Definition of 'Financial Institution

Wikipedia In financial economics, a financial institution

is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are regulated by the government.

An establishment that focuses on dealing with financial transactions, such as investments, loans and deposits. Conventionally, financial institutions are composed of organizations such as banks, trust companies, insurance companies and investment dealers. Almost everyone has deal with a financial institution on a regular basis. Everything from depositing money to taking out loans and exchange currencies must be done through financial institutions.

Investopedia explainsSince all people depend on the services provided

by financial institutions, it is imperative that they are regulated highly by the federal government. For example, if a financial institution were to enter into bankruptcy as a result of controversial practices, this will no doubt cause wide-spread panic as people start to question the safety of their finances. Also, this loss of confidence can inflict further negative externalities upon the economy.

Types of financial institutions

Broadly speaking, there are three major types of financial institutions:[1][2]

• Depositary Institutions : Deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies

• Contractual Institutions : Insurance companies and pension funds; and

• Investment Institutes : Investment Banks, underwriters, brokerage firms.

Some experts see a tendency of global homogenisation of financial institutions, which means that institutions tend to invest in similar areas and have similar investment strategies. The reason for this tendency sees economist Jayati Gosh in financial deregulation. Consequences might be that there will be no banks that serve specific target groups and e.g. small scale producers are left behind.

Function

Financial institutions provide service as intermediaries of financial markets. They are responsible for transferring funds from investors to companies in need of those funds. Financial institutions facilitate the flow of money through the economy.

Standing settlement instructions

Standing Settlement Instructions (SSIs) are the agreements between two financial institutions which fix the receiving agents of each counterparty in ordinary trades of some type. These agreements allow traders to make faster trades since time used to settle the receiving agents is conserved. Limiting the trader to an SSI also lowers the likelihood of a fraud.

Regulation

Financial institutions in most countries operate in a heavily regulated environment as they are critical parts of countries' economies. Regulation structures differ in each country, but typically involve prudential regulation as well as consumer protection and market stability. Some countries have one consolidated agency that regulates all financial institutions while others have separate agencies for different types of institutions such as banks, insurance companies and brokers.

Countries that have separate agencies include the United States, where the key governing bodies are the Federal Financial Institutions Examination Council (FFIEC), Office of the Comptroller of the Currency - National Banks, Federal Deposit Insurance Corporation (FDIC) State "non-member" banks, National Credit Union Administration (NCUA) - Credit Unions, Federal Reserve (Fed) - "member" Banks, Office of Thrift Supervision - National Savings & Loan Association, State governments each often regulate and charter financial institutions.

Definition of 'Merger

The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. Investopedia explains 'Merger'

Basically, when two companies become one. This decision is usually mutual between both firms.

A merger is the combining of two or more business entities. When people use the term merger, they mean a "merger of equals" -- two companies of the same size deciding to go forward in business as one. An example is Exxon-Mobil. There are different types of mergers. Exxon-Mobil is an example of a horizontal merger, where two companies that used to compete with similar products come together. Another type is a vertical merger, when two companies whose business complements each other merge. A bottler merging with a soda company is an example. A conglomeration is a merger of two companies with two completely different products, such as luxury goods purveyor Louis Vuitton merging with Moet and Chandon.

Reasons to Merge

The main reason companies merge is to save on the costs of production, particularly in a merger of former competitors. A merger also can generate capital to enter markets or launch products the companies would not be able to do as separate entities. Additionally, companies may possess complementary best practice and technical knowledge that makes it easier for them to compete in the market.

Regulations on MergersMergers are heavily scrutinized by the Department of Justice

and Federal Trade Commission. These agencies decide whether a merger is legal. Without their blessing, companies cannot combine, regardless of the reason. They publish a set of guidelines to help regulators decide whether a merger is legal. The aim of this process is to protect consumers from illegal pricing and make sure there is a variety of businesses in the marketplace rather than large monopolies controlling different industries.The two agencies conduct economic reviews of market conditions and the entire field of competition to understand the potential influence of the proposed merger. They also look at whether the new company would be in a position to have undue influence on competitors or be able to manipulate prices in a way that could harm consumers.

examples of mergers by companies

•Companies often merge due to reasons such as cost savings, some examples of this are:

The recent merger of Continental Airlines and United Airlines to create United-Continental which is predicted to bring savings to the companies of $1 billion and will create a company with a combined revenue of $29 billion.

