What are Financial Institutions?

The word financial institution is a kind of business organization that deals with the financial activities of a nation. These activities include accepting deposits, making payments, granting loans and advances, transferring funds, holding shares, providing credits, purchasing and selling foreign exchanges, investments in shares, futures commodities, and many more.

Financial Markets

The financial market is one of the market forms that always allow the flow of money between those who wish to lend the surplus money they have or borrow money that needs the money for various reasons at a given market interest rate. It also helps, in a variety of ways to earn interest on their savings. The transfer of funds from customers to investors enables the lender to grow their businesses and thus overall economic development takes place. In some cases, those who have a huge amount of available funds, deal directly with individuals and businesses.

Domestic establishments are significant among participating members in the United States financial market. Sometimes, many domestic establishments borrow money to finance their purchases, and finally, they help in fund movement to the financial system through their purchase, requirements, and savings. In general, governments and businesses are users of these funds. Most of the time, they borrow a sum that is more than they save.

Types of Financial Institutions

It can be classified into the following groups.

• Depository institutions
• Non-depository institution

Depository Institutions

It includes commercial banks, thrift institutions, credit unions, etc.  The objective of every depository institution is not the same. Some of the places where people keep their savings are known as banks, but there are certainly other depository institutions also that keep the money of the people who are said to be the thrift institutions and credit unions.

Non-Depository Institutions

It includes insurance companies, finance companies, brokerage firms, and pension funds.

Scope of Financial Institutions

The scope is not limited to depository institutions only but also money service businesses, savings banks, banks, insurance companies, trust companies, security dealers and brokers, commodity futures and options dealers and brokers, forward contract and foreign exchange merchants, securities, and commodities exchanges, investment corporations, clearinghouses, worker benefit plans, and U.S. holding corporations, U.S. subsidiaries, and affiliates.

Commercial Banks

A commercial bank is oriented for generating revenues. It can be understood as a financial institution accepting deposits, providing loans to businesses and individual consumers, investing in the securities of government and corporate, and assisting with other financial services. It can be categorized based on size. Indeed, the “money centre” banks reside in the nation’s financial market and move towards the smaller regional or local community banks. In the recent trends, it is clear that the smaller banks are vanishing as a result of consolidations, thus the number of small banks is decreasing. A large portion of the central banking system is now in the hands of a relatively small number of big banks. There are nearly 5,011 commercial banks, operating in the United States, which accounts for approximately $16 trillion invested in assets and $9 trillion in total liabilities.

Thrift Institution

A thrift institution is a depository institution that is developed to gather all the household savings and to make sure home mortgage loans are available. It includes savings banks, and savings and loan associations (S&Ls). S&Ls set aside large percentages of their assets in home mortgages. When compared with the S&Ls, the focus of savings banks is less on mortgage loans and more on stock and security investments. Nowadays, thrifts institutions are declining in numbers. In the late 1960s, they were at their highest point with more than 4,800 institutions.

Credit Union

A credit union (CU) is a not-for-profit organization, a member-owned financial institution. The members of CU characteristically have few things common in place. For example, doing a job for the same employer, related to the same professional or union group, or attending the same market or school. The CU uses the method of pooling its assets, or savings, to make loans available and offering other related services to its members. The status of not-for-profit CU’s allows exemption from taxes. So, they can offer comparatively good interest rates on deposits and can offer loans at friendly interest rates. Similar to banks, CU’s may have either a federal or state charter. Approximately 5,700 CU’s are working in the United States has more than 108 million members and over $1.34 trillion invested in assets.

Bank Holding Company

A bank holding company is not working as a bank instead it controls one or more banks and was introduced in the Bank Holding Company Act, 1956. These companies have various limitations for investment in non-banking companies.

Federal Bank

In the private sector, the federal bank is a major Indian commercial bank that maintains its headquarter in Aluva, Kerala. Federal banks are having 1284 operational branches and 1569 ATMs spread all over different states in India. The bank is a leader among the traditional banks in India for using the technology-driven banking system and adjusting its functioning. And also, was among the first banks in India to use computers throughout its branches. The bank is offering its clients, a range of services like mobile banking, internet banking, online bill payment, and fee collection, merchant banking services, depository services, cash management services, insurance, mutual fund products, and more such services like a strategic move to position itself as a financial supermarket and to enhance customer reliability and convenience.

Vision and Mission-Federal Bank

It is also well known as the “most admired bank” due to its digitalization and main focus on micro, medium, and middle-market enterprises. Every stakeholder received equal opportunity related to interest and obligations.

Customers: Dealing with customers and fulfilling their needs and meeting their expectations by giving them reasonable products and services. By way of a single-window channel to satisfy customers maximum needs and a 24-hour-seven-day-week idea, making a strong branch infrastructure, ATMs, other channels for alternative distribution, cross-selling a variety of products and services to cater to customers changing expectations over time, and following the first-class services at all time, designed and followed by the principle of being “digital at the fore, human at the core”.

Shareholders: To provide regular growth in shareholder’s trust and values.

Employees: Generate in each employee, a higher degree of self-respect and faith in serving the bank.

Functions: Following are the functions.

It plays the role of depositories for bank reserves.

Providing a loan to banks to meet its short-term fund requirements, seasonal business cycles, or unforeseen liquidity crunch.

Accepting and clearing balances between banks.

Printing banknotes for circulation as currency.

Look after the deposit accounts of the government.

Buyback of debts is being managed by it.

Purchasing obligations of non-bank entities via emergency credit facilities authorized by the regulator.

Federal Deposit Insurance Corporation (FDIC)

The federal deposit insurance corporation (FDIC) works as an agency that provides the facility of depositing insurance to the depositors in the United States depository institutions.

The other one is the national credit union administration that manages and insures the credit unions. FDIC was originated with the Banking Act of 1933 and came into effect at the time of the depression to regain the trust in the banking system in America. Nearly one-third of the banks were established before the FDIC was created, and didn’t work like FDIC.

Office of the Comptroller of the Currency (OCC)

In the United States, Blake Paulson is the present Office of the Comptroller of the Currency (OCC) is a kind of regulatory body and was elected on January 14, 2021. Mainly, the office of the Comptroller of the Currency is the administrator of the federal banking system and head of the OCC.

The OCC is one of the independent bureaus of the U.S. Department of the Treasury whose major function is to charters, regulates, and supervises all the commercial banks operating in the U.S. economy. The OCC also took care of the federal savings associations along with the federal branches and agencies of foreign banks.   

In other words, the OCC encourages bank compliance keeping in mind the federal consumer protection laws, the CRA (Community Reinvestment Act), and the fair lending statutes and regulations. 

Federal Reserve System

The Federal Reserve System is said to be the central bank of the United States and its main objective is to regulate the money of the U.S. and manage its financial system. It is also known as the “Federal Reserve”. The payment system of the Federal Reserve is called fed wire which is around trillions of dollars and this amount moves between the American banks daily. The main functions of the Federal Reserve are creating monetary policy, protecting and managing credit rights of consumers, regulating banking institutions, and giving financial service to the government. It was enacted by the Federal Reserve Act and signed by President Woodrow Wilson on Dec. 23, 1913. The Federal Reserve was created due to the financial panic that occurred in 1907.

State-Chartered Bank

A bank that has received a charter from the state government instead of the federal government is known as a state-chartered bank. It has all the functions similar to a national bank.

Context and Applications

The topic is significant in the professional exams for both undergraduate and postgraduate courses, especially for

●       B. Com (Bachelor of Commerce).

●       BBA (Bachelor of Business Administration) in Finance.

●       MBA (Master of Business Administration) in Finance.

●      In various banking examinations.