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A Financial Institution

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Karyl Garcia
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20 views1 page

A Financial Institution

Uploaded by

Karyl Garcia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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A financial institution is a company engaged in the business of dealing with

financial and monetary transactions such as deposits, loans, investments, and


currency exchange.
Financial institutions encompass a broad range of business operations within the
financial services sector including, banks, trust companies, insurance companies,
brokerage firms and investment dealers. Virtually everyone living in a developed
and developing economy has on ongoing or at least periodic need from the services
of financial institutions.
Financial institutions can operate at several scales from local community credit
unions to international investment banks.
The financial system matches savers and borrowers through two channels:
(1) financial markets, and
(2) banks and other financial intermediaries
These two channels are distinguished by how funds flow from savers, or lenders, to
borrowers and by the financial institutions involved. Funds flow from lenders to
borrowers directly through financial markets such as the New York Stock Exchange
and Philippine Stock Exchange or indirectly through financial intermediaries, such as
banks.
Commercial banks are the most important intermediaries. Commercial banks play
a key role in the financial system by taking in deposits from households and firms
and investing most of those deposits, either by making loans to households and
firms or by buying securities, such as government bonds, or securitized loans.
Many firms rely on bank loans to meet their short-term needs for credit, such as
funds to pay for inventories (which are goods firms have produced or purchased but
not yet sold) or to meet their payrolls. Many firms rely on bank loans to bridge the
gap between the time they must pay for inventories meet their payrolls and when
they receive revenues from the sales of goods and services. Some firms also rely on
bank loans to meet their long-term credit needs, such as funds they require to
physically expand the firm.
Insurance companies specialize in writing contracts to protect their policyholders
from the risk of financial losses associated with particular events, such as
automobile accidents or fires. Insurance companies collect premiums from
policyholders, which the companies then invest then obtain the funds necessary to
pay claims to policyholders and to cover their other costs. So, for instance, when
you buy an automobile insurance policy, the insurance company may lend the
premiums you pay to a hotel chain that needs funds to expand.

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