Accountants' Handbook Volume Two: Special Industries and Special Topics, Eleventh Edition

Chapter 31. FINANCIAL INSTITUTIONS

Laura J. Phillips CPA

Ernst & Young LLP

Mark R. Rouchard, CPA

Ernst & Young LLP

Dale K. Thompson, CPA

Ernst & Young LLP

Alan M. Kall, CPA

Ernst & Young LLP

Keith M. Housum, CPA

Ernst & Young LLP

OVERVIEW

(a) CHANGING THE ENVIRONMENT.

The financial institutions industry has changed significantly in the last decade. Regulatory changes and increased competition have further blurred the lines among depository institutions, mortgage banking activities, investment companies, credit unions, investment banks, insurance companies, finance companies, and securities brokers and dealers.

Competition has increased as all types of financial entities conduct business directly with potential depositors and borrowers. Transactions traditionally executed through depository institutions are now handled by all types of financial institutions. Increased competition has heightened the depository institutions' desire for innovative approaches to attracting depositors and borrowers. Institutions are seeking higher levels of noninterest income, restructuring banking operations to reduce costs, and continuing consolidation within the industry.

(b) ROLE IN THE ECONOMY.

Financial institutions in their basic role provide a medium of exchange; however, they may also serve as a tool to regulate the economy. In a complex financial and economic environment, the regulation of financial institutions—directly and indirectly—is used to impact economic activity.

(c) TYPES OF FINANCIAL INSTITUTIONS. ...