Financial Institutions

Financial institution (금융기관) is an intermediary between users of funds and suppliers of funds. A user of funds is an economic entity that is short of funds, and a supplier of funds is an economic entity with excessive funds.

Specialness of Financial Institutions

Financial institutions are not merely passive intermediaries. They are considered special because they perform several essential economic functions.

• Information production: they collect and process information about borrowers and investment opportunities.
• Liquidity and maturity transformation: they fund relatively illiquid and long-term assets with relatively liquid and short-term liabilities.
• Monitoring: they engage in delegated monitoring on behalf of dispersed savers and investors.

Because of these functions, financial institutions are closely related to credit allocation, payment services, and financial stability.

Types of Financial Institutions

Financial institutions can be broadly divided into depository institutions and non-depository institutions.

Depository Institutions

Depository institutions accept deposits and use them to make loans. Typical examples include banks and savings banks.

Non-Depository Institutions

Non-depository institutions do not primarily fund themselves through deposits. Major examples include securities firms, asset management companies, and insurance companies.