Test Prep Courses/GACE Economics (538) PrepCourse
- AuthorCaroline Ntara
Caroline Ntara has over 10 years of experience teaching Economics and Business courses at high school, college and university levels. She is finalizing a Doctorate in International Trade and Business at Monarch Business School Switzerland. She has an MBA in International Business and a bachelor's degree in Economics. Her certifications include CPA and TEFL/TESOL.
View bio - InstructorTammy Galloway
Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.
View bio
Discover the financial institution definition. Read about the types of financial institutions and their functions. See examples of some of the largest financial institutions.Updated: 11/21/2023
Table of Contents
- What is a Financial Institution?
- Functions of a Financial Institution
- Types of Financial Institutions
- Which Type of Financial Institution Typically Has Membership Requirements
- Lesson Summary
Frequently Asked Questions
Is a bank a financial institution?
A bank is a financial institution and helps customers to deposit and save their money. Custometrs are also allowed to withdraw their money when they need it from their accounts. Banks also give credit to customers to help them in taking care of immediate issues and pay over a duration of time as per the agreement made.
What are the examples of financial institutions?
Financial institutions can be depository, non depository or investment oriented. Some of the examples of financial instutions include JP Morgan Chase, ICBC, Wells Fargo, Morgan Stanley, Charles Schwab and Citigroup.
What does financial institution mean?
A financial institution is an entity that facilitates the monetary transactions between two or more parties. Well known financial institutions include banks, investment organizations or dealers, and insurance organizations. These institutions deal with deposits and investments from customers.
Table of Contents
- What is a Financial Institution?
- Functions of a Financial Institution
- Types of Financial Institutions
- Which Type of Financial Institution Typically Has Membership Requirements
- Lesson Summary
A financial institution is an organization that facilitates financial transactions and is a key player in financial intermediation. They are involved in handling transactions such as loans, deposits, and currency changes. The method in which financial institutions work involve utilizing money from their clients and then allocate to people and organizations that need it.
Financial institutions include varying areas of business operations, including banks, investment dealers, and insurance companies. Business operations are integral in any economy as they handle different financial activities. Therefore, people and businesses rely on financial institutions to handle their transactions and, at times, investments. Due to their criticality, financial institutions need regulation mostly from a government since their insolvencies can lead to a national fright.
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There are multiple functions of financial institutions. They include:
- Banking services - Financial institutions, specifically commercial banks, assist their customers by giving them banking services like deposit and saving services. These institutions also give out credit services that assist their clients in catering to their immediate needs. The credit services could include mortgages, personal or educational loans.
- Capital formation - Financial institutions assist in the creation of capital by increasing capital stock. Financial institutions can increase the stocks by organizing savings that are not in current use by customers and giving them to investors.
- Monetary supply regulation - Financial institutions control the supply of money in an economy. The main objective of this control is to ensure that there is stability in an economy and limited chances of inflation. The financial institution tasked with this responsibility is the central bank, and it completes this task by transacting the government's securities to influence liquidity.
- Pension fund services - Pension funds are made by financial institutions to assist people in preparation for their retirement. These pension funds are investment means that these institutions create to ensure individuals have money after their retirement, which could be issued on a monthly basis.
- Ensure economic growth of a nation - Governments play a vital role in controlling financial institutions, and the main objective is to help in the growth of an economy. When there are issues in an economy, financial institutions are mandated to provide loans with low interest to assist in maintaining an economy.
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There are three primary types of financial institutions. They are depository institutions, non-depository institutions, and investment institutions.
- Depository institutions - A depository institution is a legally permitted entity that is allowed to receive money from the public. Depository institutions include commercial banks, credit unions, and trust companies. Most people engage with depository institutions such as commercial banks due to their services. They offer commonly used financial operations like savings accounts, checking services, home mortgages, and other loans.
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- Non-depository institutions - This type of financial institution makes contractual agreements and investments to meet the requirements of investors. They are different from banks in the sense that they do not depend on depositors' money and use sources like the commercial paper market. Also, these institutions get money for their investments through the sales of insurances and securities. Some non-depository institutions include insurance companies and finance companies.
- Investment Institutions - An investment institution is an organization that oversees, sells, and looks for investment markets for people. This type of financial institution is either listed in the stock market or owned by an individual. The main activity of investment institutions is overseeing their customers' funds. Consequently, they also keep records, manages portfolios, manage group investment, and do tax management duties.
Examples of Financial Institutions
Below is a list of the largest financial institutions by their market capitalization.
- JP Morgan Chase - JP Morgan Chase is an investment institution that is based in New York City. It is one of the largest institutions with the highest market capitalization holding at $478 B.
