Financial Institutions
There are 3 categories of financial institutions:
Depository financial institutions - depository financial institutions collect bulk of their funds from deposit accounts sold to the public. Depository financial institutions are mostly commercial banks. Non-bank financial institutions are savings and loan associations, savings banks, credit union, money market firms.
Contractual financial institutions - collect funds by offering legal contract to protect savers against the risk.
Life-insurance companies
Property casualty insurance companies
Pension funds
Investment financial institutions - they sale shares to the public and invests the proceeds in different types of financial assets. They provide different types of loans to businesses and households.
Mutual funds
Real estate investment funds
Mortgage companies
Finance companies
Commercial banks: these are the dominant financial institution in the economy in the world. They offer different types of services:
Deposit accounts
Credit services
Payment services
Security underwritings
The name 'commercial' implies that they devote most of their funds to meet the financial needs of commercial organization or business.
Sources of funds of commercial banks:
Equity capital - it is supplied by the banks shareholders and it represents the minor portion of the total funds of a bank. Purpose of equity capital - equity capital is used to keep the bank open in the face of operating losses.
Deposit from the public - commercial banks collect deposit from the public and business organizations to carry out lending and investment operations
Non deposit sources of funds - loans from federal reserves of other banks
Revenues
There are different types of deposits:
Demand deposit - these are the non-interest bearing deposits commonly known as check-in account or current account. It is used for massing payments from a business to another business.
Savings deposits - these are interest bearing deposits. Can be withdrawn by deposit holders at any time
time deposits - is also interest rate bearing deposit. It carries a fixed maturity and offer highest interest rate a bank can pay
Commercial banks maintain two types of reserves:
Primary reserve - consists of cash and deposits with other banks. It serves as the first line of defense against withdrawal by depositors and customers demand for loans
Secondary reserve - these are securities acquired from the open market. Example - bonds, notes issued by the government (tax exempts)
They also purchase a small amount of corporate notes and bonds to meet the short term cash needs.
Commercial banks provide loans to business, households and government. Loan is the principal business of commercial banks, and it is the highest yielding asset of a bank, because it provides the largest portion of a bank's revenue. Types of loans:
Business loans
Short term loans(less than 1 year) - to meet the working capital needs of businesses
Long term loans(1 year or more)/term loans - to finance the purchase of machinery, buildings to support the construction of residential and commercial buildings.
Household loans - banks provide households loans to finance the purchases of home appliances, automobiles and to finance the college, university education.
Revenues of commercial banks: revenues comes from
Interest on loans
Dividends on security holding
Service charges on deposit accounts
Expenditure of commercial banks:
Interest deposits and the borrowed funds
Salaries and wages of employees and operating expenses
International banking
Banks expansions into the international markets through a wide variety of organizational forms:
Representative office - they are eyes and years of a bank in the foreign market. They cannot take deposits and make loans. They provide required information about the bank's service facilities to the customers. They make liaison with the customers in the foreign market.
Branch offices - offers all or most of the services the home bank provides including taking deposits and making loans
Subsidiaries - it is the acquisition of existing overseas banks with existing clientele by retaining its own charter and capital stock.
Joint ventures - to make business jointly with a foreign firm that is already established in other country.
