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Banking and Financial Institutions

This course is part of Managerial Economics and Business Analysis Specialization

Taught in English

Some content may not be translated

Instructor: Rustom Manouchehri Irani

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19,368 already enrolled

(155 reviews)

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There are 5 modules in this course

The purpose of this course is to provide you with a basic understanding of the connections between money, the financial system, and the broader macroeconomy. We will examine the economics of modern financial institutions (e.g. banks), including how they are organized, the products and financial services they offer, the risks they take, why and how they are regulated, and how this has changed over time. We will develop a conceptual framework that will allow us to assess how recent financial regulations as well as innovations in finance (e.g., securitization, fintech, cryptocurrencies) may influence the macroeconomic, financial, and business environment.

Course Orientation

You will become familiar with the course, your classmates, and our learning environment. The orientation will also help you obtain the technical skills required for the course.

What's included

2 videos 5 readings 1 quiz

2 videos • Total 5 minutes

• Learn About the Course and Your Instructor • 5 minutes • Preview module
• Learn on Your Terms • 0 minutes

5 readings • Total 50 minutes

• Syllabus • 10 minutes
• About the Discussion Forums • 10 minutes
• Online Education at Gies College of Business • 10 minutes
• Updating Your Profile • 10 minutes
• Getting to Know Your Classmates • 10 minutes

1 quiz • Total 30 minutes

• Orientation Quiz • 30 minutes

Module 1: Money and Finance

This module will provide a broad overview of money, the financial system, and how this all connects with real economic activity.

9 videos 1 reading 4 quizzes

9 videos • Total 75 minutes

• Module 1 Overview • 1 minute • Preview module
• Money and Its Functions • 7 minutes
• The Payments System • 7 minutes
• Money and Inflation • 10 minutes
• What Does the Financial System Do? • 6 minutes
• Financial Markets Versus Financial Institutions • 11 minutes
• Banks Versus Non-Banks • 6 minutes
• Overview of Non-Banks • 11 minutes
• Financial Development and Economic Activity • 12 minutes

1 reading • Total 10 minutes

• Module 1 Overview • 10 minutes

4 quizzes • Total 105 minutes

• Lesson 1-1 Practice Quiz • 15 minutes
• Lesson 1-2 Practice Quiz • 15 minutes
• Lesson 1-3 Practice Quiz • 15 minutes
• Money and Finance Graded Quiz • 60 minutes

Module 2: Modern Banking

In this module, we are going to zoom in on the business model of modern banks.

12 videos 1 reading 4 quizzes 1 peer review

12 videos • Total 88 minutes

• Module 2 Overview • 1 minute • Preview module
• Early Banking in the United States • 9 minutes
• Bank Holding Companies • 5 minutes
• Deregulation and Modern Banking • 5 minutes
• Bank Types and Borrowing • 8 minutes
• Bank Lending • 6 minutes
• Changes in the Lending Process • 4 minutes
• How Are Investment Banks Organized? • 7 minutes
• Investment Banking Activities • 8 minutes
• Balance Sheet • 13 minutes
• Off Balance Sheet • 10 minutes
• Income Statement • 8 minutes
• Module 2 Overview • 10 minutes
• Lesson 2-1 Practice Quiz • 15 minutes
• Lesson 2-2 Practice Quiz • 15 minutes
• Lesson 2-3 Practice Quiz • 15 minutes
• Modern Banking Graded Quiz • 60 minutes

1 peer review • Total 60 minutes

• Financial Institutions Peer Review Assignment • 60 minutes

Module 3: Risk and Return

In this module, we are going to focus on the sources of profit at modern banks and the various risks surrounding these profits.

9 videos 1 reading 3 quizzes

9 videos • Total 65 minutes

• Module 3 Overview • 1 minute • Preview module
• Bank Equity Capital • 5 minutes
• Measuring Bank Performance • 8 minutes
• Overview of Risk • 6 minutes
• Credit Risk • 12 minutes
• Interest Rate Risk • 10 minutes
• Liquidity Risk • 9 minutes
• Market Risk • 8 minutes
• Operational Risks • 3 minutes
• Module 3 Overview • 10 minutes

3 quizzes • Total 90 minutes

• Lesson 3-1 Practice Quiz • 30 minutes
• Lesson 3-2 Practice Quiz • 30 minutes
• Risk and Return Graded Quiz • 30 minutes

Module 4: Regulation

In this Module we are going to study why the government regulates banks, and what this regulation looks like in practice.

