CHAPTER THREE: Financial Institutions: Deposit Type,

Contractual, And Other Financial Institutions

Financial Institutions
 Depository institutions and non-depository
institutions both serve financial markets.
 Financial institution exists to provide a wide
variety of deposit, lending, and investment
products to individuals, businesses
 Some financial institutions focus on providing
services and accounts for the general public,
others are more likely to serve only certain
consumers with more specialized offerings.
 CENTRAL BANKS
 Central banks are the financial institutions
responsible for the oversight and management of
all other banks
 The central bank is the federal reserve bank, which
is responsible for conducting monetary policy and
supervision and regulation of financial institutions.
RETAIL AND COMMERCIAL BANKS
 Retail banks offered products to individual
consumers while commercial banks worked
directly with businesses.
The majority of large banks offer deposit
accounts, lending, and limited financial
advice to both demographics.
 Products offered at retail and commercial banks
include checking and savings accounts, certificates of
deposit (CDs), personal and mortgage loans, credit
cards, and business banking accounts
INTERNET BANKS
 A newer entrant to the financial institution
market is internet banks, which work similarly
to retail banks.
 Internet banks offer the same products and services as conventional
banks, but they do so through online platforms instead of brick-and-
mortar locations.
 Digital banks are online-only platforms affiliated with traditional
banks. However, neo-banks are pure digital native banks with no
affiliation to any bank but themselves
CREDIT UNIONS
 A credit union is a type of financial institution
providing traditional banking services and is
created, owned, and operated by its members.
 In the recent past credit unions used to serve a
specific demographic per their field of
membership, such as teachers or members of the
military..
 Credit unions are not publicly traded and only need to make
enough money to continue daily operations.
• That's why they can afford to provide better rates to their
customers than commercial banks
Savings And Loan Associations
 Financial institutions that are mutually owned by their
customers and provide no more than 20% of total
lending to businesses fall under the category of savings
and loan associations.
 They provide individual consumers with checking and
accounts, personal loans, and home mortgages.
 Unlike commercial banks, most of these institutions are
community-based and privately owned, although some
may also be publicly traded
Investment Banks
• Investment banks are financial institutions that
provide services and act as an intermediary in
complex transactions, for instance, when a startup is
preparing for an initial public offering (IPO), or in
merges.
• They can also act as a broker or financial adviser for
large institutional clients such as pension funds.
Investment banks do not take deposits;
• Investment companies, traditionally, known as
mutual fund companies, pool funds from individuals
and institutional investors to provide them access to
the broader securities market
• Global investment banks include JPMorgan
Chase, Goldman Sachs, Morgan Stanley,
Citigroup, Bank of America, Credit Suisse, and
Deutsche Bank.
• Robo-advisors are the new breed of such
companies, enabled by mobile technology to
support investment services more cost-
effectively and provide broader access to
investing by the public
BROKERAGE FIRMS
Brokerage firms assist individuals and
institutions in buying and selling securities
among available investors.
Customers of brokerage firms can place
trades of stocks, bonds, mutual funds,
exchange-traded funds (ETFs), and some
alternative investments.
INSURANCE COMPANIES
• Financial institutions that help individuals transfer the
risk of loss are known as insurance companies.
• Individuals and businesses use insurance companies to
protect against financial loss due to death, disability,
accidents, property damage, and other misfortunes.
MORTGAGE COMPANIES
• Financial institutions specialized in originating or
funding mortgage loans are mortgage companies.
• While most mortgage companies serve the
individual consumer market, some specialize in
lending options for commercial real estate only.
• Mortgage companies focus exclusively on
originating loans and seek funding from financial
institutions that provide the capital for the
mortgages.
• Many mortgage companies today operate online or
have limited branch locations, which allows for
lower mortgage costs and fees.
Types of Deposit and Accounts
• If you have ever opened an account in any of the
banks, then you must be aware of the fact that
there are many kinds of deals and features that the
banks offer us.
• These deals are meant to attract different kinds of
customers with different needs.
 Money and banking are part of everyday life.
 Banks offer all sorts of financial products to help
you manage your money on a day-to-day basis.
 The bank is such a place where once we deposit
money, it remains safe and also earns interest over
some time.
 This is known as the deposit and to each deposit;
the bank assigns a unique identity which is known
as the account.
 Bank deposits serve different purposes for different
people. Some people cannot save regularly. They
deposit money in the bank only when they have
extra income.
SAVINGS BANK ACCOUNT
 As the name suggests this type of account is
suitable for people who have a definite income
and are looking to save money.
 For example, people who get salaries or people
who work as laborers. This type of account can
be opened with a minimum initial deposit that
varies from bank to bank.
 Withdrawals can be made either by signing a
withdrawal form or by issuing a cheque or by
using an ATM card
 Current Deposit Account

Banks open a current account for hospital,college

and suppermarketter. Like a savings bank account,
this account also requires a certain minimum
amount of deposit while opening the account.

