Financial services is a broad range of more specific activities such as banking, investing, and insurance. Financial services are limited to the activity of financial services firms and their professionals, while financial products are the actual goods, accounts, or investments they provide.
Understanding Financial Institutions (FIs)
Financial inclusion is emerging as a new paradigm of economic growth that plays major role in driving away the poverty from the country. It refers to delivery of banking services to masses including privileged and disadvantaged people at an affordable terms and conditions. Financial inclusion is important priority of the country in terms of economic growth and advanceness of society. It enables to reduce the gap between rich and poor population. In the current scenario financial institutions are the robust pillars of progress, economic growth and development of the economy. The present study aims to examine the impact of financial inclusion on growth of the economy over a period of seven years. Secondary data is used which has been analyzed by multiple regression model as a main statistical tool. Results of the study found positive and significant impact of number of bank branch and Credit deposit ratio on GDP of the country, whereas an insignificant impact has been observed in case of ATMs growth on Indian GDP.
Financial institutions serve most people in some way, as financial operations are a critical part of any economy, with individuals and companies relying on financial institutions for transactions and investing. Governments consider it imperative to oversee and regulate banks and financial institutions because they do play such an integral part in the economy. Historically, bankruptcies of financial institutions can create panic. In the United States, the Federal Deposit Insurance Corporation (FDIC) insures regular deposit accounts to reassure individuals and businesses regarding the safety of their finances with financial institutions. The health of a nation’s banking system is a linchpin of economic stability. Loss of confidence in a financial institution can easily lead to a bank run.
Functions of a Financial Institution
Financial Institution provide a service as intermediaries of the capital and debt markets.
They are responsible for transferring funds from investor to companies, in need of those funds.
The presence of Financial Institutions facilitates the flow of monies through the economy.
To do so, saving are pooked to mitigate the risk brought to provide funds for loans.
Types of Financial Institutions
Financial institutions offer a wide range of products and services for individual and commercial clients. The specific services offered vary widely between different types of financial institutions.
Example – Bank is an institution that deals in money and its substitutes and provides other money-related services. In its role as a financial intermediary, a bank accepts deposits and makes loans. It derives a profit from the difference between the costs (including interest payments) of attracting and servicing deposits and the income it receives through interest charged to borrowers or earned through securities. Many banks provide related services such as financial management and products such as mutual funds and credit cards. Some bank liabilities also serve as money—that is, as generally accepted means of payment and exchange.
This article describes the development of banking functions and institutions, the basic principles of modern banking practice, and the structure of a number of important national banking systems. Certain concepts not addressed here that are nonetheless fundamental to banking are treated in the articles accounting and money.
Principles of banking
The central practice of banking consists of borrowing and lending. As in other businesses, operations must be based on capital, but banks employ comparatively little of their own capital in relation to the total volume of their transactions. Instead banks use the funds obtained through deposits and, as a precaution, maintain capital and reserve accounts to protect against losses on their loans and investments and to provide for unanticipated cash withdrawals. Genuine banks are distinguished from other kinds of financial intermediaries by the readily transferable or “spendable” nature of at least some of their liabilities (also known as IOUs), which allows those liabilities to serve as means of exchange—that is, as money.
Types of banks
The principal types of banks in the modern industrial world are commercial banks, which are typically private-sector profit-oriented firms, and central banks, which are public-sector institutions. Commercial banks accept deposits from the general public and make various kinds of loans (including commercial, consumer, and real-estate loans) to individuals and businesses and, in some instances, to governments. Central banks, in contrast, deal mainly with their sponsoring national governments, with commercial banks, and with each other. Besides accepting deposits from and extending credit to these clients, central banks also issue paper currency and are responsible for regulating commercial banks and national money stocks.
The term commercial bank covers institutions ranging from small neighbourhood banks to huge metropolitan institutions or multinational organizations with hundreds of branches. Although U.S. banking regulations limited the development of nationwide bank chains through most of the 20th century, legislation in 1994 easing these limitations led American commercial banks to organize along the lines of their European counterparts, which typically operated offices and bank branches in many regions.
In the United States a distinction exists between commercial banks and so-called thrift institutions, which include savings and loan associations (S&Ls), credit unions, and savings banks. Like commercial banks, thrift institutions accept deposits and fund loans, but unlike commercial banks, thrifts have traditionally focused on residential mortgage lending rather than commercial lending. The growth of a separate thrift industry in the United States was largely fostered by regulations unique to that country; these banks therefore lack a counterpart elsewhere in the world. Moreover, their influence has waned: the pervasive deregulation of American commercial banks, which originated in the wake of S&L failures during the late 1980s, weakened the competitiveness of such banks and left the future of the U.S. thrift industry in doubt.
