- Personal Finance»
- Understanding Finance
Place of securities and securities markets in the economy
Commercial banks are the oldest and most important financial institutions. They have the broadest range of products and services, and they are the most regulated institutions. They manage almost all bank transactions. Commercial banks collect savings, their reallocation, and the processing of money flows. Most of the payment transactions are going through commercial banks. Crediting to the deposits accounts for the main form of creating new money. As their activities directly affect the amount of money in the economy, they are also called monetary intermediaries.
Commercial banks offer loans with many maturities and many transaction types, however their major role is providing businesses and organizations with short term credits. The reason behind this is that most of the funds of commercial banks are liquid deposits, thus it would be risky to finance long term loans from these funds.
Insurance Companies and Pension Funds
Insurance companies and pension funds serve a special intermediary role. Their main role is to pay, from their monetary funds and profits, compensations for damages and pensions for their clients. However, in order to offer quality services and products, it is inevitable that they invest their collected capital in safe and profitable ways. The income of these investments provide backing for their operating costs, the maintenance of service-, and product quality, as well as the profit of insurance companies and pension funds.
In contrast with commercial banks, deposit institutions convert deposits into long term loans. Deposit institutions include such institutions as savings banks, from savings deposits, and from time deposits provide mortgage loans, mainly for housing constructions. Similar to savings banks, credit unions provide consumer credits for its members. Sometimes, both of these deposit institutions, instead of paying fixed rate interest for deposits, but rather split the income from placings among the depositors.
Insurance companies may be considered similar to commercial banks in that their clients deposit their funds with them, expecting the insurance companies to return back at least the deposited funds. In such cases during the calculation of fees, the fees do not include overhead costs or profits. Similarly the source of profit is not from paying less back then the funds that the client deposited with them.
Pension funds also provide some kind of security, or at least the sense of it, that between 15 and 30 years later, the regular income-, and at least a basic financing of the cost of living of the clients are ensured from the capital deposited during the previous decades. To ensure the maintenance of the deposited funds over such a long period of time, pension funds must make sure that their financial reserves do not lay idle. As both the incomes, and the costs, and thus also the future capital can be predicted quite accurately, making it possible for pension funds to participate in long term-, and high return investments, mostly through the purchase of corporate bonds-, and stocks.
It is also a common practice, that the traditional insurance products and services, which protect the insurance company against risks, are combined with various investment instruments, or even with short term credits. These instruments further decrease the number of differences between insurance companies and other financial institutions.