Question

Why did the United States need a Federal Reserve Bank? What is the difference among banks, savings and loan associations, and credit unions? . What is a consumer finance company?

Answer 1

Federal Reserve Bank:

The Federal Reserve System, often referred to as the Federal Reserve or simply "the Fed," is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. Today, the Federal Reserve's responsibilities fall into four general areas.

• Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
• Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
• Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
• Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.

Difference among banks, savings and loan associations, and credit unions:

The bottom line is that banks are for-profit institutions, while credit unions are non-profit. Credit unions typically brag better customer service and lower fees, but have higher interest rates. Both banks and credit unions provide similar services such as checking and savings accounts, loans and business accounts.

Banks are for-profit corporations with a charter issued at the local, state, or national level. They issue stock which is owned by investors, and those investors elect a board of directors who oversee the bank’s operations. Banks generally specialize in commercial loans – making loans to businesses to help them get started or expand.

Local banks are becoming less common, while national banks are becoming a lot more common. Over the last two decades, many local banks have been bought or merged with State banks, who in turn were bought or merged with National Banks. This has some advantages – by using a national bank, you will have access to a bank branch, ATM's, and in-person account services in a lot more locations than smaller institutions. Larger banks generally offer a lot more account management services and account types than other institutions. For example, a national bank might offer some types of checking accounts that offer points and rewards for certain types of purchases (like gas and groceries).

Because they are much larger, banks also generally have better online banking services, with more account management services. This includes things like transferring between your checking and savings accounts, viewing the checks you have previously written, checking balances with mobile apps, opening and closing credit cards, and managing automatic payments and deposits. Banks will also generally offer a lot more choice for residential loans as well.

There are some significant drawbacks as well. Banks generally have higher fees than other institutions for its services, with lower interest rates for savings (although this is not always the case). It is fairly rare to find truly “free” checking accounts at banks. The large amount of choice you have for your savings and checking accounts can be a drawback as well – if your life circumstances change from what they were when you first opened your account, you might end up with more fees and less benefits than with a different account type, but very few people consider changing very often.

Credit Unions are the financial opposite of banks – they are non-profit, almost exclusively local, and are owned by the people who make deposits. Every member who makes a deposit at a credit union is a part-owner, and can vote on issues relating to the union. They can also get elected to be the managers of the savings and loan.

Credit unions specialize in savings accounts and making short-term loans. Since they are non-profit, all the profits made by these loans are given back to the credit union’s depositors as dividends. Many depositors also prefer credit unions because of the more “Personal Banking”. This is because credit unions are almost exclusively local, and the credit union relies on the deposits to stay in business, and so they often have a reputation for excellent customer service. Since they are smaller with less management costs, Credit Unions will often have better savings account rates than a bank, and you are more likely to find free checking accounts.

Credit Unions also have their own drawbacks. They do not focus on commercial loans, and so if you want to start or expand a business, you might have to look elsewhere. They also prefer short-term loans, so you might also not be able to get many options for a residential mortgage. They are also much smaller than banks, which means you might not have access to as much of the online account management features, like bill payment and opening new accounts. If you travel a lot or move, the local credit union will also not be able to provide much service if you are outside their immediate area.

Savings and Loan institutions focus strongly on residential mortgages. In fact, by law they need to invest 65% of their assets in residential mortgages, and only up to 20% in commercial loans. They can also be local or national (like a bank).

Savings and Loans can be organized like a bank (owned by investor shareholders) or a credit union (owned by the depositors), but is always for-profit. Specializing in residential mortgages means that you might find the most flexibility for your mortgage at a Savings and Loan, and their smaller focus means that you will often see better terms for mortgages here than elsewhere (but not always!).

Savings and Loans do suffer from some of the same problems as credit unions. Their emphasis on slow-maturing mortgages means they are often lagging behind banks with account management and online services.

Consumer Finance Company:

A non-bank lender. A consumer finance company does not receive deposits, but does make loans to customers for business or personal use. It derives its profits from the interest on these loans. It is also called simply a finance company