Download Financial Institutions

Describe the various types of depository
institutions
 Discuss types of deposit insurance
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
A financial institution is any organization
or business that provides services related
to money.
› Banks, credit unions, savings associations are
known as depository institutions
A deposit is money placed or transferred
into a bank account.
 A customer who makes a deposit is
considered a depositor.

Banks are businesses…they are
supposed to make money.
 They use deposits to make loans to other
customers…charging interest…and in
turn generating revenue.

› Also make money from ATM-usage fees,
overdraft fees, monthly accountmaintenance fees, and other fees.
Depository institutions are one of the
most important parts of the US economy
…responsible for most of the money
circulating in the country.
 Paying bills or buying items using a debit
or credit card are done through
depository institutions as well as
borrowing money.
 Without depository institutions our
economy would not function well.

Commercial banks are owned by
stockholders (an investor who expects to
make a return from his or her investment
in stock).
 Functions

› Transfer funds, accept deposits, and make
loans to individuals, businesses, and
governments

About 6,500 commercial banks in the US

Transfer funds - Every time you pay for
something you are transferring money
from yourself to another party
› A transaction account allows the owner to
use it to pay a third party
 Checking accounts are the most common
type of transaction account

Accept deposits – can also save money
at a bank
› Savings accounts are deposit accounts that
provide a safe place to store your money.
 Do not have check writing privileges
 Banks pay interest on savings accounts
 Money market accounts are a type of savings
account that pays more interest than an
average savings account, requires a larger
initial deposit, and a minimum
balance…usually $500

Make loans – make more loans than
other depository institutions
› Cars
› Houses
› Sometimes higher education

Other services – vary from bank to bank
› Safe-deposit box
› Sell securities and insurance
Savings and loan association (S & L) are a
type of financial institution that helped
customers save money by allowing small
deposits and home loans; also known as a
savings association or thrift institution
(encouraged people to be thrifty and
save).
 Originally savings associations only provided
savings accounts and home loans because
many banks didn’t offer home loans.
 Today savings associations offer other types
of loans as well

Operate for a profit
 Usually owned by stockholders but can
be owned by an individual, a group of
people, or a corporation


A credit union is a financial institution that
provides many of the same services as
banks and S & Ls, but owned by its
members and run on a nonprofit basis.
› Known as a cooperative or co-op (a business or
organization that is owned by its members who
cooperate to run the organization)
› Not-for-profit means instead of paying profits to
shareholders, money made by not-for-profit
credit unions is returned to members in the form
of higher interest rates on savings accounts and
lower interest rates on loans.
Share accounts are savings accounts at a
credit union.
 Share draft accounts are checking
accounts at a credit union.
 To open a credit union account you must
meet membership criteria…most common
relate to employer, occupation, and
geography

› Once enrolled as a member you can stay
member, even if you no longer meet the
membership requirement

Currently there are more credit unions
(8,000) than banks in the US but banks
tend to be larger…have more deposits,
assets, and profits compared to credit
unions


Deposit insurance covers the deposits of customers in
the case of a bank failure.
Depository institutions pool their money and share risk
to pay premiums to the deposit insurance fund (DIF)
so that depositors can maintain their insured funds in
the case of bank failure.
› In most years, there are few bank failures and the fund
balance grows, but as a result of the financial crisis and
resulting economic downturn in the early 21st century…the
growth of this fund was affected.


Banks – Federal Deposit Insurance Corporation (FDIC)
Credit unions – National Credit Union Administration
(NCUA)

Federal Deposit Insurance Corporation
(FDIC) is an independent federal agency
established in 1933 that provides deposit
insurance up to $250,000 for depositors in
insured banks and thrifts in the case of bank
failure.
› Since thousands of banks failed during the Great
Depression, the FDIC was created to promote
public confidence in the banks.
› Since it was started, no depositor has lost a cent
of insured funds due to the failure of an FDICinsured institution.

Initially it covered each customer’s
deposits up to $100,000 but in 2008 to
improve confidence, it was raised to
$250,000 for interest bearing accounts.
› Was meant to be temporary but made
permanent in 2010
› Non-interest bearing transaction accounts
(checking accounts) are covered regardless
of the amount

Deposits are insured per ownership
category per depository institution:
› Single accounts
› Joint accounts
› Certain retirement accounts
› Certain trust accounts
› Employee-benefit plan accounts
› Government accounts
Eligible
Not eligible
• Checking accounts
• Savings accounts
• Money market accounts
• Certificates of deposits
• IRAs
• 401 (k)s
• Mutual funds
• Stocks
• Bonds
• Annuities
• Life insurance
• Contents of safe deposit
boxes
Banks must disclose the risks of
purchasing non-deposit investment
products that they sell
 FDIC also monitors banks to help ensure
that they do things by the book
 Also manages banks that are failing

National Credit Union Share Insurance Fund
(NCUSIF) was established in 1970 to insure
credit union deposits up to $250,000.
 NCUSIF is administered by the National
Credit Union Administration (NCUA).
 FDIC and NCUA are virtually Identical…

insure accounts up to $250,000
Pay insurance premiums
Backed by the government
Have examiners who determine financial
soundness of insured institutions
› Insure state as well as federally chartered
depository institutions
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Define non-depository institutions
 Describe the role of investment banks in
raising capital
 Explain the purpose of securities
 Describe the function of finance
companies
 Explain how insurance companies
provide risk-management and
investment options to their clients


Non-depository institutions – do not
accept deposits although many make
loans
› Accept money from their customers to invest
in business deals, which spreads the risk and
provides a way for customers to invest
› Examples: Investment banks, securities firms,
finance companies, and insurance
companies

Investment Banks provide services for
business…specialists in the securities
markets
› Help businesses raise capital…money…through
securities (financial instruments such as bonds
and stocks)
› Help organizations issue bonds and find investors
to buy them
 Bonds are debt issued by a government or
company
 For example, if you buy a bond you are loaning money
to that organization
› Act as assist companies raise capital by
acting as an agent to sell stock
 Stock is a security that gives the purchaser part
ownership in the company called equity
 Stockholders may receive dividends (payments) from
the issuing company

Securities Firms are financial institutions
involved in the trading of securities in
financial markets also called brokerage
firms, stockbrokers, or bondbrokers
› If you wanted to buy Google stock, you would
go to a stockbroker, the stockbroker would
place the order and charge a fee (commission)
› Full-service brokerage firms advise customers on
which securities to buy and help manage their
investments
› Discount brokers place orders for customers too
but other services may be limited…fees are less
Finance Companies make profits by issuing
loans to businesses and individuals…only
service provided to customers
 Two major types

1. Consumer financial companies – provide
personal loans to individuals…generally to
those with poor credit and usually have a
higher interest rates than a bank or credit union
 Payday lenders – short-term loans designed to
cover expenses until the borrower’s next
payday…very expensive…interest rates can be
300% or higher
2. Business financial companies – provide loans to
businesses, such as retail stores…arranges with
the business to provide loans on site to
customers
 For example, a customer wants to buy a computer
but doesn't have the cash. The computer store
can offer a loan. The computer store isn’t really
issuing the loan, the business finance company
issues the loan.
 Some large manufacturers form their own finance
company called captive finance companies, to
provide loans so the manufacturer can easily sell its
goods.
Insurance Companies are for-profit
businesses that primarily sell insurance
and may sell other products
 Two primary ways insurance companies
make money: Selling insurance policies
and selling investment products


Insurance protects us against financial
loss
› Consumers buy an insurance policy by
making periodic payments, known as
premiums and in return the insurance carrier
agrees to cover losses according to the
terms in the policy
 The person or thing covered by the policy is
called the insured