Financial-services firms and financial-services industry

A financial system can be viewed terms of a financial-services industry (FSI) consisting of financial-services (FSFs). The major players in the FSI include the following.

Banks: Commercial and investment, both domestic and foreign

Thrift institutions: Savings and loans (S&Ls) , saving banks, and credit unions

Insurance companies: Life and property and casualty

Pension funds: Private and government

Finance companies: Consumer and commercial

Mutual funds: Money market, bond, stock, and so on

Nonfinancial corporations (NFCs): Subsidiaries of NFCs such as General Motors Acceptance Corporation (GMAC), General Electric (GE) Capital Services, and AT&T Universal

Because all these companies provide financial services, they can be described as financial-services firms, or financial intermediaries (FIs). In addition, because the industries in which these companies operate have become less compartmentalized their fusion or coming together has marked the birth of the FSI. The structural changes occurring in the FSI can be described as its "-ization."

The "-ization" of the FSI

Four phenomena, or innovations, describe the "-ization" of the FSI: institutionalization, securitization, globalization, and privatization. Institutionalization refers to the growing pool of savings held by nondepositary institutions such as mutual funds and pension funds. Securitization refers to the process in which financial intermediaries pool and package loans (e.g., mortgage) for sale as securities. If the lenders, such as banks, also service the loans, then they collect interest and principal payments for a servicing fee, and they pass the proceeds on to investors, hence the terms pass-through finance and mortgage-backed securities.

Globalization refers to the growing interconnection among financial markets and financial institutions throughout the world. New York, London, and Tokyo provide the financial axis on which the world of global banking and finance rotates. In the United States, the traditional spokes emanate from the hub on Wall Street in New York City to Boston, Chicago, San Francisco, and Los Angeles, whereas new banking financial centers can be found in Atlanta, Charlotte (NC), and Columbus (OH).

Privatization refers to the conversion of formerly state-owned enterprises into private companies. Financial institutions, as resource allocators, play a major role in privatization efforts. Normally, we think of privatization as occurring in transforming economics such as Russia and Eastern and Central Europe following the collapse of communism, or in the developing economies of Western Europe when the socialists lose political power. The assets of many failed S&Ls being taken over by the U.S. government during the thrift crisis of the 1980s and later being put back in the private sector, a mess that cost U.S. taxpayers about $160 billion not counting interest, provides another example of privatization.

The Role of Banks in the fsi

Within the FSI, banks S&Ls, and credit unions are known as depository institutions. Financial-services firms that are not in this category are called nondepository institutions. The view that commercial banks operate in the FSI means that their role will look diluted in this framework. Nevertheless, commercial banks are still the kingpins of the FSI. Bear and Maldonado-Bear (1994) expand upon this theme:

Commercial banking is the cornerstone of America's financial system. How it is set up and how it operates are matters not only of enormous economic significance but also of legal, political, social, and ethical significance. How American banking fares determines in some consequential degree how every American citizen fares-as well as a sizable number of people living in other nations.