10 videos 3 readings 4 quizzes 1 plugin

10 videos • Total 65 minutes

• Module 4 Overview • 1 minute • Preview module
• Goals of Financial Regulation • 9 minutes
• The Government Safety Net • 9 minutes
• Case Study: Interventions in 2007-2009 • 4 minutes
• Bank Regulation • 8 minutes
• The Supervisory Process • 5 minutes
• Stress Testing • 5 minutes
• Too Big to Fail • 10 minutes
• Defining Shadow Banking • 5 minutes
• Case Study: Money Market Mutual Funds • 5 minutes

3 readings • Total 30 minutes

• Module 4 Overview • 10 minutes
• Congratulations on completing the course! • 10 minutes
• Get Your Course Certificate • 10 minutes

4 quizzes • Total 120 minutes

• Lesson 4-1 Practice Quiz • 30 minutes
• Lesson 4-2 Practice Quiz • 30 minutes
• Lesson 4-3 Practice Quiz • 30 minutes
• Regulation Quiz • 30 minutes

1 plugin • Total 15 minutes

• End of Course survey • 15 minutes

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Reviewed on Oct 21, 2022

Very informative, useful, consice, well structured course. Highly recommend.

Reviewed on Jun 13, 2023

The teacher is exceptional. The course is very informative and brief.

Reviewed on Apr 29, 2022

Prof. Irani is a very interesting and competent lecturer who presents complex issues in an understandable way. Thank you, Professor!

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What Is a Financial Institution (FI)?

Understanding financial institutions (fis), the function of financial institutions in capital markets.

• Financial Institutions FAQs

The Bottom Line

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What is a Financial Institution?

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

A financial institution (FI) is a company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments , and currency exchange. Financial institutions include a broad range of business operations within the financial services sector, including banks, insurance companies, brokerage firms, and investment dealers.

Virtually everyone living in a developed economy has an ongoing or at least periodic need for a financial institution's services.

Key Takeaways

• A financial institution (FI) is a company  engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange.
• Financial institutions are vital to a functioning capitalist economy in matching people seeking funds with those who can lend or invest it.
• Financial institutions encompass a broad range of business operations within the financial services sector including banks, insurance companies, brokerage firms, and investment dealers.
• Financial institutions vary by size, scope, and geography.

Investopedia / NoNo Flores

Financial institutions often match savers' or investors' funds with those seeking funds, such as borrowers or businesses seeking to trade shares of ownership for funds. Typically, this leads to future payments from the borrower or business to the saver or investor. The tools for matching all of these parties up include products such as loans, and markets, such as a stock exchange.

At the most basic level, financial institutions allow people to access the money they need. For example, although banks do many things, their primary role is to take in funds—called deposits—from those with money, pool the deposits, and lend the money to others who need funds. Banks are intermediaries between depositors (who lend money to the bank) and borrowers (who the bank lends money to).

This works well because while some depositors need their money at any given moment, most do not. So banks can use deposits to make long-term loans. This applies to almost every entity and individual in a capitalist system: individuals and households, financial and nonfinancial firms, and national and local governments.

Without financial institutions, businesses could not grow. And households could only buy goods, education, and housing that the families have cash for today.

Financial institutions serve most people in some way as a critical part of any economy—whether in banking, insurance, or securities markets. Individuals and companies rely on financial institutions for transactions and investing. For example, the health of a nation's banking system is a linchpin of economic stability. Loss of confidence in a financial institution can easily lead to a  bank run .

Capital markets are important for functioning capitalist economies because they channel savings and investments between suppliers and those in need. Suppliers are people or institutions with capital to lend or invest. Suppliers typically include banks and investors . Those seeking capital are businesses, governments, and individuals.

