1. Describe the Nature of Financial Institutions A financial institution is an organization that collects funds from individuals, businesses, and other institutions to lend to or invest in others who need the funds

2. The role of financial institutions in the economic system. By transferring money from those who have it to those who need it, financial institutions act as financial intermediaries (middlemen) in the economy. Financial institutions facilitate the flow/movement of money through the economy.

3. Different types of financial institutions and their specific functions. Deposit-taking institutions Accept deposits (funds) from savers Use deposits to offer loans to borrowers Use deposits to make payments on behalf of savers to individuals, firms, and creditors whom the savers owe money to Types of deposit-taking institutions: Commercial banks Credit unions Savings and loan associations Trust companies Mortgage companies

4. Finance and insurance institutions Finance companies are credit companies. Raise capital by issuing notes, bonds, and other obligations Provide loans, usually to businesses Insurance companies offer insurance protection in exchange for policy premiums. Manage, pool individuals’ risk Use funds from premiums to offer loans Invest funds to raise more capital Create investment products

5. Investment institutions Investment companies (mutual funds) Pool funds and invest them based on the needs of investors Investment banks Locate outside sources of money for firms Help firms to raise funds by issuing securities Pension funds Pool contributions and invest them for employees Exchanges Help to manage risk Create investment

6. Government/ semigovernment financial institutions Carry out regulatory and supervisory functions Increase funds available to investors Manage and assume risk Have different relationships with government: Government institutions are controlled by the government, while semigovernment institutions are independent organizations that are supported by the government. Examples: Small Business Administration (SBA) Federal National Mortgage Association (Fannie Mae) Federal Housing Administration (FHA)

7. International financial institutions Created and owned by multiple national governments Example: The World Bank Group Provides financing and advice to countries to encourage economic development and the elimination of poverty

8. Discuss ways in which financial institutions reduce the risk that individual savers/investors face. As intermediaries, financial institutions spread savers/investors’ funds out among many borrowers. Therefore, if a loan or investment goes bad, its impact on individual savers/investors is minimized. Financial institutions are better at determining the creditworthiness of borrowers and profitability of investments.

9. Discuss economic disadvantages of financial institutions. If the flow of money into a financial institution slows down, then there is less money available for the financial institution to lend or invest. Financial institutions are often connected to each other through deposits investments, and loans that they make in and to each other. If one financial institution fails, it has the potential to start a domino effect, causing a string of financial institution failures. Failure of multiple financial institutions could result in a severe disruption of the economy.

10. Explain how financial institution credit ratings are used. A financial institution’s credit rating: Indicates the institution’s creditworthiness Tells savers and investors how safe or risky it is to provide funds to the institution.

11. KEY TERMS Deposit-taking - used to describe a bank or other financial organization that people can put their money in: Intermediary - A financial intermediary is a financial institution such as bank, building society, insurance company, investment bank or pension fund. A financial intermediary offers a service to help an individual/ firm to save or borrow money Credit Rating - An assessment of the credit worthiness of a borrower in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money – an individual, corporation, state or provincial authority, or sovereign government Valuation - the act or process of making a judgment about the price or value of something

12. Financial Institutions Research 1.Select a Financial Institution 2.Research and Describes the services offered 3.Explain who uses or benefits from the Financial Institution you selected 4. Explain the Financial Institutions impact on the Economy.