The major components of financial institutes are banks, insurance companies, credit card agencies, investment companies, consumer finance companies, and other specialized financial institutes. Discuss

Introduction

In any economy, financial institutes play an important role because all the financial dealings and matters are handled and monitored by such institutes. The major components of financial institutes are banks, insurance companies, credit card agencies, investment companies, consumer finance companies, and other specialized financial institutes.

Though all the components have a common role to play in the country’s economy, there is a significant difference between the banking and non-banking sectors. The banking sectors include commercial banks including private banks, public sector banks, and foreign banks that are mainly responsible for ensuring fiscal stability in the country. On the other hand, the non-banking sector includes all the other components like credit card agencies, investment companies, and insurance companies that are responsible to regulate and monitor lending as well as borrowing of funds.

The key difference between banks and other financial institutes is the facility of cash deposits. This unique facility is provided by the banking sector to all its customers through means of saving accounts and current accounts. This is an easy and effective way of handling all the personal as well as business finances. Apart from this, banks also serve as financial intermediaries offering a host of financial services to all customers.

Non-banking financial institutes do provide various types of financial services but are not entitled to offer a saving account. These institutes mainly serve as investment tools or to fulfill the financial needs of individuals and companies. However, in the present day, banks are gradually expanding their operations and are offering all financial services including investment, loan, credit, and bonds under one shelter. Although Every Bank is differentiated from other financial institution by the associated law for banking and services provide by banks; In the book named “Commercial Banking” peter s. rose mentioned following laws associated with banking –

National Currency and Bank Acts (1863-64)

The first major federal laws in banking were the National Currency and Banks Acts which was passed during the Civil War. These laws set up a system for chartering national banks through a newly created division of the Comptroller of currency. For starting a Bank permission from the comptroller of the currency is mandatory but for other financial institution it is not.

The Federal Reserve Act (1913)

Central bank of the country is charged with controlling the nation’s supply and cost of money and credit to achieve economic goals. All banks will be regulated by the central bank of the country but for other financial institution this interaction is minimal and to a certain extent.

[S.Rose, Peter. Commercial Bank Management. Boston: bur, 2008. Print.]

Glass-Steagall Act (1933)

An act passed by Congress in 1933 that prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities. The act was dismantled in 1999. Consequently, the distinction between commercial banks and brokerage firms has blurred; many banks own brokerage firms and provide investment services.

This law is indicating that before 1933 banks could provide almost every type of financial services to their customer, and after the establishment of this law banks were totally separated from other financial institutions.

[S.Rose, Peter. Commercial Bank Management. Boston: bur, 2008. Print.]

Federal Deposit Insurance Corporation

The U.S. Corporations that insures deposits against bank failure in the U.S. The FDIC was created in 1933 to maintain public confidence and encourage stability in the financial system through the promotion of sound banking practices. Every bank need to have an insurance policy to run their operations and which is mandatory. Other financial institutions do not need such insurance policy to run their operations, and this obligation separates banks from other financial institutions.

[S.Rose, Peter. Commercial Bank Management. Boston: bur, 2008. Print.]

Bank Merger Act and Its Amendments (1960 and 1966)

This is a federal law which requires government approval for acquiring or merging with another banks or business. That means bank cannot merge or acquire another bank without taking the approval of the comptroller of currency. On the other hand other financial institution won’t have to seek approval from the same authority, other financial institution just needed to take the approval from the SEC in case of merging or acquiring another business.

[S.Rose, Peter. Commercial Bank Management. Boston: bur, 2008. Print.]

The Depository Institutions Deregulation and Monetary Control Act (1980)

The law was passed in 1980 which grant depository institutions new service powers and eliminate regulated deposit interest rate. These laws help make non-bank depository institution such as credit unions, saving and loan association more competitive and viable by expanding the range of permissible services of non-banking institutions. This law precisely differentiating that, bank and non-banking financial institution exists and banks are totally different form of financial institutions.

[S.Rose, Peter. Commercial Bank Management. Boston: bur, 2008. Print.]

Garn-St Germain Depository Institutions Act(1982)

This law gives further power to non-bank depository institutions to act like a bank, according to this law non-bank depository institutions were allowed to sell interest bearing checking accounts to governments as well as to individuals and nonprofit organizations.

[S.Rose, Peter. Commercial Bank Management. Boston: bur, 2008. Print.]

