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Types of financial institutions

Region: Ontario Answer # 1250

Financial institutions provide financial services to their clients and they are highly regulated by the government. Essentially, financial institutions help their clients facilitate the flow of money through the economy. Generally speaking, there are three types of financial institutions in Canada: deposit-taking institutions, insurance companies, and investment institutions.

 

Deposit-taking institutions

Deposit-taking institutions include banks, credit unions, trust companies, mortgage loan companies and building societies. Deposit-taking institutions refer to any entity that accepts deposits as an ordinary course of business. They act as an intermediary for their clients by accepting and managing deposits as well as making loans. Most banks only hold a small reserve of the funds deposited and lend out the rest in order to make a profit. This is called fractional reserve banking.

Insurance companies

Insurance companies sell insurance against the risk of loss (which can be due to various factors, such a property damage, death, job loss etc.). The insured party makes payments, called premiums, to the insurance company and in exchange the insurance company promises to compensate the insured in the case of loss covered by the insurance policy.

In addition, specified insurance companies are insurance companies that issue (or is obligated to make payments with respect to) cash value insurance contracts or annuity contracts.

 

Investment institutions

Generally, the main business of an investment institution involves investing, administering or managing funds or money on behalf of other persons. Investment institutions include investment banks, underwriters and brokerage firms. These institutions assist their clients in raising capital by acting as agent and/or the underwriter in the issuance of securities, such as stocks and bonds.

The functions of the various financial institutions can overlap, such as banks offering mortgage insurance and insurance companies offering an investment component to their life insurance policies.


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