All Banks are a financial institution but all financial institutions are not bank

“All Banks are a financial institution but all financial institutions are not bank.” Discuss and place your argument

Introduction:

A bank which belongs to financial activities is a financial institution and act as a financial intermediary which accepts deposits and savings those deposits launch lending activities, either directly or through capital markets. Bank communicates customers with capital deficits to customers with capital surpluses. On the other hand financial institution is an organization which acts as a channel between servers and borrowers. This institution collects money and puts it into assets such as stocks, bonds, bank deposits, or loans is considered a financial institution. But basically differentiating between bank and financial institution is similar to comparing a deposit taking financial institution with a non-deposit taking financial institution. Bank accepts customer cash deposits and then provides financial services like bank accounts, loans, share trading account, mutual funds, etc. But financial institution does not accept customer cash deposits but provides all financial services except bank accounts and bank interact directly with customers while a financial institution interacts with banks and governments. So financial institute provide financial service to customers but they are not authorized to collect customer’s deposits and provide deposit accounts, whereas the banks are authorized to do both. So, Banking is a financial institution but all financial institutions are not bank.

Banking law and Financial Institution law:

Banking and financial institution law is not a describe area of law like as contract of trots. It conveniently describes however the collection of legal principals which impact on banking and financial institutions transaction and on the banker-customer, FI-customer relationship. In that’s sense the activity of banking and financial institution in the location at which a divers ranges of legal principles interact which is called banking and financial institution law, For example banking act of 1959 and Financial Services Modernization Act of 1999 which is known as Gramm-Leach-Bliley Act.

Banking business under banking act 1959:

Under section 5(1) banking business means:

(a) A business that consists of banking within the meaning of paragraph 51(xiii)[1] of the constitution, or

(b) A business that is carried on by a corporation to which paragraph 5(xx)[2] of the constitution applies and that consists to any extent of

1. Both taking money on deposit and making advances of money or

2. Other financial activities prescribed by the regulation for the purpose of this definition.

So banking and Financial Institute law determinate how a bank and financial institute must operate. Although financial institution is a broad sector which constitute with such as commercial bank, mortgage bank etc. and other financial institution like as insurance company, credit union etc. The regulation of FI differs from country to country. Regulation structures differ in each country, but typically involve prudential regulation as well as consumer protection and market stability. Some countries have one consolidated agency that regulates all financial institutions while others have separate agencies for different types of institutions such as banks, insurance companies and brokers.

Basic Differences between Banking and Financial Institution’s:

In today’s world different types of banks and financial institutions are running their business and every organization now involved attracting the retail customers that means the middle income group people of the country. Both banks and the financial institutes are in the market, so it makes confusion to all the general people about the activities of these organizations. For these reason this article helps to makes differentiate between these.

Usually bank is a corporation which accepts deposits, makes loans, pays checks, and performs related services for the public. The Bank Holding Company Act of 1956 defines a bank as any depository financial institution that accepts checking accounts or makes commercial loans, and its deposits are insured by a federal deposit insurance agency. Every bank gain money by reinvesting these funds in longer-term assets. For this reason bank acts as a middleman between suppliers of funds and users of funds, substituting its own credit judgment for that of the ultimate suppliers of funds, collecting those funds from three sources: checking accounts, savings, and time deposits; short-term borrowings from other banks. Many people think that banks play only narrow roll in the economy taking deposit and making loans the modern banks has bad to adopt new roles to remain competitive and responsive to public needs. Baking’s principal roles today are as follows which are similar like as financial institution.

According to the Gramm-Leach-Bliley financial intuitions are the companies that offer consumers financial products or service like loan financial or investment advice or insurance which explain their information sharing practices to their customer. A financial institution is an organization that does not accept customer cash deposits but provides all financial services except bank accounts. The main interest of a bank to help in business transactions and savings/investment activities while an financial institution main interest is in the stabilization of the currency which differentiated the financial institution from the bank.

Similarity between Bank and Financial institution:

There are two major types of financial institutions: one is banks (deposit-type financial institutions) and other is nonbanks (non-deposit-type financial institutions). Deposit-type financial institutionsmainly fall under four classifications: commercial banks, savings and loan associations, credit unions, and the newer Internet banks.

Both banks and nonbanks offer online financial services; these services allow to access bank balances and other resources twenty-four hours a day. With the blurring of roles between deposit and non-deposit institutions, banks can now offer investment services and non-banks can offer check-writing privileges, credit cards, and savings accounts. For example Commercial banks are the principal financial institution which is directly concerned in the finance of the real estate. The real estate’s they are involved have activities involving short term loans disbursement. Commercial banks also act as a mediator between an issuer of securities; the investing clients facilitate mergers and other business reorganizations. The banks can also act as a broker for clients. Basically credit union gives short term loans are mainly given to the member to purchase automobiles, household needs, medical needs and emergencies. The loans are also use for agricultural production and small scale business.

