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Financial institutions are often a crucial factor in the progression of society's sustainable development. There are different types of financial institutions that need to be understood how they work. This essay defines a financial institution and highlights the types of financial institutions while briefly highlighting the US case of a financial institution.
A financial institution is defined as an organization that is involved in providing different types of financial services to their customers. The financial assets include such as bonds, money market instruments, stocks, bank deposits and loans. There are two types of financial institutions; depository and non-depository institutions. But with time, most of the financial institutions are merging the two depository and non-depository functions. An example is that of Brokerage Company that places customers' deposits in certificates of deposits and money market funds and sell insurance (Business glossary).
Basically, there are two types of financial institutions; depository and non-depository institutions. Depository institutions are those institutions that lend out a significant part of the funds entrusted to them in form of savings (mortgages and loans). These institutions include; commercial banks, saving institutions and cooperative banks and credit unions. They pay interest on deposits and invest the deposited money usually in form of loans. Commercial banks are institutions that use entrusted funds to them by their customers to lend out loans to consumers and customers who could want to borrow. They later distribute profits to their shareholders. Savings institutions are usually mutually structured which attract savings and give home financial. They give surplus profits to their customers. Credit unions and cooperative banks are institutions that although not focused on profits but on providing credit to their members and any profits retained (Jeucken, M. 2004).
Non-depository institutions are those organizations that finance their activities by issuing securities through customers' contributions or shares on the capital market. There are several of these non-depository institutions and they include; securities markets, investment insertions, contractual savings, multilateral & governmental institutions. They collect money from the public by selling their ideas or receiving contributions and pay later at 'legitimate' claims or for retirement benefits. Securities markets are institutions that are involved in market transactions and offer advice to institutional investors. These include investment banks, brokers and dealers. Examples are the securities traded on the bourse like the New York Stock Exchange (Jeucken M. 2004).
Investment institutions are those that attract funds to invest in high risk securities and loans than those accepted by commercial banks. Examples are the mutual funds, equity funds, bond markets. Contractual savings are institutions that provide protection to businesses and individuals during unforeseen but predictable circumstances. These include the insurance and assurance policies and pension funds.
Multilateral and governmental financial institutions are those institutions that are largely financed by governments whose main objective is to stimulate development and credit facilities to individuals (student loans) and businesses (by SMEs) and those loans by development banks lie the World Bank. (Jeucken M. 2004).
Financial system in US
The financial system in the US consists of institutions that help march a person's savings with another person's investment. In the US, the financial institutions moves the economy's resources from people who want to save to people who want to spend. The financial system is made up of various financial institutions that coordinate savers and borrowers. The US financial system can be grouped into financial markets and financial intermediaries. Financial markets are those institutions through which savers supply directly to borrowers and these include the bond market and stock market. Financial intermediaries are those institutions through which savers indirectly supply money to borrowers. They include the banks and credit institutions (Mankiw N. G. 2008).
The essay has defined a financial institution and we have given examples of financial institutions and highlighted the major differences. We have also briefly seen the financial system in the US.