What is a “Financial Institution”?
Financial institutions are public or private entities that are engaged in financial and/or monetary activities such as banking – providing deposits, loans and currency exchange services, and/or investing in the financial markets and dealing in securities such as stocks and bonds. Other activities that financial institutions operate in include insurance and stockbroking. Central banks and supranationals such as the International Monetary Funds and the World Bank are also financial institutions, but have a different focus on the economy – controlling the money supply and inflation, promote stable economic growth, or support countries that experience financial difficulties.
Key Learning Points
- A financial institution is a public or private entity that is engaged in financial or monetary activities such banking operations and services, investing and capital markets.
- Most popular structures include banks, insurance companies, asset and wealth managers, and stockbrokers.
- Central Banks and supranational organisations such as the IMF are also financial institutions that aim to support sustainable economic growth.
- Financial institutions are very diverse group which vary not just in size and geography, but also in the business and economic segment they operate in.
Generally, banks offer a very wide range of services to various types of clients. Commercial banks provide conventional services such as deposit or savings accounts, mortgages, business or personal loans, money transfers, and currency exchange. They focus on the retail market and attract a large number of customers that need everyday financial services.
On the other hand, investment banks are involved in more sophisticated operations and offer services such as initial public offerings (IPOs), mergers and acquisitions (M&A), or leveraged buyouts (LBOs). They tend to serve large institutional clients and also act as a market maker for trading activities or manage other corporate restructurings.
Insurance companies are classified as non-banking financial institutions and are involved in business with both retail and institutional clients. Their core business is to provide protection for the client’s assets and require a very accurate calculation of a number of risks. The specifics of this business is that virtually any individual or corporation could get access to an insurer that is willing to protect their assets for a particular price. For example, some of the most popular types of personal insurance products include car, health, life, and home insurance.
Asset Managers and Brokerage Firms
Asset management companies are institutional investors that operate in the financial markets. They offer a wide range of products such as mutual funds, retirement solutions, passive funds, or discretionary management for wealthier (also known as high-net-worth) clients or corporations. Their services could be suitable for both retail and institutional clients as they basically offer money management (investing) on the client’s behalf and charging management and administration fees.
Stockbrokers are financial institutions that are involved in trading activities on the financial markets. They facilitate the execution of trades and offer a wide range of individual securities and collective investments to their clients such as equities and funds. Their business model could vary, but most often stockbrokers generate revenues through charging administration or transaction fees.