Financial institutions play an important role in capital markets, directing capital to where it is most useful. For example, a bank takes in deposits from customers and lends the money to borrowers, ensuring capital markets' efficient function.

Governments oversee and regulate banks and financial institutions because the institutions play an integral economic role. Bankruptcies of financial institutions, for instance, can create panic. Federal and state agencies can regulate financial institutions. Sometimes, multiple agencies regulate the same institution.

Federal Depository Regulators

Federal depository regulators oversee commercial banks, thrifts (savings associations), and credit unions accepting customer deposits.

• U.S. Federal Reserve (The Fed) : Regulator of Federal Reserve System member state banks, foreign banking organizations operating in the United States, and financial holding companies .
• Office of the Comptroller of the Currency (OCC): The OCC is responsible for seeing that national banks and federal savings associations operate safely, provide equal access to financial services, treat customers fairly, and comply with applicable laws and regulations. It also regulates U.S. federal branches of foreign banks and federally chartered thrift institutions.
• Federal Deposit Insurance Corporation (FDIC) : The FDIC regulates federally insured depository institutions, state banks that aren't members of the Federal Reserve System , and state-chartered thrift institutions.
• National Credit Union Administration (NCUA): NCUA supervises and insures federally chartered or insured credit unions .

The FDIC insures deposits in state-chartered banks and federal savings associations if a bank fails. The FDIC insures regular deposit accounts of up to $250,000 per depositor per institution. Offering this insurance reassures individuals and businesses regarding the safety of their finances with financial institutions. Like the FDIC, the NCUA insures deposit amounts of up to $250,000.

Federal Securities Markets Regulators

Two federal institutions regulate products, markets, and market participants for securities such as stocks, bonds, and derivatives.

• Securities and Exchange Commission (SEC): The SEC regulates securities exchanges, broker-dealers, and corporations selling securities to the public; investment funds, including mutual funds; investment advisers, including hedge funds with assets over $150 million; and investment companies.
• Commodities Futures Trading Commission (CFTC): The CFTC regulates futures exchanges, futures commission merchants, commodity pool operators, commodity trading advisors, derivatives, clearing organizations, and designated contract markets.

Government-Sponsored Enterprise (GSE) Regulators

These dedicated regulators exclusively oversee government-sponsored enterprises, which are quasi-governmental entities established to enhance the flow of credit to specific sectors of the U.S. economy.

• Federal Housing Finance Agency: The FHFA supervises, regulates, and performs oversight of the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Bank System.
• Farm Credit Administration: This agency regulates Farm Credit System institutions and Farmer Mac, credit sources for eligible persons in agriculture and rural America.

Consumer Protection Regulator

Currently, the Consumer Financial Protection Bureau (CFPB) is the only national consumer entity tasked with exclusively regulating consumer products. CFPB's purview includes nonbank mortgage-related firms, private student lenders, payday lenders, and other large “consumer financial entities,” as determined by the CFPB. CFPB is the rulemaking consumer protection authority for all banks and has supervisory authority for banks with more than $10 billion in assets.

State Regulators

States may regulate financial institutions in addition to or instead of federal regulators. For example, there is minimal federal oversight of the insurance industry. Each state government has a department that licenses and regulates insurance companies and any company selling insurance products. States may also regulate banking, securities, and consumer protections in addition to federal regulators who work in those areas.

Types of Financial Institutions

Financial institutions offer various products and services for individual and commercial clients. The specific services offered vary widely between different types of financial institutions . Here are some of the types consumers are most likely to use:

Banks, Credit Unions, and Savings & Loans

These financial institutions accept deposits and offers checking and savings account services; make business, personal, and mortgage loans; and provides basic financial products like certificates of deposit (CDs). They may also act as payment agents via credit cards, wire transfers, and currency exchange.

These types of financial institution can include:

• Commercial or private banks
• Savings and loans associations
• Credit unions
• Foreign banks
• Savings banks, industrial institutions, thrifts

Investment Companies, Advisors, and Brokers

Investment companies issue and invest in securities (stocks, bonds, mutual funds and ETFs or exchange-traded funds). Mutual funds are one example of a product offered by an investment company, where many investors' money is pooled and invested in stocks, bonds, money market instruments, other securities, or even cash in an ongoing manner.