- ICBC - This institution is a commercial bank and is based in China. It has a market capitalization of $238 B. This makes it one of the largest financial institutions in China and in the world.
- Wells Fargo - Wells Fargo is an American company that provides financial services to multiple countries in the world. Its market capitalization is at $193 B.
- Morgan Stanley - Morgan Stanley is another American investment institution that offers its services to various countries in the world. Its market cap is at $175 B.
- Charles Schwab - Charles Schwab is an American financial services company that offers services in various countries in the world. It has a market cap of $149 B.
- Citigroup - Citigroup is an American investment bank that offers various financial services to various countries. The company is based in New York and has a market cap of $129 B.
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Credit unions are financial institutions that are non-profit entities that members own; thus, they require membership. This feature makes credit unions different from typical banks. The main function of credit unions is to support savings and provide their customers with credits at affordable interest rates. Other services they provide include mortgages, loans, savings accounts, and checking accounts, to mention a few.
The roles of members of credit unions involve sharing vision and profits. Other roles of these individuals include voting, the management of the unions, and sharing in the union's success. These are among the privileges that are acquired when one becomes a credit union member.
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Financial institutions are entities that facilitate financial transactions and act as intermediaries in financial operations. There are various functions of financial institutions, including banking services, capital formation, monetary supply regulation, pension fund services, and the economic growth of a nation. There are various types of financial institutions. They include depository, non-depository, and investment institutions. These entities are differentiated by the way they function. It is critical to note that different large financial companies have done well due to their market cap. Lastly, credit unions are the financial institutions that require membership.
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Video Transcript
What Are Financial Institutions?
If you have a part-time job or full-time job and a credit or debit card, you most likely have a customer relationship with a financial institution. Financial institutions are organizations that process monetary transactions, including business and private loans, customer deposits, and investments. They're key to the financial intermediation process, whereby financial institutions transfer funds from those who save money to those who borrow money. Let's take a look at the three main types of financial institutions: depository, non- depository, and investment.
Depository Institutions
Depository institutions allow customers to deposit money in an account. You're probably most familiar with these types of financial institutions if you have a checking or savings account. Examples of depository institutions include commercial banks and credit unions. Commercial banks are for-profit entities that provide a number of services to their account holders. These types of financial institutions usually operate at the local, regional or national level, have large advertising budgets, and charge higher fees than a credit union. Credit unions are non-profit entities owned by accountholders, also called members. You must be affiliated with a certain organization or live within a certain proximity to the credit union to be a member. Fees are usually lower at credit unions. They're typically found at the local level.
It's relatively easy to understand how financial intermediation works at depository institutions because customers deposit money in accounts, and the institutions loan that money to borrowers. Now let's see how non-depository institutions play a role in this process.
Non-Depository Institutions
As you may have already guessed, non-depository institutions do not allow customers to deposit money. However, they're considered financial institutions because they transfer funds from savers to borrowers by investing the funds they receive. Insurance companies are non-depository institutions. Insurance companies provide customers with policies that protect them from risk, for which they charge them monthly premiums. Only a small percentage of the premiums collected are paid out in losses. Insurance companies invest the rest of the premiums in securities, like stocks, bonds, and other commodities, such as cattle, gold, and silver. Sometimes, insurance companies purchase securities and commodities directly from an entity. Other times, there's a middleman involved: an investment firm.
Investment Institutions
Investment banks are also financial institutions in that they play a role in the financial intermediation process by channeling funds from savers to borrowers. Unlike commercial banks, they usually don't provide services to the public. Areas of focus include initial public offerings (IPOs), mergers, share offerings, and underwriting. Investment banks may also function as brokers, provide financial advice to corporations, or serve as the middlemen between investors and securities issuers. Examples of investment banks include Citigroup, Goldman Sachs, Lehman Brothers, and Morgan Stanley. Regulatory bodies, like the Securities and Exchange Commission (SEC) and the U.S. Treasury, oversee the activities of investment banks.
Lesson Summary
Let's review. Financial intermediation is the process by which financial institutions transfer funds from those who save money to those who borrow money. There are three main types of financial institutions. Depository institutions allow customers to deposit money in an account and then loan the money to borrowers. Non-depository institutions do not allow customers to deposit money, however, they use monies received from the services they provide to invest in securities and commodities. Investment firms are financial institutions, like Goldman Sachs and Morgan Stanley, that act as the middlemen and facilitate the channeling of funds from savers to borrowers. Instead of providing services to the public, they're typically involved in corporate mergers, IPOs, share offerings, and underwriting activities.
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