Function, Purpose, and Regulation of Financial Institutions Flashcards
Banks - Function
A bank performs financial transactions such as receiving, investing, and lending money.
Banks - Purpose
A bank is a financial intermediary. The bank accepts deposits, paying interest on those deposits. Banks then make loans from unused deposits, receiving interest from the borrowers.
Banks - Regulation
Bank regulation involves three federal agencies and fifty state agencies. If the bank is federally or nationally chartered, it is regulated by of
- the Comptroller of the Currency
- the Federal Reserve
- the Federal Deposit Insurance Corporation (FDIC).
A state-chartered bank is subject to regulatory authority of the particular state in which it is located, as well as the Federal Reserve, and the Federal Deposit
Insurance Corporation.
Savings and Loan (S&L)/Thrifts - Function and Purpose
Typically, the S&Ls acquire funds through time deposits. Funds are then used to make mortgage loans.
Savings and Loan (S&L)/Thrifts - Regulation
Like banks, S&Ls may be federally, or state chartered and are regulated by a branch of the FDIC and the Federal Home Bank Board.
Bank and S&L account insurance
The Federal Deposit Insurance Reform Act of 2005 merges the Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF) into the new Deposit Insurance Fund. Coverage depends
on the titling (ownership) of the account. Coverage is accumulative per titling.
Insurance Limitations
The standard insurance amount is $250,000 per depositor (owner), per insured bank for each ownership category. Only certain types of deposit products are insurable.
Ownership Categories
- Individual accounts
- Joint accounts: Regulations now allow for each individual to have his or her full $250,000 coverage on joint accounts. This means that a husband and wife could own one or more accounts at the same insured institution covered for an aggregate maximum of $500,000. This is also true of
someone sharing a joint account with a son, daughter, mother, father, etc. Example: A father has $250,000 in a joint account with his son and $250,000 in a joint account with his daughter. The father is insured for $250,000 ($125,000 each account), and the children are insured for $125,000
each. The total insured is $500,000. - Revocable trust (in trust for or payable on death to): Regulations now allow for an additional $250,000 per beneficiary named in a revocable living trust. Example: Man has revocable trust, names his wife as beneficiary $250,000.
- IRAs and Keoghs: IRA and Keogh funds will be insured separately from any non-retirement funds. The regulations allow for an additional $250,000 per account.
Insurable and Not Insurable Deposit Products
Insurable
* Checking accounts
* Savings accounts
* Money Market Deposit Accounts (MMDAs)
* Certificates of Deposit (CDs)
No Insurable
* Stock investments
* Bond investments
* Mutual Funds (including Money Market
mutual funds)
* U.S. Treasury bills, bonds or notes
Credit unions
Credit unions are nonprofit financial organizations serving members with a common affiliation (i.e. employment union). Credit unions, like other financial institutions, are closely regulated. The National Credit Union Share Insurance Fund, administered by an agency of the federal government, insures (up to
$250,000 like FDIC) deposits of credit union members at more than 12,000 federal and state-chartered credit unions. Members are provided with a safe, convenient place to save and borrow at reasonable
rates. A variety of loans are available and often include the following:
* new or used vehicles * personal signature
* first and second mortgages * student
* home equity * consolidation
Brokers and Dealers - Function
A dealer is an individual or firm acting as a principal in a securities transaction. Principals trade for their own account and risk. They buy from sellers and sell to buyers. When buying from a firm acting
as a dealer, a customer receives securities from the firm’s inventory. When floor specialists trade for their own account they act as dealers.
However, when these firms match buyers to sellers they act as brokers. Since most brokerage firms operate both as brokers and as principals, they are known as broker-dealers.
Brokers and Dealers - Purpose
Brokerage companies act as agents in executing orders to buy and sell securities on various stock exchanges. Most broker-dealers also facilitate over the counter (off exchange) trading.
Brokers and Dealers - Regulation
The SEC regulates brokerage companies through FINRA.
Insider Trading and Securities Fraud Enforcement Act of 1988
“Insider trading” cannot be defined precisely. An insider is a person with access to key information before it is made available to the public. Insiders are often directors, officers, and key employees and
may also include relatives and others in a position to capitalize on insider information.
Insurance companies - Function
Insurance companies help clients to protect their assets and income against a variety of risks. Besides marketing products, the companies engage in a variety of functions:
* underwriting of policies * reinsurance * claims adjusting * rate making * investing assets