Other examples of investment-related financial institutions include investment advisors and brokers. Brokers accept and carry out orders to buy and sell investments (such as securities) for customers.

Insurance Companies

Among the most familiar non-bank financial institutions are insurance companies. Providing insurance for individuals or corporations is one of the oldest financial services. Protection of assets and protection against financial risk, secured through insurance products, is an essential service that facilitates individual and corporate investments that fuel economic growth.

Insurance is primarily regulated at the state level, but the U.S. Treasury's Federal Insurance Office (FIO) does monitor the industry and plays an advisory role .

Why Are Financial Institutions Important?

Financial institutions are essential because they provide a marketplace for money and assets so that capital can be efficiently allocated to where it is most useful. For example, a bank takes in customer deposits and lends the money to borrowers. Without the bank as an intermediary, any individual is unlikely to find a qualified borrower or know how to service the loan. Via the bank, the depositor can earn interest as a result. Likewise, investment banks find investors to market a company's shares or bonds to.

What Are the Different Types of Financial Institutions?

The most common types of financial institutions include banks, credit unions, insurance companies, and investment companies. These entities offer various products and services for individual and commercial clients, such as deposits, loans, investments, and currency exchange.

Which Agency Oversees Banking Operations in the United States?

Several agencies oversee banking operations in the U.S., including the Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA).

What's the Difference Between a Commercial and Investment Bank?

A commercial bank, where most people do their banking, is a type of financial institution that accepts deposits, offers checking account services, makes business, personal, and mortgage loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. Investment banks specialize in providing services designed to facilitate business operations. This might include raising money through financing and equity offerings, including initial public offerings (IPOs). They also commonly offer brokerage services for investors, act as market makers for trading exchanges, and manage mergers, acquisitions, and other corporate restructurings.

Which Agency Regulates Investment Banking Firms?

The Securities and Exchange Commission (SEC) oversees the operations of investment banks as these banks deal with securities.

Financial institutions help keep capitalist economies running by matching people who need funds with those who can lend or invest it. They offer a wide range of business operations within the financial services sector including banks, credit unions, insurance companies, and brokerage firms. Regulatory agencies such as the OCC, the SEC, the FDIC, and the Federal Reserve oversee the operations of financial institutions in the United States.

CRS. " Introduction to Financial Services: The Regulatory Framework , p. 2."

U.S. Department of Treasury. " About FIO ."

CRS. " Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework ."

Federal Deposit Insurance Corporation. " Are My Deposit Accounts Insured by the FDIC? "

NCUA. " Share Insurance Fund Overview ."

FHFA. " FHFA At-A-Glance ."

Farm Credit Administration. " About Us ."

CRS. " Introduction to Financial Services: The Regulatory Framework ," p. 24.

Investor.gov. " Investment Company ."

Investor.gov. " Brokers ."

Duke University. " What is an Investment Bank? "

SEC. " Rules and Regulations for the Securities and Exchange Commission and Major Securities Laws ."

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Loan Participation Vs Assignment

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Sub-participation

Sub-participation is a form of loan participation in which a lender shares its risk with a second party. This type of loan participation does not change the documentation of the loan. This type of loan participation can also include future amounts for loans that have not yet been fully disbursed, such as a revolving credit facility.

The legality of sub-participation is dependent on the conditions of the loan agreement. In general, a loan participant cannot enforce the loan or proceed against the collateral on their own. Furthermore, the borrower may not even be aware that the loan participant is involved. However, the seller of the participation retains the right to enforce or compromise the loan, as well as to amend it without the consent of the participant.

As for drafting sub-participation agreements, there are many ways to do so. But it is important to include at least the following provisions: The term of the agreement, the rate of interest, and the repurchase provisions. These provisions should be included in the sub-participation or assignment agreement.

