# Understanding Financial Institutions: Banks, Loans, and Investments Explained

> **Definition**
>
> A financial institution is a company involved in financial and monetary transactions such as deposits, loans, investments, insurance, brokerages, and investment dealers.

## What Is a Financial Institution (FI)?

A financial institution (FI) is in the business of facilitating financial and monetary transactions such as deposits, loans, [investments](https://www.investopedia.com/articles/basics/11/3-s-simple-investing.asp), and currency exchange. Financial institutions connect savers and borrowers, playing a crucial part in a capitalist economy. They include banks, insurance companies, asset management companies, brokerage firms, and investment banking firms. Regulation of financial institutions is vital to maintaining the integrity and trust in financial systems.

### Key Takeaways

*   Financial institutions serve as intermediaries between those who have capital to invest or lend and those who need funds, facilitating economic activity by enabling savings, investments, and efficient allocation of resources.
*   Financial institutions are categorized into a variety of types including banks, credit unions, insurance companies, and investment companies, each offering distinct services like deposits, loans, investments, and risk management products.
*   Regulation is a critical component in the functioning of financial institutions, ensuring economic stability and consumer protection. Multiple federal and state agencies are involved in regulating these entities to prevent financial crises.
*   The presence of robust financial institutions is fundamental to the growth and stability of capitalist economies, enabling businesses to expand and individuals to achieve financial goals like homeownership and education.

![Financial Institution](https://www.investopedia.com/thmb/TE6zRZkv4KfVjhK5n4xHzKGye7o=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/financialinstitution-dc2ec0e00bc44e24adbb9c542f0a03e6.jpg)

*— Investopedia / NoNo Flores*

## How Financial Institutions Operate

Financial institutions often match savers' or investors' funds with those seeking funds, such as borrowers or businesses seeking to trade shares of ownership for funds. Typically, this leads to future payments from the borrower or business to the saver or investor. The tools for matching all of these parties up include products such as loans, and markets, such as a stock exchange.

At the most basic level, financial institutions allow people to access the money they need. For example, although banks do many things, their primary role is to take in funds—called deposits—from those with money, pool the deposits, and lend the money to others who need funds. Banks are intermediaries between depositors (who lend money to the bank) and borrowers (who the bank lends money to).

This works well because while some depositors need their money at any given moment, most do not. So banks can use deposits to make long-term loans. This applies to almost every entity and individual in a capitalist system: individuals and households, financial and nonfinancial firms, and national and local governments.

> **Important**
>
> Without financial institutions, businesses could not grow. And households could only buy goods, education, and housing that the families have cash for today.

Financial institutions serve most people in some way as a critical part of any economy—whether in banking, insurance, or securities markets. Individuals and companies rely on financial institutions for transactions and investing. For example, the health of a nation's banking system is a linchpin of economic stability. Loss of confidence in a financial institution can easily lead to a [bank run](https://www.investopedia.com/terms/b/bankrun.asp).

## The Role of Financial Institutions in Capital Markets

Capital markets are important for functioning capitalist economies because they channel savings and investments between suppliers and those in need. Suppliers are people or institutions with capital to lend or invest. Suppliers typically include banks and [investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp). Those seeking capital are businesses, governments, and individuals.

Financial institutions direct capital to where it is most needed in capital markets. A bank collects deposits from customers and lends the money to borrowers, facilitating efficiency in those markets.  

## Financial Institution Regulations and Oversight

Governments regulate financial institutions because they are crucial to the economy. Bankruptcies of financial institutions, for instance, can create panic. Federal and state agencies can regulate financial institutions. Sometimes, multiple agencies regulate the same institution.  

### Federal Depository Regulators

Federal regulators oversee commercial banks, savings associations, and credit unions that accept deposits.

