5. FINANCIAL INSTITUTIONS........................................................................
Financial analysts and economists classify the financial markets and institutions into five
categories: securities market institutions, investments institutions, contractual savings
institutions, depository institutions, and government financial institutions. Thus, students will
study the prominent characteristics of each category and understand how a financial institution
from one category differs from another category. Unfortunately, these categories are not etched
into stone because a financial company could be classified under two or more categories. Since
the 1980s, the U.S. federal government started deregulating the financial markets allowing the
financial institutions to expand into new activities as they cross into other categories.
Consequently, financial institutions began competing fiercely as financial institutions in one
sector started competing with institutions in other sectors. For instance, a company could expand
across three categories because it offers banking services, sells insurance, and becomes a broker
for financial securities.
Securities Market Institutions
Securities market institutions include investment bankers, brokers, dealers, and organized
exchanges. These institutions enhance the liquidity of the secondary markets. However, these
institutions are not financial intermediaries, and they do not link the savers to the borrowers.
Instead, the securities market institutions help the savers locate the borrowers.
Prominent securities market institution is the investment bank. An investment bank helps
corporations issue new stock and bonds, or it helps a local or state government issues new
bonds. Furthermore, an investment bank could help a corporation take over another.
Consequently, the investment bank influences the primary market heavily. In the United States,
an investment bank is not a regular bank. It serves as a marketing agent for new securities. For
example, Ford wants to build a new factory and decides to issue new stock. New stock will
provide funds that Ford can use to build the factory. Ford will go to an investment bank, and the
investment bank will assist Ford in creating the new securities. Then the investment bank sells
these new Ford stock to customers. If these customers want to sell their stock, subsequently,
they sell them on the secondary markets or organized exchanges. Some prestigious investment
banks include Merrill Lynch, Goldman Sachs, and Credit Suisse.
The U.S. government passed the Glass–Steagall Act of 1933 to separate the functions of
commercial and investment banking. A commercial bank is a standard bank that accepts
deposits and makes loans. Many countries, such as the European Union, Great Britain, and
South Korea do not legally separate commercial and investment banking. Then the U.S.
government repealed parts of the Glass-Steagall Act in 1999 and allowed U.S. investment banks
to branch into commercial banking and insurance, so they could compete internationally.
Unfortunately, the largest commercial and investment banks in the world teetered on bankruptcy
during the 2008 Financial Crisis. Consequently, many government leaders across the world are
debating to enact similar laws to the Glass-Seagall Act.