According to First ACH glossary, a financial institution is any bank, savings and loan, credit union or other financial institution capable of both accepting deposits and making loans. These institutions are subject to national and state banking laws. Financial markets provide our specialized, interdependent economy with many financial services, including time preference, distribution of risk, diversification of risk, transactions economy, transmutation of contractual arrangements, and financial management. Financial institutions are very important for individual decision making regarding personal finances.
For example, when I wanted to mortgage a house, I had to see which bank will provide me the loan at a decent interest rate and for what duration will they provide me the loan. On another occasion, when I was thinking of having a credit card, I had to see which bank provided me more services, which had a lower interest rate, which bank gave me the maximum amount of time to pay back the credit card bill, etc. In daily life, all our decisions related to spending, borrowing, investing depend on the financial institutions.
Financial institutions greatly facilitate transactions whether they revolve around individuals, businesses or governments. According to Dr. Econ (2005), “Financial markets play a critical role in the accumulation of capital and the production of goods and services. The price of credit and returns on investment provide signals to producers and consumers who are financial market participants. Those signals help direct funds from households and businesses to the consumers, businesses, governments, and investors that would like to borrow money by connecting those who value the funds most highly (i.
e. , are willing to pay a higher price, or interest rate), to willing lenders. ” Moreover, the financial institutions also facilitate the international flow of money between countries. For example, when a buyer in United States wants to pay to an Indian seller then he can utilize these financial institutions such as HSBC to pay his seller in Indian Rupee by giving the bank US$ which will then remit the equivalent Indian Rupee to the Indian seller. Apart from helping individuals and businesses to transfer fund, these financial institutions also help organizations to manage portfolios.
For example, a firm has $100,000, it can ask a financial institution such as JP Morgan Chase to invest its money in a portfolio depending on the risk appetite of the firm. Therefore, the firm can concentrate on its core business whereas, as financial institution can manage its portfolio, hedge risk, diversify risk in a very organized manner. Like individual, businesses are frequently making decisions about short-term and long-term uses of funds, and businessmen have to judge between outlays which provide a return in the near term and those which pay off many years from now.
Moreover, the businesses have to make decisions about which financial institution to choose depending on the cost. For example, if Toyoto wants to put up a new manufacturing plant and they need funds, they have to decide which bank to ask for the role depending to the cost of borrowing from them and how flexible are the terms, etc. The role of financial institution in case of an individual or a business is quite similar. For both parties, the financial institution facilitates flow of money from one part to another.
Secondly, both can use financial institutions for managing portfolio and for security trading. Moreover, both individuals and businesses can transfer funds across the national boundaries using financial institutions so in conclusion, I would say that the role of financial institution is very similar for both individual and businesses however, for businesses, the amount if much larger compared to individuals. References: 1. Financial institution. (n. d. ) In First ACH glossary. Retrieved May 22, 2009, from http://www.
firstach. com/front/resources_glossary. html#F 2. FINANCIAL MARKETS AND INSTITUTIONS: IMPORTANT FUNCTIONS. In financial markets. Retrieved May 23, 2009, from http://74. 125. 155. 132/search? q=cache:3QtLEPU5R4sJ:129. 3. 20. 41/econ-wp/fin/papers/0512/0512025. doc+How+do+financial+institutions+facilitate+transactions+between+individuals,+businesses,+and+governments%3F&cd=5&hl=en&ct=clnk&gl=pk 3. FINANCIAL MARKETS AND INSTITUTIONS: IMPORTANT FUNCTIONS. In Time Preference. Retrieved May 23, 2009, from http://74.
125. 155. 132/search? q=cache:3QtLEPU5R4sJ:129. 3. 20. 41/econ-wp/fin/papers/0512/0512025. doc+How+do+financial+institutions+facilitate+transactions+between+individuals,+businesses,+and+governments%3F&cd=5&hl=en&ct=clnk&gl=pk 4. Author, Dr. Econ (January 2005). Please explain how financial markets may affect economic performance. In why are financial markets and institutions important? Retrieved May 22, 2009, from http://www. frbsf. org/education/activities/drecon/answerxml. cfm? selectedurl=/2005/0501. html