While these and other institutions are often called banks, they do not perform all the banking functions described above and are best classified as financial intermediaries. Institutions that fall into this category include finance companies, savings banks, investment banks (which deal primarily with large business clients and are mainly concerned with underwriting and distributing new issues of corporate bonds and equity shares), trust companies, finance companies (which specialize in making risky loans and do not accept deposits), insurance companies, mutual fund companies, and home-loan banks or savings and loan associations. One particular type of commercial bank, the merchant bank (known as an investment bank in the United States), engages in investment banking activities such as advising on mergers and acquisitions. In some countries, including Germany, Switzerland, France, and Italy, so-called universal banks supply both traditional (or “narrow”) commercial banking services and various nonbank financial services such as securities underwriting and insurance. Elsewhere, regulations, long-established custom, or a combination of both have limited the extent to which commercial banks have taken part in the provision of nonbank financial services.
Commercial Banks
A commercial bank is a type of financial institution that accepts deposits, offers checking account services, makes business, personal, and mortgage loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. A commercial bank is where most people do their banking, as opposed to an investment bank.
Banks and similar business entities, such as thrifts or credit unions, offer the most commonly recognized and frequently used financial services: checking and savings accounts, home mortgages, and other types of loans for retail and commercial customers. Banks also act as payment agents via credit cards, wire transfers, and currency exchange.
Investment Banks
Investment banks specialize in providing services designed to facilitate business operations, such as capital expenditure financing and equity offerings, including initial public offerings (IPOs). They also commonly offer brokerage services for investors, act as market makers for trading exchanges, and manage mergers, acquisitions, and other corporate restructurings.
Insurance Companies
Among the most familiar non-bank financial institutions are insurance companies. Providing insurance, whether for individuals or corporations, is one of the oldest financial services. Protection of assets and protection against financial risk, secured through insurance products, is an essential service that facilitates individual and corporate investments that fuel economic growth.
Brokerage Firms
Investment companies and brokerages, such as mutual fund and exchange-traded fund (ETF) provider Fidelity Investments, specialize in investment services that include wealth management and financial advisory services. They also offer access to investment products ranging from stocks and bonds to lesser-known alternative investments, such as hedge funds and private equity investments.
Why Are Financial Institutions Important?
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. For example, a bank takes in customer deposits and lends the money to borrowers. Without the bank as an intermediary, any individual is unlikely to find a qualified borrower or know how to service the loan. Via the bank, the depositor can earn interest as a result. Likewise, investment banks find investors to market a company’s shares or bonds to.
What Are the Different Types of Financial Institutions?
The most common types of financial institutions are commercial banks, investment banks, insurance companies, and brokerage firms. These entities offer a wide range of products and services for individual and commercial clients such as deposits, loans, investments, and currency exchange.
Which Agency Oversees Banking Operations in the United States?
The OCC, the Office of the Comptroller of the Currency, is an independent branch of the U.S. Department of the Treasury that charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks.
What’s the Difference Between a Commercial and Investment Bank?
A commercial bank, where most people do their banking, is a type of financial institution that accepts deposits, offers checking account services, makes business, personal, and mortgage loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. Investment banks specialize in providing services designed to facilitate business operations, such as capital expenditure financing and equity offerings, including initial public offerings (IPOs). They also commonly offer brokerage services for investors, act as market makers for trading exchanges, and manage mergers, acquisitions, and other corporate restructurings.
Which Agency Regulates Investment Banking Firms?
The Securities and Exchange Commission (SEC) oversees the operations of investment banks.
The Bottom Line
Financial institutions offer a wide range of business operations within the financial services sector including banks, trust companies, insurance companies, brokerage firms, and investment dealers. Regulatory agencies such as the OCC, the SEC, the FDIC, and the Federal Reserve oversee the operations of financial institutions in the United States.
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Useful links
How Do Commercial Banks Work, and Why Do They Matter?
A commercial bank is a financial institution that accepts deposits, offers checking and savings account services, and makes loans.
How Banking Works, Types of Banks, and How To Choose the Best Bank for You
A bank is a financial institution licensed to receive deposits and provide other services such as mortgage loans and individual retirement accounts.
Chartered Bank: Explanation, History and FAQs
A chartered bank is a financial institution in the business of providing monetary transactions, such as safeguarding deposits and making loans.
Federal Reserve System: What It Is and How It Works
The Federal Reserve System is the central bank of the United States and provides the nation with a safe, flexible, and stable financial system.
Financial Services Modernization Act of 1999
The Financial Services Modernization Act of 1999 partially deregulated the financial industry by letting banks and insurers integrate their operations.
Prime Brokerage Services, Example, Requirements for an Account
Prime brokerage refers to a complex group of financial services that some brokers may offer to special clients such as hedge funds and large investors.