The activities of bank:

The main activities of bank are:

1. Store money: Storing money for the customeris themain objective for every bank. Traditional bank, saving institution offer these service. Customer use bank account such as regular saving account because most provide save locations to store deposit money that is FDIC secured. These means customer will not lose their regular money.

2. Facilitate money: Bank and financial institution enable their customer to pay others. Every customer is giving checks both paper and electronic. The financial institution sends money from the customer’s account to their designated payee[3].

3. Loan money: all banks allow lending to gain business profit. They also extra charge for the loan. Loan are use to purchase car or lease automobiles etc. Each loan interest varies from bank to bank. The bank uses customer’s money or the money from saving accounts in order to loan money to other customer.

The activities of financial institution:

1. Syndicate lending: It represent the agent bank in syndicated credit facilities, from negotiating and documenting facility at inception to advising the agent in connection with restructurings and bankruptcies. Since clients often finance companies with complex capital structures, the firm routinely addresses sophisticated inter creditor issues.

2. Asset-Based Lending: It representing clients in asset-based transactions that involve such collateral as receivables, inventory, documents of title, investment securities, intellectual property, machinery and equipment, and real estate.

3. Commercial Lending – Advising the clients with respect to granting or obtaining revolving credit and term loan facilities. Clients look to the firm for assistance with financing of ongoing businesses, as well as acquisition financing and the sale of portfolios of existing loans.

4. Letters of Credit: Drafting, negotiating, and litigating the provisions and obligations arising under commercial letters of credit, standby letters of credit. International Standby Practices and the underlying state law embodied in the Uniform Commercial Code, all of which govern letters of credit.

5. Project and Lease Finance – Representing lenders, lessors and equity investors in highly-sophisticated domestic and international equipment and facility financings structured through leases or through limited or non-recourse project financings.

Comparative assessment:

From this discussion we see that the purpose of bank and financial institutions are same but banking is totally different form some financial institutions by its activities. Although depository financial institutions including the commercial bank, saving bank, credit union etc which are actually bank and these bank has multidimensional function. For these reason we called these type bank is a financial institution because of fulfill requirement of these sector. On the other hand pension fund, insurance company, mortgage financing firm etc. are the financial institutions but these type of institution are totally different from the bank because these type of financial institution does not accept customer cash deposits but provides all financial services except bank accounts. For this reason the depository financial institutions are the bank but the non depository financial institutions are not bank. Because the main function of the banking is to deposit money from the customer and make loan to the customers. Bank also invests its money to real estate sector such like as commercial bank. So all banks acts as a financial institution but non depository financial institutions are not bank. Now it is proved that banking is a financial institution but not all financial institutions bank.

Conclusion:

Although financial institute is a big sector which formed with the combination of commercial bank, credit union, saving and loan association also known as depository bank. These banks also accept checking accounts or makes commercial loans, and its deposits are insured by a federal deposit insurance agency. This type of institutes offers consumers financial products or service like loan financial or investment advice or insurance which explain their information sharing practices to their customer. On the other hand non-bank financial institute can offer check-writing privileges, credit cards, and savings accounts. In this case banking is similar not to all financial institute. Because bank issue the check, take the deposit from the customer and make loan for the customer and invest money in different sector like real estate sector. So, the banking behaviors are like as a financial institute but all financial institutes are not bank.

References

• Legal Service Commission, Law Handbook Online, “Non-bank financial institutions” http://www.lawhandbook.sa.gov.au/ch07s05s06s03.php

• FRB: Speech, Greenspan – Do efficient financial markets mitigate crises? – October 19, 1999

• Carmichael, Jeffrey, and Michael Pomerleano. Development and Regulation of Non-Bank Financial Institutions. World Bank Publications, 2002, 19.

• Non-Bank Financial Institutions: A Study of Five Sectors, http://osdbu.treas.gov/cooply.html

http://bbamba.info/Articles/Business/Roles-of-Commercial-Bank.html

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=574481

http://www.answers.com/topic/bank

[1] Banking, other than State banking; also State banking extending beyond the limits of State concerned, the incorporation of banks, and the issue of paper money.

[2] Foreign corporations and trading or financial corporation’s formed within the limits of the Commonwealth.

[3] For example a bank customer may receive a paycheck or direct deposit from his employer. Then he deposits the check to bank account to have access to all funds.

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