Definition of financial institution (FI)

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What is a financial institution (FI)?

A financial institution (FI) is a company whose business is to process financial and monetary transactions such as deposits, loans, investments and foreign exchange transactions. Financial institutions encompass a wide range of business transactions within the financial services industry, including banks, trust companies, insurance companies, brokerage firms, and securities dealers.

Virtually everyone living in a developed economy has a permanent or at least periodic need for the services of financial institutions.

Key points to remember

  • A financial institution (FI) is a company whose business is to process financial and monetary transactions such as deposits, loans, investments and foreign exchange transactions.
  • Financial institutions encompass a wide range of business transactions within the financial services industry, including banks, trust companies, insurance companies, brokerage firms, and securities dealers.
  • Financial institutions can vary by size, scope and geography.

Understanding the financial institution

Financial institutions serve most people in one way or another, as financial operations are an essential part of any economy, with individuals and businesses relying on financial institutions for transactions and investments. Governments consider it imperative to supervise and regulate banks and financial institutions, as they are an integral part of the economy. Historically, bankruptcies of financial institutions can create panic.

In the United States, the Federal Deposit Insurance Corporation (FDIC) maintains regular deposit accounts to reassure individuals and businesses about the safety of their finances with financial institutions. The health of a country’s banking system is a pillar of economic stability. Loss of confidence in a financial institution can easily lead to a bank run.

Types of financial institutions

Financial institutions offer a wide range of products and services for individual and business customers. The specific services offered vary widely between different types of financial institutions.

Commercial banks

A commercial bank is a type of financial institution that accepts deposits, offers checking account services, provides business, personal and mortgage loans, and offers basic financial products such as certificates of deposit (CDs) and bank accounts. savings for individuals and small businesses. A commercial bank is where most people do their banking, as opposed to an investment bank.

Banks and similar business entities, such as savings banks or credit unions, offer the most commonly recognized and frequently used financial services: checking and savings accounts, mortgages and other types of loans for individuals and businesses. Banks also act as payment agents through credit cards, wire transfers, and exchange bureaus.

Financial institutions can operate at many scales, from local community credit unions to international investment banks.

Investment banks

Investment banks specialize in providing services designed to facilitate business operations, such as capital expenditure financing and equity offerings, including initial public offerings (IPOs). They also typically provide brokerage services to investors, act as market makers for trade, and handle mergers, acquisitions and other corporate restructurings.

Insurance companies

Among the best-known non-bank financial institutions are insurance companies. Insurance, whether for individuals or businesses, is one of the oldest financial services. Asset protection and financial risk protection, secured by insurance products, is an essential service that facilitates the investments of individuals and businesses that fuel economic growth.

Brokerage firms

Investment firms and brokerage houses, such as mutual fund and exchange-traded fund (ETF) provider Fidelity Investments, specialize in providing investment services that include wealth management services and financial advice. They also provide access to investment products that can range from stocks and bonds to lesser-known alternative investments, such as hedge funds and private equity investments.

Why are financial institutions (FIs) important?

Financial institutions serve most people in one way or another, as financial operations are an essential part of any economy, with individuals and businesses relying on financial institutions for transactions and investments. Governments consider it imperative to supervise and regulate banks and financial institutions, as they are an integral part of the economy. Historically, bankruptcies of financial institutions can create panic.

What are the different types of financial institutions?

The most common types of financial institutions are commercial banks, investment banks, insurance companies, and brokerage firms. These entities offer a wide range of products and services for retail and business customers such as deposits, loans, investments and foreign exchange.

What is the difference between a commercial bank and an investment bank?

A commercial bank, where most people do their banking, is a type of financial institution that accepts deposits, offers checking account services, provides business, personal, and mortgage loans, and offers basic financial products such as certificates of deposit (CDs) and savings accounts. individuals and small businesses. Investment banks specialize in providing services designed to facilitate business operations, such as capital expenditure financing and equity offerings, including initial public offerings (IPOs). They also typically provide brokerage services to investors, act as market makers for trade, and handle mergers, acquisitions and other corporate restructurings.


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