Plan
1. Financialinstitution
2. Typesof financial institutions
3. Functionsof financial institutions
4. Informationof some types of FI
5. Regulationsof financial institutions
6. Thelist of literature
1. Financial institution
In financialeconomics, a financial institution an institution that provides financialservices for its clients or members. Probably the most important financial serviceprovided by financial institutions is acting as financial intermediaries.
First thingthat people think of when hearing words financial institutions are banks. Butbanks are not even near to be the only financial institutions. Financialinstitutions are the firms that provide financial services and advices to itsclients. The financial institutions are generally regulated by the financiallaws of government authority. The variety of financial institutions reveals thecomplex requirements of both borrowers and lenders. Banks, building societies,investment trusts and pension funds are just a few of the organisations whosejob it is to channel funds to those that require them.
Theseinstitutions operate in the short-term (money) market and the long-term (capital)market.
In the moneymarket, the main activity centres around funds, which are lent for periods fromas short as overnight up to about one year. The capital market focuses on moneyborrowed and lent for periods of five years or more.
2. Types of financialinstitutions
Various typesof Financial Institutions are as follows:
· Commercialbanks
· Creditunions
· Stockbrokerage firms
· Assetmanagement firms
· Insurancecompanies
· Financecompanies
· BuildingSocieties
· Retailers
· Investmentfunds and mutual funds
The variousfinancial institutions generally act as the intermediaries between the capitalmarket and debt market. But the service provided by financial institutiondepends on its type. The financial institutions are also responsible totransfer funds from investors to the companies. Typically, these are the keyentities that control the flow of money in the economy.
The servicesprovided by the various types of financial institutions may vary from oneinstitution to another. For example, the services offered by the commercialbanks are — insurance services, mortgages, loans and credit cards. The servicesprovided by the brokerage firms, on the other hand, are different and they are- insurance, securities, mortgages, loans, credit cards, money market and checkwriting. The insurance companies offer — insurance services, securities, buyingor selling service of the real estates, mortgages, loans, credit cards andcheck writing.
3. Functions of financialinstitutions
The mainfunctions of financial institutions are:
1. Tohelp businesses manage risks e.g. by providing insurance in the case ofinsurance companies.
2. Toprovide corporate finance as is the case with banks, or investment trusts,which enable lots of investors to own shares in a range of companies.
Anotherfunction of financial institutions is the transformation of assets, which areacquired through markets, into a wider and more preferable form, which becomestheir liability – this function is performed mainly by financialintermediaries, which is undeniably the most important category of financialinstitutions. Also financial institutions are involved in exchanging of assetson behalf of their customers. Other than that, exchanging of assets for theirown personal accounts is also part of their job. Furthermore, financialinstitutions create financial assets for their customers and sell those assetsto other market participants for a definite emolument. In addition to all thesefunctions, financial institutions are also involved in providing investmentadvice to market participants and managing the portfolios of marketparticipants.
4. Information of sometypes of FI
The creditunion is co-operative financial institution, which is usually controlled bythe members of the union. The major difference between the credit unions andbanks is that the credit unions are owned by the members having accounts in it.The creditunions are generally non-profit organizations. The credit union can also betermed as profit enterprise dedicated to earn profit for its members. Theprofits earned by the union are received by the members in the forms ofdividends. The dividends are paid on savings that are taxed as ordinary income.Depending on the financial structure of the country, the functionality ofcredit unions may vary in different countries. The operations of the creditunions of UK, credit unions of Canada and U.S credit unions are different fromeach other.
The stockbrokerage firms are the other types of financial institutions that helpboth the corporations and individuals to invest in the stock market. There are primarily twotypes of stock brokerage firms, based on their mode of operation — the onlinestock brokerage firms and the off line stock brokerage firms. The off linestock brokerage firms are the traditional stock brokerage firms. The onlinestock brokerage firms are those, who offer their services through the Internet.
Another typeof financial institution is the asset management firms. The primefunctionality of these firms is to manage various securities and assets to meetthe financial goals of the investors. The firms also offer fund managementadvice and decisions to the corporations and individuals.
Investmentfunds.These work like regulary companies. You buy their shares over stock market andas they invest and achieve returns, you get them in the form of capital gainsand/or dividends. In case company goes does you loose it all. Also you can’tget all your money of the investment fund if you don’t find a buyer and this isthe main difference between investment funds and mutual funds.
Mutualfunds arealso companies, but you don’t buy their shares, you buy their points. Youalways know how much each point is worth and as the fund makes some returns,the value of your point goes up. The best part of mutual funds is, that you canget money out anytime you want. You don’t have to seek the buyer for yourpoints, you just have to ask them to pay you out. In this view mutual funds aremuch better than investment funds, but because of the need for liquidity theycannot take on all investments making their returns a little smaller thenreturns of investments funds.
5. Regulations offinancial institutions
Financialinstitutions in most countries operate in a heavily regulated environment asthey are critical parts of countries’ economies. Regulation structures differin each country, but typically involve prudential regulation as well asconsumer protection and market stability. Some countries have one consolidatedagency that regulates all financial institutions while other have separateagencies for different types of institutions such as banks, insurance companiesand brokers.
Countries thathave separate agencies include the United States, where the key governingbodies are the Federal Financial Institutions Examination Council (FDIC),Office of the Comptroller of the Currency — National Banks, Federal DepositInsurance Corporation (FDIC) State «non-member» banks, National CreditUnion Administration (NCUA) — Credit Unions, Federal Reserve (Fed) — «member» Banks, Office of Thrift Supervision — National Savings &Loan Association, State governments each often regulate and charter financialinstitutions.
Countries thathave one consolidated financial regulator include United Kingdom with theFinancial Services Authority, Norway with the Financial Supervisory Authorityof Norway, Hong Kong with Hong Kong Monetary Authority and Russia with CentralBank of Russia.
The list of literature
1) http://en.wikipedia.org/wiki/Financial_institution
2) http://finance.mapsofworld.com/financial-institutions/
3) http://www.investorwords.com/