loans. They offer these services to individuals and businesses. Commercial bank owners, commonly referred to as stockholders, expect the bank to make a profit through loan and investment activities. In addition to depository accounts and loans, commercial banks offer services such as credit and debit cards, automated teller machines (ATMs), and online banking and bill paying.
Savings and Loan Associations began as real estate lenders to individuals who could not get loans from commercial banks. Today savings and loan associations offer many of the same services offered by commercial banks. The key difference between the two institutions is that savings and loans associations are owned by their depositors rather than outside parties.
Mutual Saving Banks are similar to savings and loan associations because they receive their deposits from individuals and are owned by their depositors. Sometimes called thrift institutions, these state-chartered banks are regulated and protected by state and federal law. Few of these banks remain, however, due to the banking crisis of the 1980s.
Credit Unions, also owned by their depositors, require that users be members. Membership is based on association with a common employer, a certain line of work, or even a geographic location. Credit unions are non-profit institutions that exist for the benefit of the owners. Any profit earned is returned to the members. Credit unions often offer low-interest rate loans to members, as well as higher interest on savings programs. Online banking is another service offered by credit unions.
Non-Depository Institutions
Non-Depository Institutions do not receive deposits but provide other financial services for a fee.
Insurance Companies offer financial protection against a variety of losses. Insurance companies charge fees called premiums in return for protection. In order to make a profit, insurance companies take the premiums they receive and invest them in a variety of ways. The aim of the investment is to make more money with investments than they have to pay out for claims against their policies.
Trust Companies administer retirement funds. While managing money for a fee, trust companies promise to provide future income. This income comes from investments made by an administrator. While the administrator hopes for a profit, a risk of loss also exists.
Brokerage Houses execute orders to buy and sell stock and other securities. Paid on commission, brokers help guide their customers in their choices, but they make money only when there is a transaction.
Loan Companies known as finance companies are private companies that lend money and make a profit on the interest. Because they offer loans to customers who are at a higher risk, they charge higher interest to offset that risk.
Currency Exchanges don't make loans. Instead, they make money by charging fees for cashing checks, issuing money orders, or other exchange services. Because their business relies wholly on fees, those fees are usually higher than fees for comparable services provided by a commercial bank or savings and loan association.
The Role of the Federal Reserve System
Since its establishment in 1913, the Federal Reserve has had an increasingly important role in regulating banks and influencing our economy. While we discussed briefly how the Fed's monetary policy helped bring stability to the economy late in the 20th century, you will answer the question "What does the Federal Reserve do?" in your next assignment. See the assignment instructions on the next page.
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