Definition: A financial institution is an intermediary between consumers and the capital or the debt markets providing banking and investment services.
What Does Financial Institution Mean?
What is the definition of financial institution? A financial institution is responsible for the supply of money to the market through the transfer of funds from investors to the companies in the form of loans, deposits, and investments. Large financial institutions such as JP Morgan Chase, HSBC, Goldman Sachs or Morgan Stanley can even control the flow of money in an economy.
The most common types of financial institutions include commercial banks, investment banks, brokerage firms, insurance companies, and asset management funds. Other types include credit unions and finance firms. Financial institutions are regulated to control the supply of money in the market and protect consumers.
Let’s look at an example.
Bank ABC is a shareholder-owned institution that offers banking and investment services to a wide range of customers. The bank acts as an intermediary between retail and institutional investors, who supply the funds through deposits and retail and institutional investors, who are looking for financing. The bank pays a 2% interest on the deposits it accepts from households and businesses from the interest earned from lending services. In addition, the bank offers fund management and health and life insurance services through its subsidiaries.
Furthermore, Bank ABC operates in the wholesale market, seeking to lend large conglomerates and corporations as well as government agencies. In this context, the bank has a highly-equipped advisory team, which offers corporate finance, forex, capital markets and investment management services.
The bank is regulated for the protection of consumers. Hence, its funds undergo strict scrutiny by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve System. These two Federal agencies are responsible for guaranteeing that the bank will be able to repay the borrowed funds.
Define Financial Institutions: Financial institution means a bank that provides investment and depository services to customers.