Other major mergers include: Time Warner/AOL, Daimler Benz/Chrysler, Exxon-ExxonMobile. There is a huge number and they constantly occur but this answer should give you a few.

•Rasmussen University in England put together a list of successful and unsuccessful mergers. At the top was the Disney-Pixar merger. Disney was known for its classic family films and theme parks. Pixar was a small but innovative animation company. Together the two produced such films as "Toy Story." At the other end of the spectrum was the AOL/Time Warner merger. The intent was to combine the television and Internet businesses into one high-tech company. The problem was that AOL already was rapidly losing market share. The merger later was dissolved when the company stock lost more than 80 percent of its value.

Types of Company Mergers

There are five commonly-referred to types of business combinations known as mergers: conglomerate merger, horizontal merger, market extension merger, vertical merger and product extension merger. The term chosen to describe the merger depends on the economic function, purpose of the business transaction and relationship between the merging companies.

• ConglomerateA merger between firms that are involved in totally

unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.• Example

A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting company is faced with the same competition in each of its two markets after the merger as the individual firms were before the merger. One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company.

• Horizontal MergerA merger occurring between companies in the same industry.

Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry.• Example

A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.

• Market Extension MergersA market extension merger takes place between two companies that deal in

the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base.• Example

A very good example of market extension merger is the acquisition of Eagle Bancshares Inc by the RBC Centura. Eagle Bancshares is headquartered at Atlanta, Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets worth US $1.1 billion.

Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in the metropolitan Atlanta region as far as deposit market share is concerned. One of the major benefits of this acquisition is that this acquisition enables the RBC to go ahead with its growth operations in the North American market.

With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta , which is among the leading upcoming financial markets in the USA. This move would allow RBC to diversify its base of operations.

• Product Extension MergersA product extension merger takes place between two business

organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.• Example

The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product extension merger. Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless LAN.

Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets that are equipped with the Global System for Mobile Communications technology. It is also in the process of being certified to produce wireless networking chips that have high speed and General Packet Radio Service technology. It is expected that the products of Mobilink Telecom Inc. would be complementing the wireless products of Broadcom.

• Vertical MergerA merger between two companies producing different goods or

services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.• Example

A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. An automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. The parts division, in turn, would be guaranteed a steady stream of business.

Synergy, the idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts is one of the reasons companies merger.

The Advantages of Company Mergers

Mergers typically involve two relatively equal companies making the mutually beneficial decision to become a single legal entity. They are different from acquisitions, which usually involve a larger company absorbing a smaller company, sometimes against the will of the smaller company’s management. Mergers are undertaken to improve long-term shareholder value and overall company performance.

• Reduced CostsA merged company can reduce many of its expenses. Budgets for

things like marketing might be trimmed, while the new, larger company enjoys greater purchasing power, which lowers the costs of raw materials and other necessities. More often than not, a merger results in staff layoffs as positions become redundant in the new single entity. Merged companies can also share office space and eliminate duplicate manufacturing facilities.• Market Penetration

By merging, the new company is theoretically provided with access to more customers. This is true if the individual companies had been demonstrably successful in separate markets, as opposed to roughly equally competing in the same one. For example, according to the BBC, the merger of the German automaker Daimler Benz with the American automaker Chrysler Corp. allowed the new company, Daimler Benz, to access markets in both Europe and North America.

• DiversificationMerged companies can offer a greater range of products and

services. Because these may be complimentary, the merged company may be able to capture more consumers than they would as individual entities. For example, the result of merging two travel companies allows a greater range of options to be presented to the consumer at the point of sale.• Skills and Knowledge

The merged company can make use of the very best minds from both companies and make up for shortfalls in the individual companies' skill-sets. For example, allowing the scientists from two previously separate pharmaceutical research and development departments to work together is more likely to generate more innovative products. The combined skills of the marketing departments will then be able to sell these products more effectively. The net result is that shareholder value is increased.