Introduction to Business

The role of commercial banks, savings and loan associations, credit unions and non-deposit institutions in the US financial system

Commercial banks

            Commercial banks play a significant role in the US financial system. They keep deposits received from investors into loans and later offer them to firms. This loans help in expanding business operation of these firms and in turn leading to more deposited funds into the banks again. Small deposits by from investors can be collected, merged up and used as large loans to these firms. They also employ analysts in assessing creditworthiness of the borrowing firms, a task that investors cannot perform by themselves (Ebert & Griffin, 2003). Commercial banks reduce the risk of holding money in cash as people safely deposit their savings in banks. Commercial banks are also responsible for payment system. They have introduced electronic payments for example the use of card payments, direct debits, transfers, etc, thus people use less cash and this has quickened transaction (Ebert & Griffin, 2003).

Savings and loan associations

Savings and loan association are one of the types of banks that offer financial services such as savings, accounts, credit cards, home mortgage loans and other consumer loans. In many respects, they resemble banks. This financial institution has provides mortgage and loans to homebuyers and that was its primary role of establishment (Ebert & Griffin, 2003). They have also broadened their operational scope to money supply. Thus, they contribute to economy’s money supply through traditional banks, mutual savings banks and credit unions.

Credit unions

Credit union are an option for exclusivity of commercial banks. Credit unions offer loans at lower rates and offer higher rates on deposits compared to commercial banks (Ebert & Griffin, 2003).

Non-deposit institutions

Non-deposit institution may also act as an intermediary between borrowers and savers but does not allow time deposits. They fund their lending activities through selling insurance policies, securities to the public (Griffi, 2007). They also play a significant role in the financial system by offering protection against loss or damage of property, natural disasters, and damages during accidents. They also offer life insurance for instance when death of a person occurs uncertainly. As security firms, they support the buying and selling of securities.

References

Ebert, R. J., & Griffin, R. W. (2003). Business essentials. Upper Saddle River, N.J: Prentice Hall.

Griffi, (2007) introduction to business. Published by Prentice Hall, 2007.