What Is a Financial Institution?
Written by True Tamplin, BSc, CEPF®
Updated on July 19, 2021
Financial Institution Definition
A financial institution is an umbrella term for a company dealing with financial and monetary transactions, including loans, deposits, and/or investments.
“Financial institution”covers a wide range of businesses and activities. They can operate on several scales, ranging from local to global.
Define Financial Institution in Simple Terms
The exact definition of a financial institution is contained in Title 31 of the United States code.
It lists 26 different types of financial institutions, ranging from commercial banks and insurance companies to casinos and pawnbrokers.
Financial institutions primarily make their money through interest on loans, transaction fees, and commissions for performing certain services.
What Is a Financial Institution in Finance?
The purpose of financial institutions is to handle and facilitate monetary transactions at the consumer level and beyond.
Most individuals in developed countries have an occasional, if not ongoing, need for a financial institution.
They are a vital part of the economy, and because of their importance, governments consider it crucial to oversee and regulate their business.
In the US, the Federal Deposit Insurance Corporation (FDIC) insures consumer deposit accounts to maintain individual confidence in the safety of putting money into banks.
Historically, loss of confidence in financial institutions leads to bank runs, where citizens withdraw their accounts en masse, effectively defunding banks and threatening a cascading financial collapse.
Financial Institution Example
Some examples of financial institutions are:
- All manner of banks, from local credit unions to international investment banks
- Insurance companies
- Wealth managers