A Quick Look Into Financial Institutions

Updated: May 29, 2021

In financial market there are many types of financial institutions are intermediaries which exist for the flow of funds. These institutions provide services as intermediaries of financial markets. There are different types of financial institutions:


· Depository institution, are institution Which accepts and manage is deposits and makes loans including banks credit unions trust companies and mortgage loan companies

· contractually institutions search is insurance companies and pension funds

· investment institutions such as investment banks under writers and brokerage firms

financial institutions can be distinguished broadly into 2 categories:

· Commercial bank

· Cooperative bank

Banking Is an industry which handles cash credit and other financial transactions. Banks provide a safe place to store assets such as cash and jewelry. Banks offer facilities such as checking account, savings account, certificates of deposit and credit cards. Bank loans and credit means families don't have to save up before sending their children to college or buying a house. Banking is described as the establishment which accepts the money of the public for safeguarding and then lends out this money in order to conduct financial, cost-effective, profitable, lucrative, money-spinning trade. A bank is an accredited financial institution which is authorized to receive deposits and make loans.


There are two types of banks commercial/retail banks and investment banks. In most countries’ banks are regulated by the national government or central bank. A banking Department is a regulatory body that oversees the operation of financial institution within its jurisdiction. The primary responsibility of the banking Department is to ensure that the financial system is easily manageable and accessible and stable for all the customers. The different types of financial institutions that fall under the supervision of the banking department include commercial banks, credit unions, and non-bank mortgage lenders. Examples of commercial banks include JP Morgan chase and Bank of America.


The most common type of banks are commercial and investment banks, they work with varied customers they focus on performance credit capital capabilities and operational excellence. These banks can adapt to new environment and can create significant value. These banks provide various services such as currency exchange to retirement and wealth management.


In the United States of America, banks are regulated by the US Federal Reserve bank which is one of the world's major central banks about all the central banks are responsible for currency stability. The Federal Reserve Bank controls inflation and regulates financial policies and oversees budgetary demand and supply in the market.


Commercial retail banks offer services such as managing money deposits and withdrawals and provides basic checking and savings account certificates of deposit. They provide debit and credit cards to their customers, they provide short term and long-term loans, car loans, mortgages or equity loans.


Cooperative bank holds deposits, makes loans enjoyed other financial services to cooperatives and member owned organizations. Cooperative banks are owned by their customers and follow the cooperative principle of one person one vote. They are controlled and structured under both banking and cooperative regulations. They provide services such as savings and loans to non-members as well as members. Some cooperative banks get involved with the wholesale market for bonds, money and even equities. Many cooperative banks are traded on public stock markets with the result that they are partly owned by non-members member control is diluted by these outside shakes so they may be regarded as semi cooperative local branches of cooperative banks select their own board of directors and manage their own operations but most strategic decisions required approval from a central office. Cooperative banks outperformed their competitors during the financial crisis of 2007 -2008.


Credit investment banks offer their services to corporate clients; they provide services such as merger and acquisition among other investment services

The Banks main function is to take customer deposits in return for paying customers an annual interest payment. The bank then uses most of these deposits to lend to other customers for a variety of loans. Banking industry is in the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers. Banks accepts deposits and stores assets (safety deposit boxes) on behalf of the customers. Other banking functions include providing different types of loans to customers and small business. Paying or collecting cheques drawn by customers is another important function of the bank. A bank is a financial institution authorized to receive deposits and make loans Modern banking practices, including fractional reserve banking and the issue of bank notes.

Contemporary banking evolved in the 14th century in Italy. But the numerous techniques, ideas and concepts of financial transactions, savings and investments, credit and lending , financing and funding were longstanding, deep-rooted systems from the ancient world. In the past, there were many banking dynasties notably, the Medicis, the Fuggers, the Welsers, the Berenbergs, and the Rothschilds who have helped develop the banking system over many centuries. The oldest existing retail bank is Banca Monte dei Paschi di Siena, while the oldest existing merchant bank is Berenberg Bank.


Fractional reserve banking is a banking system in which only a portion of the banks deposits are actually available for withdrawal. Fractional reserve banking is the current form of banking system which is being practiced in most countries worldwide. This is the customary practice by commercial banks of accepting deposits, and creating credit, while holding reserves equal to a fraction of the bank's deposits. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank. Most banks are required to keep 10% of the deposit, referred to as reserves. Some banks are exempt from holding reserves, but all banks are paid a rate of interest on reserves. This rate is called the "interest rate on reserves" or the "interest rate on excess reserves," the IOR and IOER, respectively. This rate acts as an incentive for banks to keep excess reserves.


