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Financing Strategies - Financial institutions: Banks

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

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


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

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