Finance banking insurance
Financial services firms facilitate economic growth in modern society by performing essential functions. In the past, each firm had a narrow band of services that it offered to its consumer and business clients. The payments system was controlled by commercial banks that cleared checks and drafts. Today money is transferred electronically among any number of financial firms in volumes that could never be efficiently handled in the physical form. Residential mortgage finance was available primarily from savings and loan associations that held the loans to maturity.
This mortgage finance is now available from a wide array of sources and the mortgage loans themselves are traded as securities. Securities firms offered corporate and government securities as investment vehicles. Now these firms offer close substitutes for bank deposits and help industrial firms bypass the commercial banking system in their pursuit of short-term financing. The mainstay for insurance companies was the traditional whole life insurance policy. Today insurance companies provide offer products that compete with investments obtainable through securities firms. Mutual funds have emerged to permanently change the dynamics of the banking industry.
Over time, traditional roles have been blurred and it is not always easy to distinguish the product of a commercial bank from that of another financial institution. The competitive forces in the banking industry are not limited to domestic firms. There is increased pressure from foreign institutions. The financial services industry is in the process of significant change in a time of new alignments in domestic markets and increased international competition.
The Traditional Roles:
Commercial banks are one of several financial institutions that serve the economy. Others include thrifts, credit unions, investment companies, pension funds, insurance companies, and finance companies. An examination of their traditional roles helps an observer of the industry to appreciate the dramatic transformation that has taken place.
In the classification of depository institutions are commercial banks, savings and loan associations, mutual savings banks, and credit unions. That is, they all issue deposits money that can be withdrawn upon demand or according to terms of the deposit agreement. For many years, these deposits formed the basis for the country's payments mechanism. That was before money took the form of electronic impulses rather than physical currency and coin.
Savings and loan associations were originally established to provide real estate finance by accepting small savers' deposits and investing in residential mortgages. Mutual savings banks were also originally geared to the small investor. These institutions made mortgage loans and accepted primarily savings deposits. They originally invested these funds in small consumer loans for purposes other than residential housing. Members of credit unions shared some form of common bond, frequently employment or occupation.
Other non depository institutions include investment companies, pension funds, insurance companies, and finance companies. Traditionally, the financial instruments that they offered for sale to the public could not be used as money. But advances in technology have minimized this apparent limitation. Investment companies pool money in small denominations to make large purchases of corporate and government securities. To this extent, they are similar to commercial banks, but investment companies issue ownership shares, not deposits, to their investors. The rate of return from an investment company share depends on the rate of return of the securities in which the company invests, with no guarantee or insurance for the investor.
Traditional banking services can be obtained now from any number of financial institutions, including investment companies, insurance companies, and pension funds, and finance companies. Competition between domestic and foreign institutions is becoming much keener. From a relatively small foreign presence less than three decades ago, international interests in the United States are now substantial. The economies of the world clearly are becoming more integrated. If anything is a constant in the changing financial services industry, it may be the continuing trend toward integration of institutions, markets, and economies. Commercial banks must rise to the challenge of international competitiveness.
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