A financial institution serves an important function in the financial world. It serves as a go-between for investors and corporations by carrying out financial transactions. The financial markets that a financial institution operates in are complex, with many players exchanging money in different forms. Because a financial institution serves multiple purposes, its organizational structure will reflect the diversity of those purposes.
There are many different types of financial institutions that serve the financial markets, and they exist both on paper and in actual brick-and-mortar form. According to the book "Financial Markets and Institutions" by Jeff Madura, types of financial institutions include:
- commercial banks
- pension funds
- insurance companies
- mutual funds
- securities firms
- finance companies
- credit unions
- savings institutions
In terms of the size of their assets, pension funds, insurance companies, mutual funds and commercial banks comprise 84 percent of the financial market.
Structure and Regulation
Some aspects of a financial institution's organizational structure are determined by the national laws under which the institution operates. For instance, after the Greek financial markets were deregulated in the 1980s, there was significant growth -- 48 percent from 1981 to 1996 -- in the number of bank branches serving customers. In the U.S., various financial institutions are regulated by different entities, such as investment firms being regulated by the U.S. Securities and Exchange Commission and banks being regulated by the Federal Reserve system.
Relationship to Products and Services
A multi-branch bank is an example of a financial institution that develops according to what it needs to sell, which are financial products and services. A national or regional bank operates different branches in convenient locations for customers so they will come in and perform their transactions, such as depositing money. But branches also exist so that the bank can sell financial products and services. For example, a bank representative will meet with a potential homeowner to sell a home loan product.
Structure and Risk
A financial institution's structure also develops around the concept of risk. Every financial institution makes monetary transactions and performs other activities in a risky environment. The level of risk, which can be viewed in terms of how much of a financial return an investor can recover from an investment, will influence which customers interact with a financial institution. For example, working people will deposit checking and savings funds to earn a low level of guaranteed interest, but only people with discretionary funds will generally risk their money for higher earnings in financial products like stocks and mutual funds.
- "Financial Markets and Institutions"; Jeff Madura; 2008
- "Performance of Financial Institutions"; Patrick T. Harker, et al.; 2000
Audra Bianca has been writing professionally since 2007, with her work covering a variety of subjects and appearing on various websites. Her favorite audiences to write for are small-business owners and job searchers. She holds a Bachelor of Arts in history and a Master of Public Administration from a Florida public university.