Financial institution

Financial institutions, otherwise known as banking institutions, are corporations that provide services as intermediaries of financial markets. Broadly speaking, there are three major types of financial institutions:[1][2]

  1. Depository institutions – deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies;
  2. Contractual institutions – insurance companies and pension funds
  3. Investment institutions – investment banks, underwriters, and other different types of financial entities managing investments.
"Banking institutions" redirects here. For banks as financial institutions, see Bank.
The oldest financial institution in the world, Banca Monte dei Paschi di Siena, founded in 1472.

Financial institutions can be distinguished broadly into two categories according to ownership structure:

Some experts see a trend toward homogenisation of financial institutions, meaning a tendency to invest in similar areas and have similar business strategies. A consequence of this might be fewer banks serving specific target groups, and small-scale producers may be under-served.[3] This is why a target of the United Nations Sustainable Development Goal 10 is to improve the regulation and monitoring of global financial institutions and strengthen such regulations.[4]

Standard settlement instructions

Standard Settlement Instructions (SSIs) are the agreements between two financial institutions which fix the receiving agents of each counterparty in ordinary trades of some type. These agreements allow traders to make faster trades since the time used to settle the receiving agents is conserved. Limiting the trader to an SSI also lowers the likelihood of a fraud. SSIs are used by financial institutions to facilitate fast and accurate cross-border payments.

Regulation

Financial institutions in most countries operate in a heavily regulated environment because they are critical parts of countries' economies, due to economies' dependence on them to grow the money supply via fractional-reserve banking. Regulatory structures differ in each country, but typically involve prudential regulation as well as consumer protection and market stability. Some countries have one consolidated agency that regulates all financial institutions while others have separate agencies for different types of institutions such as banks, insurance companies and brokers.

Countries that have separate agencies include the United States, where the key governing bodies are the Federal Financial Institutions Examination Council (FFIEC), Office of the Comptroller of the Currency - National Banks, Federal Deposit Insurance Corporation (FDIC) State "non-member" banks, National Credit Union Administration (NCUA) - Credit Unions, Federal Reserve (Fed) - "member" Banks, Office of Thrift Supervision - National Savings & Loan Association, State governments each often regulate and charter financial institutions.

Countries that have one consolidated financial regulator include: Norway with the Financial Supervisory Authority of Norway, Germany with Federal Financial Supervisory Authority and Russia with Central Bank of Russia.

Merits

Merits of raising funds through financial institutions are as follows:

  1. Financial institutions provide long term finance, which are not provided by commercial banks;
  2. The funds are made available even during periods of depression, when other sources of finance are not available;
  3. Obtaining loan from financial institutions increases the goodwill of the borrowing in the capital market . Consequently, such a company can raise funds easily from other sources as well;
  4. Besides providing funds, many of these institutions provide financial, managerial and technical advice and consultancy to business firms;
  5. As repayment of loan can be made in easy installments, it does not prove to be much of burden on the business.

See also

References
  1. Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill Ryerson. p. 40. ISBN 0-07-087158-2.
  2. Robert E. Wright and Vincenzo Quadrini. Money and Banking: Chapter 2 Section 5: Financial Intermediaries. Accessed July 24, 2012
  3. Jayati Gosh (January 2013). "Too much of the same". D+C Development and Cooperation/ dandc.eu.
  4. "Goal 10 targets". UNDP. Retrieved 2020-09-23.
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