The Different Types of Financial Institutions
The National Bank Act of 1864 established the national banking system in the United States.4 The Act still governs U.S. national banks even though Congress has updated it many times since 1864. Understanding the types of organizations that are considered financial institutions is important to understanding how the national banking system works. Most people know that financial institutions include banks and credit unions. Other organizations that provide financial services to customers include:
- Savings and loan associations
- Finance companies
- Insurance companies
- Investment companies
Several laws also define the types of organizations that are considered financial institutions. For example, the Fair Credit Reporting Act of 1970 (FCRA) defines financial institutions as banks, savings associations, and credit unions.5 It also includes any organization that holds a transaction account on behalf of a customer as a financial institution. This law has a very specific definition.
Not all laws are that precise. The Bank Secrecy Act of 1970 has a long list of organizations that are financial institutions for the purposes of that law. The list includes banks, securities brokers, insurance companies, and pawnbrokers.6
The Bank Secrecy Act of 1970 also is known as the Currency and Foreign Transactions Reporting Act.7 Congress created this law to fight drug trafficking, money laundering, and other crimes. The Act keeps banks and other financial institutions from being used by criminals to hide or transfer money and tries to keep criminals from profiting from illegal acts. The definition of a financial institution is broad for this reason.
The Gramm-Leach Bliley Act (GLBA) defines a financial institution as an institution that conducts financial activities.8 This law, which is discussed later in this chapter, then points to the Bank Holding Company Act of 1956 for a list of actions that are considered financial activities. These include lending, exchanging, or investing money. They also include insurance and other financial advising services.9
You must read laws carefully since different laws may define the same term in different ways. It is always important to make sure that you understand how terms are used in each law.