Tuesday, August 18, 2009

classification of financial intermediaries

Financial intermediaries may be grouped in a variety of different ways. For example, we can identify depository intermediaries (commercial banks, savings and loan associations, mutual savings banks, and credit unions) and contractual intermediaries (insurance companies and pension funds). Depository institutions derive the bulk of their loanable funds from deposit accounts sold to the public, while contractual intermediaries attract funds by offering legal contracts to protect the saver against risk.
Other methods of classification focus upon the form of organization used by intermediary. For example, mutual organizations (prominent in the insurance industry and among savings and loans, mutual savings banks, and credit union) legally are owned by their policyholders, depositors, or borrowers. In contrast, stockholder-owned intermediaries are owned, as is any private corporation, by their stockholders, and the depositors or policyholders are simply creditors of the organization. Commercial banks, finance companies, investment companies, real estate investment trusts, and some insurance companies and savings and loans are stockholder-owned corporations.
We may also classify an intermediary as a unit, if it operates out of only one office, or a branch, if it conducts its business from several office locations. This distinction is especially important in the commercial banking industry and in savings banking, where both state and federal laws prohibit or restrict some forms of branching activity.
Some authorities find it useful to distinguish between local intermediaries and regional or national intermediaries. A financial institution is local in character if it receives the bulk of its funds and makes a majority of its loans and investment in the surrounding community (usually a city or country area). Most creditors unions, savings and loans, and smaller commercial banks are locally oriented intermediaries. Other financial institutions- especially insurance companies, finance companies, larger commercial banks, pension funds, and investment companies-tend to be regional or national in scope. Their sources of funds, loans, and investment in securities tend to cover wide geographic areas and may even reach into foreign markets. This distinction between local, regional, national, or international intermediaries is especially important in trying to assess the degree of competition prevailing in the financial institution's sector and in evaluating how well each institution is serving the public in its chosen market area.

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