Introduction to Finance

DEPOSITORY INSTITUTIONS
Commercial banks
Individual savings
Savings and loan associations
Individual savings
Savings banks
Individual savings
Credit unions
Individual savings
CONTRACTUAL SAVINGS ORGANIZATIONS
Insurance companies
Premiums paid on policies
Pension funds
Employee/employer contributions
SECURITIES FIRMS
Investment companies (mutual funds)
Individual savings (investments)
Investment banking firms
Other financial institutions
Brokerage firms
Other financial institutions
FINANCE FIRMS
Finance companies
Other financial institutions
Mortgage banking firms
Other financial institutions

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3.2 Types and Roles of Financial Institutions
49
to individuals, primarily in the form of mortgage loans. Very often the trustees of these banks 
were prominent local citizens, serving without pay, who regarded their service as an important 
civic duty. Today, savings banks operate almost entirely in New England, New York, and New 
Jersey, with most of their assets continuing to be invested in mortgage loans.
Savings and loan associations (S&Ls)
, known also as either savings and loans or S&Ls, 
came on the scene in 1831. The basic mission of these institutions, which were fi rst known as 
building societies and then as building and loan associations, was to provide home mortgage fi n-
ancing. In distinguishing between savings banks and S&Ls, it might be said that, originally, the 
savings banks’ emphasis was on thrift and the safety of savings while the emphasis of the S&Ls was 
on home fi nancing. Today, S&Ls accept individual savings and lend pooled savings to businesses 
and to individuals, primarily in the form of mortgage loans. In contrast with the limited geographic 
expansion of savings banking, savings and loan activity spread throughout the United States.
Credit unions came on the American scene much later than the other thrift institutions. 
Credit unions
are cooperative, nonprofi t organizations that exist primarily to provide mem-
ber depositors with consumer credit, including the fi nancing of automobiles and the purchase 
of homes. Credit unions are made up of individuals who possess common bonds of associ-
ation, such as occupation, residence, or church affi
liation. These institutions derive their funds 
almost entirely from the savings of their members. The fi rst offi
cial credit union was formed in 
the United States in 1909, but it was not until the 1920s that credit unions became important 
as a special form of depository institution.
Figure 3.2
illustrates graphically the process of getting funds from individual savers and 
investors into the hands of 
business fi rms
that want to make investments to maintain and grow 
their fi rms. Individuals make deposits in commercial banks that, in turn, make loans to and 
purchase debt securities from business fi rms. Since thrift institutions focus primarily on gath-
ering the savings of individuals and, in turn, lending those funds to individuals, they are not 
depicted on Figure 3.2.
Contractual Savings Organizations
Contractual savings organizations in the form of insurance companies and pension funds play 
important roles by collecting premiums and contributions and using these pooled funds to