Page 460 - Business Principles and Management

Chapter 17 • Financial Services

17.1 Financial Institutions

Goals Terms
• Identify several types of banks and • bank • nonbank
how they are regulated. • demand deposit • Federal Reserve
• Discuss the similarities and differ- • time deposits System
ences among nonbanking financial • commercial loan • Federal Deposit
institutions and banks. Insurance
• consumer loan
Corporation (FDIC)

Banks and Banking

All businesses rely on the services of financial institutions. A business like Kilgore
Kitchens must deposit cash, make payments, invest excess funds, and borrow
money. Knowledge of the available types of financial institutions and the services
they provide help managers like Andrew and Julie operate businesses efficiently
and use their financial resources wisely.
Financial institutions handle transactions that deal primarily with money and
securities. Banks provide many of these services, and other financial institutions
provide investment services that banks traditionally did not. However, each year
it is getting more and more difficult to distinguish among the services provided
by various financial institutions. Nonbank financial institutions have rapidly
expanded the services they offer, competing directly with banks in areas such as
checking and savings accounts. The deregulation of banking has made it possible
for banks to offer a variety of new investment products and other financial ser-
vices. Computer technology and the Internet have allowed consumers to conduct
many financial transactions online and have contributed much to changing how
the world conducts its financial affairs.

BANKS AND NONBANKS
Banks are financial institutions that historically have been closely regulated by
the government to make sure financial services are widely available and that fi-
nancial resources of individuals and businesses are protected. In order to oper-
ate, a bank must receive a charter. A bank charter authorizes the operation of a
bank following the regulations established by the state or federal government.
To be recognized as a bank, a financial institution must accept demand de-
posits, make consumer and commercial loans, and buy and sell currency and gov-
ernment securities. A demand deposit is money put into a financial institution that
the depositors can withdraw at any time without penalty. A checking account is an
example of a demand deposit account. Time deposits (also known as certificates of
deposit or CDs) are made for a specified period of time and cannot be withdrawn
early without some financial penalty. A commercial loan is a loan made to a busi-
ness, whereas a consumer loan is a loan made to an individual for personal use.
If the primary purpose of an institution is to offer financial products and
services other than deposits and loans, it is classified as a nonbank financial

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