Private Financial Institutions Answers

Finance companies generally do not accept deposits. They raise funds by borrowing or issuing securities and use that money to make loans, often to consumers or businesses that may not qualify for bank loans. This differs from institutions such as banks, which accept deposits as a major source of funds.

The Federal Reserve System was established to make the nation's banking and monetary system more stable, help prevent or respond to financial panics, and provide a more flexible currency and emergency lending for banks. Congress established the Fed by passing the Federal Reserve Act, which President Woodrow Wilson signed in 1913.

Credit unions are member-owned, not-for-profit cooperatives, usually serving people who share a particular community, employer, or association. Banks are generally for-profit institutions owned by shareholders and serve the public more broadly. Both accept deposits and make loans, but credit union earnings benefit their members, often through lower fees or more favorable rates.

Banks use money deposited by customers to make loans to borrowers. Borrowers pay interest to the bank, and the bank pays depositors a lower amount of interest. The difference between the interest the bank earns and the interest it pays is a source of profit.

A state or national charter legally authorizes an institution to operate as a bank. Once chartered, it can provide banking services such as accepting deposits and making loans, while following the laws and regulations that apply to its charter.

Both crises involved risky real-estate lending, declining property values, and losses at financial institutions that affected the wider economy. In the 1980s, savings and loan institutions faced large losses partly because rising interest rates made their long-term, fixed-rate mortgages costly to fund with short-term deposits; deregulation also encouraged some institutions to take greater risks. The 2007 crisis followed a housing bubble and a wave of risky subprime mortgages. Those mortgages were bundled into securities and spread through the financial system, so defaults and falling home prices caused losses at many interconnected institutions. Thus, both crises involved real estate and risky lending, but their main financial mechanisms differed.