*   **U.S. Federal Reserve (The Fed)**: Regulator of [Federal Reserve System](https://www.investopedia.com/terms/f/federalreservebank.asp) member state banks, foreign banking organizations operating in the United States, and financial [holding companies](https://www.investopedia.com/terms/h/holdingcompany.asp#toc-example-of-a-holding-company).
*   **Office of the Comptroller of the Currency (OCC):** [The OCC](https://www.investopedia.com/terms/o/office-comptroller-currency-occ.asp) is responsible for seeing that national banks and federal savings associations operate safely, provide equal access to financial services, treat customers fairly, and comply with applicable laws and regulations. It also regulates U.S. federal branches of foreign banks and federally chartered thrift institutions.
*   **Federal Deposit Insurance Corporation (FDIC)**: [The FDIC](https://www.investopedia.com/terms/f/fdic.asp) regulates federally insured depository institutions, [state banks that aren't members of the Federal Reserve System](https://www.investopedia.com/terms/i/industrial-bank.asp), and state-chartered thrift institutions.
*   **National Credit Union Administration (NCUA):** [NCUA](https://www.investopedia.com/terms/n/ncua.asp) supervises and insures federally chartered or insured [credit unions](https://www.investopedia.com/terms/c/creditunion.asp).

> **Important**
>
> The FDIC insures deposits in state banks and federal savings associations if a bank fails. The FDIC insures regular deposit accounts of up to $250,000 per depositor per institution. Offering this insurance reassures individuals and businesses regarding the safety of their finances with financial institutions. Like the FDIC, the NCUA insures deposit amounts of up to $250,000.

### Federal Securities Markets Regulators

Two federal institutions regulate products, markets, and market participants for securities such as stocks, bonds, and derivatives.

*   **Securities and Exchange Commission (SEC):** [The SEC](https://www.investopedia.com/terms/s/sec.asp) regulates securities exchanges, broker-dealers, and corporations selling securities to the public; investment funds, including mutual funds; investment advisers, including hedge funds with assets over $150 million; and investment companies.
*   **Commodities Futures Trading Commission (CFTC):** [The CFTC](https://www.investopedia.com/terms/c/cftc.asp) regulates futures exchanges, futures commission merchants, commodity pool operators, commodity trading advisors, derivatives, clearing organizations, and designated contract markets.

### Government-Sponsored Enterprise (GSE) Regulators

These dedicated regulators exclusively oversee government-sponsored enterprises, which are quasi-governmental entities established to enhance the flow of credit to specific sectors of the U.S. economy.

*   **Federal Housing Finance Agency:** [The FHFA](https://www.investopedia.com/terms/f/fhfa.asp) supervises, regulates, and performs oversight of the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Bank System.
*   **Farm Credit Administration:** This agency regulates Farm Credit System institutions and Farmer Mac, credit sources for eligible persons in agriculture and rural America.

### Consumer Protection Regulator

Currently, the [Consumer Financial Protection Bureau (CFPB)](https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp) is the only national consumer entity tasked with exclusively regulating consumer products. CFPB's purview includes nonbank mortgage-related firms, private student lenders, payday lenders, and other large “consumer financial entities,” as determined by the CFPB. CFPB is the rulemaking consumer protection authority for all banks and has supervisory authority for banks with more than $10 billion in assets.  

### State Regulators

States may regulate financial institutions in addition to or instead of federal regulators. For example, there is minimal federal oversight of the insurance industry. Each state government has a department that licenses and regulates insurance companies and any company selling insurance products. States may also regulate banking, securities, and consumer protections in addition to federal regulators who work in those areas.

## Explore Different Types of Financial Institutions

Financial institutions provide a variety of products and services for individuals and businesses. The specific services offered vary widely between [different types of financial institutions](https://www.investopedia.com/ask/answers/061615/what-are-major-categories-financial-institutions-and-what-are-their-primary-roles.asp). Here are some of the types consumers are most likely to use:

### Banks, Credit Unions, and Savings & Loans

These institutions accept deposits, offer checking and savings accounts, and provide loans and products like CDs. They may also act as payment agents via credit cards, wire transfers, and currency exchange.

These types of financial institution can include:

*   Commercial or private banks
*   Savings and loans associations
*   Credit unions
*   Foreign banks
*   Savings banks, industrial institutions, thrifts

### Investment Companies, Advisors, and Brokers

Investment companies issue and invest in securities (stocks, bonds, mutual funds and ETFs or exchange-traded funds). [Mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) are one example of a product offered by an investment company, where many investors' money is pooled and invested in stocks, bonds, money market instruments, other securities, or even cash in an ongoing manner.

Other examples of investment-related financial institutions include investment advisors and brokers. Brokers accept and carry out orders to buy and sell investments (such as securities) for customers.

