A financial institution is an institution that issues deposits and other financial liabilities and invests predominantly in loans and other financial assets (Kidwell, Blackwell, & Whidbee, p. 636, 2008). Financial institutions include organizations such as banks, trust companies, insurance organization, pension, and mutual funds, and investment dealers or banks. In some shape or form individuals and corporations deal with a financial institution on a daily. Depositing money, taking out loans, currency exchange, or investing one has to go through a financial institution.
There are several financial institutions three of the major financial institutions and the role they play in the financial market will be discussed in detail. Commercial Banks This is a bank that accepts deposits and makes consumers, commercial, and real estate loans (Saunders, & Cornett, p. 29, 2008). The largest groups of depository institutions that are measured by asset size are commercial banks. Commercial banks have similar functions as savings institutions and credit unions. The three accept deposits (Liabilities) and make loans (assets).
The difference is in the arrangement of assets and liabilities, which are much more diverse. To meet the interest obligations to deposit, commercial banks carefully invest the assets in addition to extending loans to business and individuals. Enterprises of small and medium sized businesses are the greatest potential customers of the commercial banking area. Commercial banking has less influence over larger corporations there is a possibility for corporations to influence consumer behavior through the financial products offered.
The role of commercial banks in the financial institution is essential because it offers a wide assortment of deposit accounts and serves both the public and private sector. Commercial banks are dominant depository institutions. Insurance Organization The primary function of insurance companies is to protect individuals and corporations from adverse events. In the financial institution, the insurance companies invest in financial securities, such as corporate bonds and stocks with the premiums collected. By accepting these premiums, insurance companies promise policyholders reimbursement if certain specified events occur.
The importance of the insurance company in the role of financial institution is one that cannot be overlooked. It protects people and companies from the financial consequences of events whose risks are actuarially determinable. The financial health of the insurance company is the single most important purchase criterion; because an insurance contract is a promise by the insurance company to pay the insured if an event occurs. Investment Banks The possibility of the investment bank depends on the influence the investment bank has over the business.
This type of financial institution specializes in the sale of new securities to the public or otherwise known as underwriter. Investment banking has the appeal of allowing one to make a large amount of money. The specialty is helping businesses and governments sell debt or equity in the primary markets to finance capital expenses. Restrictions are few on the range of activities in which investment banks can engage in. The one concern is the role of the financial institution between environmental performance and investment performance.
Investment bankers study the market of the securities as well as maintaining relationship that provides a full range of the firm’s services to government agencies or corporate clients looking to raise capital. This requires creative thinking and the ability to leverage other product areas in the organization. The three financial institutions act as intermediaries between the net providers and borrowers of funds. The financial institutions specialize in varying types of financial assets and services and most of them are acquired through the market and organize them into a different and more widely preferable type of asset.
Commercial banks, investment banks, and insurance companies facilitate the efficiency and growth of the economy as well as trading of existing securities. The major players in the financial market are very important to the financial market. In conclusion financial institutions create financial assets for customers and sell the assets to other markets for a profit. The functioning of these institutions is very important for an effective financial market and for the conduct of monetary policies. Commercial banks, insurance organizations, and investment banks have been explained separately and how each interacts with each other.