Competitive Equality in Banking Act (1987)

Federal law which are allowing nonbank institutions to be formed, and which are requiring depository institutions to publish their policies for giving credit for newly deposited funds.

[S.Rose, Peter. Commercial Bank Management. Boston: bur, 2008. Print.]

The Financial Institutions Reform, Recovery, and Enforcement Act (1989)

This law was designed to resolve the failures of depository institutions and bring insurance for thrifts under the management of the FDIC. It was applied directly on non-banking institutions as they were failing to keep people’s faith and banks were getting benefit from this provision. From this provision we can easily extract that non-banking institutions and banking industry were always considered separately, although non-banking institutions had the power to provide service like a bank.

[S.Rose, Peter. Commercial Bank Management. Boston: bur, 2008. Print.]

The Gramm-Leach-Bliley Act (1999)

This regarded as one of the most important banking laws of the 20th century, which changed the whole definition of banking system and differentiated banking and non-banking services perfectly. This law implied following changes;

Commercial banks can affiliate with insurance companies and securities films (either through the holding-company route or through a bank subsidiary structure), provided they are well capitalized and have regulatory approval from their principal federal supervisory agency.

Consumer protections must be put in place for consumers considering the purchase of insurance through a bank. Consumers must bereminded that no depository financial service products, including insurance, are not FDIC-insured and the nature of insurance cannot be imposed by a lender as a requirement for obtaining a credit from the same lending institution.

Bank, thrifts,credit unions,insurance companies, security brokers, and other financial institutions must inform consumers about their privacy policies when accounts are opened and at least once a year thereafter, indicating whether nonpublic personal information can be shared with an affiliated firm or with outsiders. Customers are allowed to opt out of sharing personal information with unaffiliated parties (to be defined later by regulation).

[S.Rose, Peter. Commercial Bank Management. Boston: bur, 2008. Print.]

Summery on findings

Considering each and every law related to the Banking industry we can see that when any law is passed regarding banking industry there is a consideration on non-banking financial institution as well. By definition we can say that, Bank is an institution offering certain financial services, such as the safekeeping of money, conversion of domestic into and from foreign currencies, lending of money at interest, and acceptance of bills of exchange. On the other hand,an establishment that focuses on dealing with financial transactions, such as investments, loans and deposits. Conventionally, financial institutions are composed of organizations such as banks, trust companies, insurance companies and investment dealers. Almost everyone has deal with a financial institution on a regular basis. Everything from depositing money to taking out loans and exchange currencies must be done through financial institutions.

Although every financial institution perform same type of financial services but banks are unique type of financial institution which have legal permission to offer saving account and current account for taking deposits from the depositors. These specific services of Banks differentiate Banks from other types of financial institutions. Another important aspect, that differentiates Banks from other financial institutions, is the regulatory body of the banks.Many different but related regulatory bodies and agencies oversee the banking and thrift industry. These begin with the the Central Bank of the country, Treasury, known as the “Fed”. Other regulatory bodies are the Federal Deposit Insurance Corporation (FDIC), the Comptroller of the Currency of the Country (OCC), and the National Credit Union Share Insurance Fund (NCUSIF). State and local banks are chartered by the states but can be overseen by both the FDIC and the Central Bank of the country. Of course, things are always changing in the banking industry, as there are always new rules and regulations being promulgated, such as the 1998 Homeowners Protection Act, which regulates mortgage insurance. On the other hand, financial organizations are all accountable to a regulatory body overseeing the financial services industry. The three main bodies consist of Prudential Regulation Authority (PRA), The Australian Securities and Exchange Commission (SEC) and The Central Bank of the country. Whilst these three are the main arms to the financial services industry, and also Taxation department, Consumer credit code, Insurance council of the country, credit unions and The treasury department as well.

[NonBankFinancialInstitutionsRegulatoryAuthority(NBFIRA).webhttp://www.ifsc.co.bw/nbifira.php]

[BankingRegulationandSupervisionAgency.Web.http://www.bddk.org.tr/websitesi/english/Legislation/Legislation.aspx]

Therefore, analyzing every aspects and laws related with banking and other financial institution we find that banking industry was always separated from non-banking financial institution by the implied laws and regulations. Also, Banks have the power to provide every financial services which provided by other financial institution but any non-banking institution don’t have the power to provide core baking services such as offering saving and current account, and other retail banking services. By considering this we can say that-

“Every Bank is a financial institution but every financial institution in not a Bank”