Assignment and sub-participation are standard terms in inter-bank transactions. We will examine the purposes of the loan participation and assignment agreements, as well as the terms of the transaction. While they are essentially interchangeable, they are fundamentally different.

Loan participation and assignment are both ways to transfer ownership of a loan. Assigning a loan to a third party or sub-assigning it to yourself is a common way to transfer the loan.

The terms “loan participation” and “assignment” are often used in the banking industry. Both terms refer to the transfer of a loan’s rights and payments between two financial institutions. We’ll look at what each term means and how they differ from each other.

Loan participation has long been a common form of loan transfer. Its advantages over other loan transfer methods include the ability to diversify a portfolio and limit risk. It also eliminates the need for loan servicing. However, this option can be problematic when it differs from underlying loans. For this reason, it’s important to structure loan participation carefully.

Whether a loan is a participation or an assignment depends on a variety of factors. The percentage of loan ownership, relationship with the other financial institution, and confidence in the other party are all important considerations. However, the basic difference between participation and assignment is that the former involves the original lender continuing to manage the loan while the latter takes on the responsibility of doing so.

As a rule, loan participation is a good option if the original lender does not want to keep the title of the loan. It allows the borrower to avoid the costs associated with the loan and is more attractive for borrowers. In addition, loan participation arrangements can be more flexible than outright assignments. However, it’s important to make sure that the arrangement you enter into is formal. This will prevent any confusion or conflict down the road.

Syndication

Understanding the differences between loan participation and syndication is important for lenders. Understanding these two options can help them find the best solutions for their lending needs. Syndication is a common type of lending program where lenders pool their loans together to reduce the risks of defaults. Loan participation programs can be more complex and require due diligence to be effective.

Syndicated lending allows lenders to access the expertise and business relationships of their fellow lenders while maximizing their exposure to deal flow. However, lenders who join a syndicated lending arrangement often give up some of their independence and flexibility to take unilateral action. In addition, these arrangements often involve the involvement of legal counsel, which can also be important.

A loan participation arrangement is a group of lenders coming together to fund a large loan. A lead bank underwrites the loan and sells portions of it to other financial institutions. Loan syndication, on the other hand, is an arrangement whereby multiple financial institutions pool their money together and make one large loan. In this type of arrangement, the original lender transfers the rights and obligations to the purchasing financial institution. The risk is then shared among the participating lenders, allowing them to share in the interest and the risks of the loan’s default.

A syndication contract can be structured in as many tranches as necessary to meet the borrowing needs of a customer. The underlying contract will contain a commitment contract that specifies the ratio of participation among the participants. Each tranche will have a borrower, which will be a common participant or may be different. The contract will require that each participant fulfill their commitments before the scheduled due dates.

Loan participation and assignment are standard transactions between banks. They are similar in some respects but have different purposes. 

There are many types of loan participation agreements. Some involve a full assignment, while others are a sub-participation. If you are involved in loan participation or assignment, you need to understand which type of agreement applies to your situation. There are several types of loan participation agreements, including sub-participation agreements, undisclosed agencies, and assignments.

Sub-participation agreements are typically used to assign part of the loan amount to a new lender, and the loan documentation remains unchanged. In addition, these types of agreements include future amounts, which may be provided as part of a revolving credit facility or a portion of a loan that hasn’t been fully disbursed.

Loan participation is a popular option for lenders to limit their exposure to borrowers. Lenders may sell a portion of the loan to an investor or sell a portion of their interest to another party. While the transfer of a loan portion does not always require the consent of the transferor, lenders must consider participating interest guidelines and the applicable rules.

How Do Variables Affect Bank Loan Sales?

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To the Governor: Louisiana Passes Second Amendment Financial Privacy Act

By: Michael Boldin | Published on: May 28, 2024 | Categories: Right to Keep and Bear Arms , State Bills , Surveillance |

BATON ROUGE , LA. (May 28, 2024) – Today, the Louisiana Senate gave final approval to the “Second Amendment Financial Privacy Act,” a bill to prohibit financial institutions from using a credit card merchant code that would enable the tracking of firearm and ammunition purchases.

