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The Role and Services of Financial Institutions

Although the number is constantly changing, there are in excess of 18,000 financial institutions in the United States. These are comprised of commercial banks and thrift institutions, including credit unions, savings and loan associations, federal savings banks, and mutual savings banks.

Depository institutions play a central role in the payment system, with the vast majority of payments originating from demand deposit, or checking accounts. Since the early 1980s, all depository institutions have access to the Federal Reserve payment systems. Commercial banks offer a wide range of services (see Exhibit 8.1), while thrift institutions play a more limited role, accepting consumer deposits and lending money, primarily for home mortgage loans.

Checking Accounts
There are two types of checking account: the demand deposit account (DDA), which traditionally does not pay interest; and the hybrid account that combines the features of a demand and savings account, such as the negotiable order of withdrawal (NOW) and money market deposit accounts.

Credit Services
Short- and long-term credit facilities, as well as a range of special-purpose loans, such as mortgages.

Payment and Collection Services
Clearing checks and effecting electronic transfers.

Investment Services
A wide range of investments from the overnight sweep accounts to mutual funds and long-term time deposits and certificates of deposit.

Risk Management Services
Swaps, options, forwards, futures, and other derivatives to reduce or eliminate a customer’s exposure to foreign exchange, interest rate, or commodity price risk.

Investment Banking Services
Services associated with issuing commercial paper, the sale of loans, and private placements, and consulting services on mergers and acquisitions and corporate structure.

Trade Services
Services to assist in the financing and collection of trade obligations, such as letters of credit, documentary collections, and bankers’ acceptances (BAs).

Agent and Fiduciary Services
Managing assets whose title remains with the owner. Examples of these services are: registrar, transfer agent, paying agent, custody services, corporate pension plans, qualified employee benefit plans, and corporate trustee.

Taken From : Essentials of Managing Corporate Cash

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