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Financial services refer to the non-financial services provided by businesses in the financial services sector. The finance industry refers to all those financial institutions and other businesses involved in the business of financial services. This includes investment banking, corporate investment, estate planning, mortgage and trust management, financial planning, insurance, asset management, trading, franchises etc. The various financial services sectors include many small business finance services as well.
The basic function of any financial services sector is to provide financial tools and investment instruments to create wealth and improve economic growth. The key function of banks is to provide monetary liquidity. In the United States, the banking system is generally considered as one of the major contributors to the overall economic growth. However, this has not always been the case.
In fact, it is not uncommon for banks to contribute significantly less to overall economic growth than other financial services sectors. Moreover, the trend of diminishing returns for bank loans and increasing concentration of resources in the banking sector (reducing residential and commercial real estate holdings, adding more foreign exchange trading activities and creating or consolidating captive external investments) have resulted in some consternation in the banking sector. In addition, recent legislation has resulted in limiting the freedom of banks with respect to the use of their own assets and capital. An important feature of financial services is “leverage”. Banks enjoy significant “leverage” in relation to other financial sectors due to the presence of “non-bank lenders”.
The vast majority of financial institutions operate through the traditional means of direct transaction or credit (such as commercial banks, savings and loans, mortgage banks and building societies). A relatively small number of financial services sector entities – mainly broker-banks and insurance companies – operate through financial markets. Financial markets are the financial instruments used by financial institutions to facilitate the transfer of risks and rewards between the various financial institutions and their customers. The most popular financial markets are foreign exchange trading, stocks and fixed exchange traded products. Foreign exchange trading involves the buying and sale of the currencies of different countries.
Another segment of the financial services sector is that of commercial banks. Most commercial banks are subject to government regulation. The structure of commercial banks resembles that of the larger banking sector. The most common types of financial institutions are branch offices of commercial banks. The most significant difference between the two is that branches are generally located in areas where the business to be conducted resides, whereas commercial banks usually conduct all their business dealings on a distant basis from their location. This ensures that the customer can conduct all financial transactions even when the location is located overseas.
The third segment of the financial services sector is that of government regulators and inspectors. The activities performed by inspectors and regulators fall under the heading of regulatory activities. Regulators monitor the activities of financial service companies to make sure that they are meeting minimum standards and that they are not defrauding their customers. Regulations issued by government regulators usually cover insurance companies and banks.
Banks are also one of the most important segments of the financial services sector. Most banks provide a number of financial services, including cash advances, loans, investing, investment, credit card processing, home equity loans, and mortgage banking services. In addition to these, commercial banks provide many other financial services such as international money transfers, corporate financing, and financial product counseling.
The fourth segment of the financial services sector is retail trading. The most common financial goods being traded in the financial services industry are equities, derivatives, and interest rates. Derivatives refer to the products that allow a firm to become more financially stable during a financial crisis by changing the face value of one’s liabilities. Interest rates are used to determine the value of the securities underlying an economic entity.