 On this deposit, the bank does not pay any interest

on the balances. Rather the account holder pays a
certain amount each year as an operational charge.
 Fixed Deposit Account

• This type of deposit account allows the deposit to be made of

an amount for a specified period. This period of deposit may
range from 15 days to three years or more during which no
withdrawal is allowed.
Recurring Deposit Account
•The account can be opened by a person individually or jointly
with another, or by the guardian in the name of a minor.

•The rate of interest allowed on the deposits is higher than that

on a savings bank deposit but lower than the rate allowed on a
fixed deposit for the same period.
Home Safe Account or Money Box Scheme:
 For regular savings, the bank provides a safe or box
(Gullak) to the depositor. The safe or box cannot be
opened by the depositor,
Cumulative-cum-Sickness deposit Account:
 A certain fixed sum is deposited at regular intervals in
this account. The accumulated deposits over time
along with interest can be used for payment of
medical expenses, hospital charges, etc.
Home Construction deposit Scheme/Saving Account:
In this account, we can deposit the money regularly
either for the purchase or construction of a flat or house
in future.
 Depository Institutions

• Depository institutions accept deposits from

individuals and firms and use these funds to
participate in the debt market, making loans
or purchasing other debt instruments such as
Treasury bills.
• The deposit market is a special type of loan
market in which depositors “loan” money to
depository institutions, which in turn use the
funds to purchase other financial assets.
• The major types of depository institution are
commercial banks, savings and loan
associations, mutual savings banks, and
credit unions.
Commercial Banks
• Their main source of funds is demand
deposits (i.e., checking account deposits) and
various types of savings deposits (including
time deposits and certificates of deposit).
 Savings and Loan Associations

• Savings and loan associations were originally designed as

mutual associations, (i.e., owned by depositors) to
convert funds from savings accounts into mortgage loans
Mutual Savings Banks
• Mutual savings banks are much like savings and loans,
but are owned cooperatively by members with a
common interest, such as company employees, union
members, or congregation members
Credit Unions
• Credit unions are organized as cooperative depository
institutions, much like mutual savings banks. Depositors
are credited with purchasing shares in the cooperative,
which they own and operate.
 Non-depository institutions

• Non-depository institutions do not accept

checkable deposits.
• With one exception that will be noted shortly, you
cannot simply write a check to withdraw funds
from a non-depository institution
Mutual Funds
• Mutual funds sell shares to investors, and invest
the proceeds in a wide choice of assets.
• Owners of shares receive pro rata shares of the
earnings from these assets, minus management
and other fees assessed by the fund
Insurance Companies
• Insurance companies protect individuals against risk.
Life insurance companies accept regular payments from
individuals in exchange for contracted payments in the
event of the insured’s death
• Other insurance companies, called fire and casualty
insurance companies, insure against loss from fire,
theft, and accident
Pension Funds
• Private and government (including federal, state, and
local) pension funds provide retirement income to
employees covered by the pension plan.
• Funds are collected by regular contributions from
employees, usually via payroll deduction.
Brokerage Firms
 Brokerage firms serve the valuable function
of linking buyers and sellers of financial
assets. In this regard they function as
intermediaries, earning a fee for each
transaction they create.
Modern brokerage firms such as Merrill
Lynch and Charles Schwab also compete with
depository institutions in the deposit market,
where they attract depositors with money
market mutual funds.
 Investment Fund
• An investment fund is a way of investing money
alongside other investors in order to benefit from
the inherent advantages of working as part of a
group such as reducing the risks of the investment
by a significant percentage.
• These advantages include ability to hire
professional investment managers, who may offer
better returns and more adequate risk
management; benefit from economies of scale,
i.e., lower transaction costs; and increase the
asset diversification to reduce some unsystematic
risk.
 The difference between a commercial bank and other financial institutions

• The main difference between a commercial

bank and other financial institutions is that
commercial banks can take deposits from
their customers
• The secondary distinction between other
financial institutions and commercial banks is
that commercial banks invest their clients’
money by lending it out.