Question

Identify the major types of financial institutions and their significance in the financial system. Describe how the institutions were affected by the financial crisis.

Answer 1

Major types of financial institution are mentioned below :

1.) Mortgage companies

Mortgage companies lends funds to the borrowers who were in need of the big amount of money and some mortgage companies do not take any charges or originating fees and lend to the borrowers a sum of money. This mortgage helps in the financial systems in many ways that these companies provide funds and due to this the money gets floated in the investment channels and this good for country economy also because it contributes in increase of Gross domestic product (GDP).

Financial crisis affects mortgage company because of there are no funds or less funds backed with company then they cant be able to provide loans to the borrowers and hence due to the crises of funds the company may suffer huge loss.

2.) Insurance companies - Individuals and businesses get services from insurance companies to protect against financial loss due to death, disability, accidents, property damage, and other misfortunes.

Financial system would be strong because of the business men and entrepreneurs are mostly dependent on the insurance companies and due to them the entrepreneurs are investing money with confidence and and insurance companies helps prevent the invested money loss to recover via claim form the insurance companies.

3.) Brokerage firms - Brokerage firms help individuals and institutions in buying and selling shares among available investors. Customers of brokerage firms can place trades of stocks, bonds, mutual funds, exchange-traded funds (ETF).

Brokerage firms play significant role in getting the buyer and seller of shares and securities to transact with each other and brokers charge some amount of commissions for these services given to both. These transactions of buying and selling of shares of the company , the money start foating in the market and companies also get equity for running their business and company pay to their share holders in the form of dividend.

4.) Investment banks - These investment banks do not provide services of depositing money but provide individuals and businesses to raise their investment capital by purchasing of securities and mutual funds.

Investment banks helps the financial system to grow because they provide funds to those who want to expand their business and if business expands the lot of people get benefit in terms of money such as employees , labor, suppliers, share holders and money lenders like financial institution.

The financial crisis hits badly to this banks and they will not able to increase their sale of mutual funds and other securitirs.

5.)Online Banks- These banks are the new entrant to the financial institution and are also known as the Internet banks. These banks provide same types of service which the other banks provide but they do online not from the specific locations.

These banks provide loans to the borrowers and get deposits also and the bank are the most common source to grow the financial position of any economy and helps the financial aspect of the country.

These banks will suffer of the financial crisis takes place because the deposits will be lesser and the borrowers will be more in this situation they will be suffer loss.

6 .) Central banks / Federal reserve bank - Central Bank is the financial institution responsible for the supervision and management of all other working banks and in United states it is known as federal reserve bank. This bank also maintain their Repo rate and because all other banks have to maintain their ration of deposits with the central banks ,which is the betterment for the people of.the country in periods of financial crises.

Central banks have the reserves of all other banks so they can use the reserves in the urge of financial crisis.