CFP exam takers should be familiar with the function, purpose and regulation of financial institutions.

References:
Keown, Personal Finance: Turning Money into Wealth, 3rd Edition,Chapter 5
Downes, Goodman, Dictionary of Finance and Investment Terms, 5th Edition

Banks

Types of banks
What the typical consumer thinks of as a bank actually could be one of several types of financial institutions engaged in the business of accepting deposits and making loans.

  1. Commercial banks - Large depository institutions offering the widest variety of financial services. Operate large branch networks that stretch across multiple states. Serve both consumer and business customers, though business loans account for the majority of their lending business. Generally stock corporations whose primary obligation is to make a profit for shareholders.
  2. Savings and loan associations (S&Ls) - Obtain the bulk of their deposits from consumers and hold most of their assets in the form of home mortgages. Pay dividends rather than interest to depositors.
  3. Savings banks - Like S&Ls, savings banks accept primarily consumer deposits and issue home mortgages and pay dividends rather than interest to depositors. Most are mutual institutions, meaning they are owned by depositors. Located primarily in New England, New York and New Jersey. Smaller in scale than commercial banks.
  4. Credit unions - A not-for-profit cooperative made up of members with some type of common bond, such as employees of the same company, members of the same labor union or the same religious denomination. Because of tax-exempt status, a credit union may offer higher interest rates to deposits and lower rates to borrowers.

Banking regulation
Depending on the type of institution, a bank may be regulated by several different types of regulators simultaneously. The major banking regulators:
  1. Federal Reserve Board - Examines and sets reserve requirements for member banks. Acts as clearinghouse for transfer of funds throughout the banking system.
  2. Office of the Comptroller of the Currency - Oversees federally chartered national banks. Only the Comptroller of the Currency can declare a national bank insolvent.
  3. Office of Thrift Supervision - Oversees federally chartered savings and loan associations and federal savings banks.
  4. State banking regulators - Regulate state-chartered banks located within their individual states.
  5. National Credit Union Administration - Oversees federal credit unions and insures member deposits.


Brokerage and Insurance Companies

Related Articles
  1. Investing

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  2. Insights

    A Brief History of U.S. Banking Regulation

    From the establishment of the First Bank of the United States to Dodd-Frank, American banking regulation has followed the path of a swinging pendulum.
  3. Personal Finance

    Tired Of Banks? Try A Credit Union

    These nonprofit organizations can provide a range of services for lower fees.
  4. Insurance

    How the Federal Deposit Insurance Corporation (FDIC) Works

    Learn more about the Federal Deposit Insurance Corporation (FDIC) and what happens to your deposits over $250,000 if a member bank fails.
  5. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  6. Personal Finance

    What is a Financial Institution?

    A financial institution is in business to, among other things, accept deposits, make loans, exchange currencies, and broker investment securities.
  7. Insurance

    Insurance Companies Vs. Banks: Separate And Not Equal

    Insurance companies and banks are both financial intermediaries. However, they don't always face the same risks and are regulated by different authorities.
  8. Personal Finance

    What Does a Central Bank Do?

    A central bank oversees a nation’s monetary system.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center