Sen. Blake Miguez filed Senate Bill 301 ( SB301 ) on March 1. The bill would prohibit any financial institution operating in the state from requiring or permitting “the assignment of a firearms code in a way that distinguishes a firearms retailer from other retailers.”

SB301 also prohibits all state and local government entities from keeping any list, record, or registry of privately owned firearms or the owners of such firearms. Financial institutions would be prohibited from denying a transaction based on the code. Those found guilty in a court of violating the law would be subject to a fine not to exceed $1,000 per violation, with the court determining the amount by factors “including the financial resources of the violator and the harm or risk of harm to the rights under the Second Amendment to the United States Constitution and Article I, Section 11 of the Constitution of Louisiana, resulting from the violation.”

On April 16, the Senate passed the bill by a vote of 28-11 . Last week, the House approved the measure with some technical amendments by a vote of 74-26 . Today, the Senate concurred with a vote of 27-9 .

Over the 2023-2024 legislative sessions, at least 13 states have passed similar legislation.

In response to legislation like SB301, the major credit card payment networks have “ paused ” implementation of the firearms merchant code. In an email to Reuters , a Mastercard representative said such bills would cause “inconsistency” in how the code could be applied by merchants, banks, and payment networks. The more states that ban such codes, the more likely this program gets scrapped permanently.

In September 2022, the International Standards Organization, based in Switzerland, approved a new merchant category code for firearm and ammunition merchants. In the letter to payment card networks, federal lawmakers stated that the new Merchant Category Code for firearms retailers would be “. . .the first step towards facilitating the collection of valuable financial data that could help law enforcement in countering the financing of terrorism efforts,” expressing a clear government expectation that networks will utilize the new Merchant Category Code to conduct mass surveillance of constitutionally protected firearms and ammunition purchases in cooperation with law enforcement.

The more states that ban such codes, the more likely this program gets scrapped permanently.

IMPACT ON FEDERAL PROGRAMS

Data collected from this merchant code would almost certainly end up in federal government databases.

Concern about the misuse of federal firearms databases isn’t just paranoia. The  Taliban has reportedly used a firearm ownership database created by the U.S. government  to track down gun owners and confiscate firearms in Afghanistan. This goes to show that even if you trust the people creating the database, it can fall into the wrong hands. In other words, the very existence of a database is a danger.

The feds can share and tap into vast amounts of information gathered at the state and local level through fusion centers and a system known as the “information sharing environment” or ISE.

Fusion centers were sold as a tool to combat terrorism, but that is not how they are being used. The ACLU pointed to a  bipartisan congressional report  to demonstrate the true nature of government fusion centers: “They haven’t contributed anything meaningful to counterterrorism efforts. Instead, they have largely served as police surveillance and information sharing nodes for law enforcement efforts targeting the frequent subjects of police attention: Black and brown people, immigrants, dissidents, and the poor.”

Fusion centers operate within the broader ISE. According to  its website , the ISE “provides analysts, operators, and investigators with information needed to enhance national security. These analysts, operators, and investigators…have mission needs to collaborate and share information with each other and with private sector partners and our foreign allies.” In other words, ISE serves as a conduit for the sharing of information gathered without a warrant. Known ISE partners include the Office of Director of National Intelligence which oversees 17 federal agencies and organizations, including the NSA. ISE utilizes these partnerships to collect and share data on the millions of unwitting people they track.

In practice, local data collection using ALPRs, stingrays, drones and other spy technologies create the potential for the federal government to obtain and store information on millions of Americans including phone calls, emails, web browsing history, location history, and text messages, all with no warrant, no probable cause, and without the people even knowing it.

In a nutshell, without state and local assistance, the feds have a much more difficult time gathering information. When the state limits surveillance and data collection, it means less information the feds can tap into. This represents a major blow to the surveillance state and a win for privacy.

WHAT’S NEXT

SB301 will go to Gov. Jeff Landry’s desk. He must sign or veto the bill within 10 days of transmittal, or it becomes law without his signature.

Tags: 2nd Amendment Financial Privacy Act , Banking Surveillance , Financial Surveillance , Louisiana , Merchant Category Codes , SB301

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