Central banks are chiefly responsible for currency stability, controlling inflation and monetary policy and overseeing money supply. some of the major central banks include the US Federal Reserve bank the European Central Bank the Bank of England the Bank of Japan the Swiss National Bank and the people's Bank of China.


Federal Reserve System (FRS) is the central Bank of the United States. It was founded by the Congress in 1913 to provide the nation with a steady and flexible ;financial system over the years its role in the banking and economics. It regulates the US monetary and financial system. The Federal Reserve system was composed of a central governmental agency in Washington DC. There are twelve banks, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve Act of 1913.

· Federal Reserve Bank of Boston

· Federal Reserve Bank of New York

· Federal Reserve Bank of Philadelphia

· Federal Reserve Bank of Cleveland

· Federal Reserve Bank of Richmond

· Federal Reserve Bank of Atlanta

· Federal Reserve Bank of Chicago

· Federal Reserve Bank of St. Louis

· Federal Reserve Bank of Minneapolis

· Federal Reserve Bank of Kansas City

· Federal Reserve Bank of Dallas

· Federal Reserve Bank of San Francisco


Functions of the Federal Reserve

· Acting as depositories for bank reserves

· Lending to banks to cover short-term fund deficits or liquidity demands

· Collecting and clearing payments between banks

· Issuing bank notes for general circulation as currency

· Administering the deposit accounts of the federal government

· Conducting auctions and buybacks of federal debt

While many banks are able to offer online services online banking offer consumers higher interest rates and lower fees convenience interest rate and fees are the driving factors in consumers decision of which bank to do business with as an alternative to banks.


Credit Unions, A credit union is a member-owned financial organization, operated on the principle of people helping people, providing its members credit at competitive market rates as well as other financial services. Consumers can opt to use credit union which is a type of financial cooperative; they provide traditional banking services. Credit union ranges from size and are created, owned and operated by the members. credit unions pay millions of dollars in property, sales and employment taxes each year, but credit unions enjoy a federal exemption on corporate income taxes because they are not-for-profit meaning credit union organization’s must reinvest all their income in ways that exclusively benefit the organization and/or its members. Credit union systems differ considerably in terms of total assets and average asset size etc. Credit unions operate alongside other financial sectors. Credit unions follow a basic business model. Credit unions have fewer options than traditional banks but have access to better rates and more ATM locations. Credit unions in the US head 5 times slower failure rate than other banks during the financial crisis and more than doubles lending to small businesses between 2008-2016. Small businesses are 80% less likely to be dissatisfied with a big bank.


National banks are regulated by the office of the comptroller of the currency (OCC). OCC regulations primarily cover bank capital levels asset quality and liquidity banks with federal deposit insurance corp. (FDIC) Insurance are additionally regulated by the FDIC.


A State Bank is a financial institution that is chartered by the state. It is different from reserve bank as it does not control monetary policy provides commercial banking services. A state chartered bank cannot have “National” or “Federal” in it’s name. State banks are regulated by a state department. State banks are members of the Federal Reserve and state banks which are not members of the Federal reserve are regulated by Federal Deposit Insurance Corporation (FDIC).


An investment bank is a bank that purchase large holdings of newly issued shares and resells them to potential stockholders. and in western bank is a financial services company or corporate division there engages in advisory-based financial transactions on behalf of individuals corporations and governments. Conventionally, Investment banking is associated with corporate finance. Investment banks increase their financial capital by underwriting or acting as the clients the ”Issuers of securities” An investment bank also assists companies involved in “Mergers and Acquisitions” and provide auxiliary services such as market making (ready to buy and sell stock) trading of derivatives an equity services and FICC services (fixed income instruments currencies and commodities). Most investment banks maintain prime brokerage and asset management departments in combination with their investment research businesses. As an industry it is broken up into bulge bracket banks (large multi-national investment banks, primary dealers in US treasury securities, strong presence in all three of the world’s America’s, Europe, The Middle East and Africa (EMEA) ad Asia Pacific (APAC)), middle market (mid-level businesses )and boutique market (specialized businesses, generally corporate finance ). Unlike commercial banks and retail banks investment banks do not take deposits all investment banking activity is classed as either sell side or by side the sell side in all's trading securities for cash or for other securities (e.g. facilitating transactions , market making ), or the promotion of securities (e.g. underwriting , research etc.).define roles the boy advice instead by investors private equity mutual funds life insurance companies, Unit trusts, and hedge funds are the most common types of by side entities.


An investment bank can also be split into private and public functions to prevent information from crossing the private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas such as stroke analysis deal with public information. an advisor who provides investment banking services in the United States must be a licensed broker dealer and subject to the US Securities and Exchange commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulation.