financial institution
According to 18 U.S. Code § 20 , a financial institution is an entity , national or international, that deals primarily in business related to financial or/and monetary transactions , namely loans , deposits , investments , currency exchange, or any other transaction of similar nature. Financial institutions therefore encompass banks , trust or insurance companies, credit unions , finance companies , securities firms, leasing companies , etc. In that sense, financial institutions constitute a major component of the financial services sector.
On the other hand, the Bank Secrecy Act, the anti- money laundering law in the United States, defines a financial institution in 31 USC § 5312(a)(2) by providing a comprehensive list of institutions, and the operation of each of them has already been governed by other federal statutes.
Financial institutions can be of different natures, private or public, national or international. A dual classification of financial institutions is oftentimes used, putting on one side financial banking institutions and on the other side financial non-banking institutions. Banking financial institutions include commercial banks, whose most important role is to deal with loans and deposits, and more broadly everyday banking transactions . Non-banking financial institutions include investment banks, insurance and leasing companies, whose roles are more specialized and technical. For instance, investment banks’ main role is to advise businesses and governmental entities on how to meet their financial challenges and provide them with a broader expertise on concrete operations.
International financial institutions (IFI) are important on the international stage because they establish a framework for the development of financial and monetary rules and allow financial actors to benefit from major sources of financial and technical support for matters related to economic development. The main participants in IFI are generally national governments or other international institutions, or other organizations. Bilateral financial institutions also exist.
The main and most renowned IFI were instituted with the creation of the Bretton Woods system, namely the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the International Centre for Settlement of Investment Disputes (ICSID). Other well-known IFI can be quoted and categorized as multilateral development banks, such as the World Bank, the European Investment Bank or the Islamic Development Bank . Oftentimes IFIs are regional, in that sense can be the following: the Asian Development Bank , the CAF – Development Bank of Latin America, the African Development Bank , etc.
In the United States, financial institutions are regulated by a comprehensive set of statutes and case law. For example, the Securities and Exchange Commission (SEC) regulates securities exchanges, brokers, and dealers based on federal statutes and a comprehensive set of rules and guidelines, thereby protecting investors and promoting a fair market. On the other hand, the Office of the Comptroller of the Currency (OCC) is in charge of issuing banking licenses for national banks and federal savings associations.
For state laws on financial institutions, see this table on Financial Institutions - State Laws .
[Last reviewed in December of 2024 by the Wex Definitions Team ]
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