Difficulty: Beginner | Prerequisites: None
Financial institutions are the organisations that move money through the economy: they take deposits, make loans, and provide accounts. The five main types you need to know are commercial banks, savings and loan associations, mutual savings banks, credit unions, and finance companies. Each serves a slightly different market and operates under different rules, but they all channel funds from savers to borrowers.
Commercial bank
A bank that offers services to both the general public and to companies. It accepts deposits, provides checking accounts, and makes business, personal, and mortgage loans. Think of it as the all-purpose high-street bank most people use day to day.
Savings and loan association (S&L)
A financial institution that specialises in accepting savings deposits and making mortgage and other loans. In simple terms, S&Ls exist primarily to help people save money and buy homes.
Mutual savings bank
A financial institution chartered by a central government, without capital stock, that is owned by its members who subscribe to a common fund. Think of it as a bank designed for low-income savers, where depositors are also the owners.
Credit union
A non-profit money cooperative whose members can borrow from pooled deposits at lower interest rates. In simple terms, it is a member-owned alternative to a bank, often offering better rates because it does not need to generate profit for shareholders.
Finance company
An organisation that makes loans to individuals and businesses. Unlike banks, finance companies typically do not accept deposits; they raise capital through other means and lend it out, often to borrowers who may not qualify for traditional bank loans.
Serve both individual consumers and businesses
Accept deposits into checking and savings accounts
Make three main loan types: business loans, personal loans, and mortgage loans
Offer the widest range of financial services of any institution type
Regulated by federal and state banking authorities
Example: JPMorgan Chase, Bank of America, Wells Fargo
Originally created to promote home ownership by pooling members' savings
Accept savings deposits and pay interest on them
Primary lending focus is home mortgage loans
Also offer checking accounts and other basic banking services
Historically known as "thrifts"
Chartered by government, with no capital stock
Owned collectively by depositors (members), not by outside shareholders
Designed to serve low-income individuals who needed a safe place to save
Invested primarily in mortgages
Most common in the northeastern United States
Non-profit structure, owned and controlled by members
Members share a "common bond" (same employer, community, or association)
Offer mortgages, lines of credit, checking and savings accounts, and auto loans
Provide electronic banking and ATM access
Typically offer lower interest rates on loans and higher rates on savings than commercial banks, because profits return to members
Make loans to individuals and businesses but generally do not take deposits
Often serve borrowers who cannot obtain credit from traditional banks
Raise funds by issuing bonds or borrowing from banks, then lend at higher rates
The broader financial services industry also includes central banks, investment banks, brokerage firms, insurance companies, and mortgage companies
Students often think credit unions and commercial banks are the same thing. They are not: credit unions are non-profit cooperatives owned by their members, while commercial banks are for-profit corporations owned by shareholders.
Students sometimes assume savings and loan associations only offer savings accounts. S&Ls also provide checking accounts and other services, though their speciality remains mortgage lending.
Students frequently confuse mutual savings banks with credit unions. The key difference is that mutual savings banks are government-chartered and open to anyone, while credit unions require a common bond among members.
Students sometimes believe finance companies are banks. Finance companies do not accept deposits; they borrow money themselves and then lend it on at higher rates.
Know the defining feature of each institution type. Exams typically give a description and ask you to identify which institution it matches.
Understand the profit motive distinction: commercial banks and finance companies operate for profit; credit unions do not.
Be able to explain why credit unions can offer lower loan rates (no shareholders to pay).
The ownership structure question comes up often: who owns a mutual savings bank (its depositors) versus who owns a commercial bank (its shareholders).
Be ready to match each institution to its primary lending focus: S&Ls and mutual savings banks lean toward mortgages, credit unions serve a broad range of consumer lending, and finance companies lend to higher-risk borrowers.
True or false: A credit union is a for-profit financial institution. (False, it is non-profit.)
Fill in the blank: A ______ is a government-chartered institution, without capital stock, owned by its depositor-members. (Mutual savings bank.)
True or false: Finance companies accept deposits from the public. (False, they raise capital by other means.)
Fill in the blank: Savings and loan associations were originally created to promote ______. (Home ownership.)
True or false: Commercial banks serve only individual consumers, not businesses. (False, they serve both.)
Q: What is the main difference between a commercial bank and a credit union?
A: A commercial bank is a for-profit institution owned by shareholders, while a credit union is a non-profit cooperative owned by its members. This structural difference is why credit unions can often offer lower loan rates and higher savings rates.
Q: Why were savings and loan associations originally established?
A: To pool members' savings and use those funds to make home mortgage loans, promoting home ownership.
Q: How does a mutual savings bank differ from a commercial bank in terms of ownership?
A: A mutual savings bank has no capital stock and is owned by its depositors (members). A commercial bank is owned by its shareholders, who may or may not be depositors.
Q: Why might a borrower use a finance company instead of a bank?
A: Finance companies often lend to individuals and businesses that cannot qualify for traditional bank loans. They accept higher risk in exchange for charging higher interest rates.
Q: Name three services that credit unions typically offer.
A: Mortgages, checking and savings accounts, and auto loans. They also commonly provide lines of credit, electronic banking, and ATM access.
This material connects directly to the study of account types (checking, savings, money market, CDs), which is covered in the companion study notes. Understanding which institutions offer which accounts is a common exam question.
It also ties into broader macroeconomics topics such as the money supply and the role of the Federal Reserve, since these institutions are the channels through which monetary policy reaches consumers and businesses.
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