### Insurance Companies

Among the most familiar [non-bank financial institutions](https://www.investopedia.com/terms/n/nbfcs.asp) are insurance companies. Offering insurance is one of the oldest financial services for individuals and businesses. Protection of assets and protection against financial risk, secured through insurance products, is an essential service that facilitates individual and corporate investments that fuel economic growth.

Insurance is primarily regulated at the state level, but the U.S. Treasury's Federal Insurance Office (FIO) does monitor the industry and plays an [advisory role](https://www.investopedia.com/ask/answers/05/investmentbankfig.asp).

## Why Are Financial Institutions Important?

Financial institutions are key because they create a [money and asset marketplace](https://www.investopedia.com/ask/answers/05/investmentbankfig.asp), efficiently allocating capital. For example, a bank takes in customer deposits and lends the money to borrowers. Without the bank as an intermediary, any individual is unlikely to find a qualified borrower or know how to service the loan. Via the bank, the depositor can earn interest as a result. Likewise, investment banks find investors to market a company's shares or bonds to.

## What Are the Different Types of Financial Institutions?

The most common types of financial institutions include banks, credit unions, insurance companies, and investment companies. These entities offer various products and services for individual and commercial clients, such as deposits, loans, investments, and currency exchange.

## Which Agency Oversees Banking Operations in the United States?

Several agencies oversee banking operations in the U.S., including the Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA).

## What's the Difference Between a Commercial and Investment Bank?

A commercial bank, where most people do their banking, is a type of financial institution that accepts deposits, offers checking account services, makes business, personal, and mortgage loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses.[  
Investment banks](https://www.investopedia.com/terms/i/investmentbank.asp) specialize in providing services designed to facilitate business operations. This might include raising money through financing and equity offerings, including initial public offerings (IPOs). They also commonly offer brokerage services for investors, act as market makers for trading exchanges, and manage mergers, acquisitions, and other corporate restructurings.

## Which Agency Regulates Investment Banking Firms?

The Securities and Exchange Commission (SEC) oversees the operations of investment banks as these banks deal with securities.

## The Bottom Line

Financial institutions play a crucial role in facilitating economic transactions such as deposits, loans, and investments, and are important to a nation's economic growth and stability. They include banks, insurance companies, and investment firms, and provide a wide array of necessary financial services to individuals and businesses. Financial institutions connect savers and investors with those seeking funds, which allows efficient capital allocation and supports entrepreneurial activities. The Federal Reserve, OCC, SEC, and FDIC, which regulate financial institutions in different ways, help ensure the health and stability of financial institutions, and protection of consumers.  

> **Article Sources**
>
> 1.  CRS. "[Introduction to Financial Services: The Regulatory Framework](https://crsreports.congress.gov/product/pdf/IF/IF11065)", Page 2.
>     
> 2.  U.S. Department of Treasury. "[About FIO](https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/federal-insurance-office/about-fio)."
>     
> 3.  CRS. "[Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework](https://crsreports.congress.gov/product/pdf/R/R44918/8)."
>     
> 4.  Federal Deposit Insurance Corporation. "[Are My Deposit Accounts Insured by the FDIC?](https://www.fdic.gov/resources/deposit-insurance/financial-products-insured/)"
>     
> 5.  NCUA. "[Share Insurance Fund Overview](https://ncua.gov/support-services/share-insurance-fund)."
>     
> 6.  FHFA. "[FHFA At-A-Glance](https://www.fhfa.gov/AboutUs)."
>     
> 7.  Farm Credit Administration. "[About Us](https://www.fca.gov/about/about-fca)."
>     
> 8.  CRS. "[Introduction to Financial Services: The Regulatory Framework](https://crsreports.congress.gov/product/pdf/IF/IF11065)," Page 24.
>     
> 9.  Investor.gov. "[Investment Company](https://www.investor.gov/introduction-investing/investing-basics/glossary/investment-company)."
>     
> 10.  Investor.gov. "[Brokers](https://www.investor.gov/introduction-investing/getting-started/working-investment-professional/brokers)."
>      
> 11.  Duke University. "[What is an Investment Bank?](https://econ.duke.edu/sites/econ.duke.edu/files/file-attachments/Investment%20Banking%20Demystified.pdf)"
>      
> 12.  SEC. "[Rules and Regulations for the Securities and Exchange Commission and Major Securities Laws](https://www.sec.gov/about/laws/secrulesregs)."