Financial Institutions

Financial institutions are businesses that trade in money. They have different rights, different powers and obligations. The most familiar financial institurions are commercial banks, savings and loan associations, credit unions, mutual savings banks and other organizations that perform banking functions.

Mainly, banks fall into two main categories: retail banks and wholesale banks. Retail banking refers to banks which offer services to individual customers, while wholesale banks deal with corporations. The most obvious type of retail bank is the commercial bank.

Commercial banks, which include trust companies, savings banks and industrial banks, have traditionally rendered a wide range of services. Today they are specialized in helping business and making investments. In some countries (as in our Republic, for example) there are banks that combine the services offered by retail banks with those supplied by wholesale banks. These are called universal banks.

Savings and Loan Associations A savings and loan association (S&L) is a financial institution that primarily accepts savings deposits and provides home-mortgage loans. Originally, they were permitted to offer their depositors only savings accounts. But since Congress passed the Depository Institutions Deregulation and Monetary Control Act, which became effective on January 1, 1981, they have been able to offer interest-paying checking accounts (NOW accounts) to attract depositors. A NOW account is an interest-bearing checking account. (NOW stands for Negotiable Order of Withdrawal.)

Credit Unions A credit union is a financial institution that accepts deposits from, and lends money to, only those people who are its members. Usually the membership is composed of employees of a particular firm, people in a particular profession, or those who live in a community served by a local credit union. Some credit unions require that members purchase at least one share of ownership, at a cost of about $5 to $10. Credit unions generally pay higher interest than commercial banks and S&Ls, and they may provide loans at lower cost. Credit unions are regulated by the Federal Credit Union Administration.

Mutual Savings Banks A mutual savings bank is a bank that is owned by its depositors. Located primarily in the northeastern part of the United States, mutual savings banks accept deposits and lend money for home mortgages. The approximately 375 mutual savings banks in the USA have no stockholders. Their profits are distributed to depositors. They operate much like S&Ls and are controlled by state banking authorities.

Organizations That Perform Banking Functions There are three types of financial institutions that are not actually banks but that are nevertheless involved in various banking activities to a limited extent.

Insurance companies provide long-term financing for office buildings, shopping centers, and other commercial real estate projects throughout the United States. They also invest in corporate and government bonds. The funds used for this type of financing are obtained from policyholders' insurance premiums.

Pension funds are established by employers to guarantee their employees a regular monthly income upon retirement. Contributions to the fund may come either from the employer alone or from both the employer and the employee. Pension funds earn additional income through generally conservative investments in certain corporate stocks, corporate bonds, government securities, and real estate developments.

Brokerage firms offer combination savings and checking accounts that pay higher-than-usual interest rates (so-called money-market rates). Many people switched to these accounts when their existence became widely recognized to get the higher rates. In the last few years, however, banks have instituted similar types of accounts, hoping to lure their depositors back.

Any financial organization has both internal and external customers. These are considered to become clients as soon as their relationship with the bank or any other financial institution is reliable and long lasting. All the bank departments and their staff are internal customers to each other. The external customers comprise natural and legal persons, i.e. individuals, private and slate companies as well as the government.