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Financial Institutions

IMPORTANCE OF FORECASTS AND insurance; and investment, pension, and risk manage-
PROJECTIONS ment. There are also government and government-
Forecasts and projections have assumed extraordinary sig- sponsored institutions that carry out regulatory, supervi-
nificance in U.S. business. The release of corporate man- sory, and financing functions. Historically, each type has
agers’ earnings forecasts has become common. performed a specialized function in the financing and
Management forecasts have become an important source investment management needs of different industries and
of information for financial analysts and investors. Stock economic activities, as well as development of regional
prices show significant movements after the release of areas of the country.
information that shows earnings will be higher or lower
than current expectations. DEPOSIT TAKING
However, some skepticism in regard to these forecasts Deposit-taking institutions take the form of commercial
exists on the part of financial analysts and governmental banks, which accept deposits and make commercial, real
agencies, such as the Securities and Exchange Commis- estate, and other loans; savings and loan associations and
sion, because of the fear that forecasts may be biased at mutual savings banks, which accept deposits and make
times in order to influence capital markets or may simply mortgage and other types of loans; and credit unions,
be inaccurate. In addition, prospective financial informa- which are cooperative organizations that issue share cer-
tion is considered vital in relation to mergers and acquisi- tificates and make member (consumer) and other loans.
tions as well as to such business entity management Altogether, there were more than 9,000 deposit-taking
activities as budgeting. In these circumstances, it would institutions with more than 92,000 branches spread across
appear advisable to obtain certified public accountant the U.S. economy in 2005.
examinations and reports before the public release of The U.S. commercial banking system practiced com-
prospective financial information. petition through a large number of firms in the industry

SEE ALSO Budgets and Budgeting; Finance; Forecasing in from 1776 to 1976. It was designed to be a unit-banking
Business system in which state charters of banks allowed only one-
office banking. The system also encouraged thrift and use
of local savings for investment in the local economy. The
BIBLIOGRAPHY unit-banking system not only forced competition among
Coller, Maribeth, and Yohn, Teri Lombardi (1998). “Manage-
existing and new banks in a given banking market, it
ment Forecasts: What Do We Know?” Financial Analysts
Journal (January/February): 58-62. deliberately avoided the emergence of monopolies in the
industry. The founding fathers in the original thirteen
Guide for Prospective Financial Information (2002). New York:
American Institute of Certified Public Accountants. states understood the harm monopolies could inflict on
the economic and financial systems. In due course the
Hirst, D. Eric, Koonce, Lisa L., and Miller, Jeffrey S. (1998).
“The Joint Effect of Management’s Prior Forecast Accuracy U.S. Congress passed the Sherman Antitrust Act of
and the Form of Its Financial Forecasts on Investor Judg- 1890—and subsequent laws and regulations—making
ment.” Journal of Accounting Research 37 (Supplement): 101- monopoly and monopolistic practices unacceptable and
124. therefore illegal.
The commercial banking industry dominated the
U.S. financial industry from the beginning to the 1970s
Bernard H. Newman
when financial product innovation and the resulting busi-
ness and consumer financial choices exploded to create
competition across financial services industries. The com-
FINANCIAL mercial banking industry and its limited product offerings
on both sides of the balance sheet were the only choices
INSTITUTIONS available to the general public until the late 1960s. This is
A financial institution is one that facilitates allocation of because the commercial banks specialized in taking check-
financial resources from its source to potential users. A ing account deposits on the liability side and making com-
large number of different types of financial institutions in mercial loans on the asset side. For the safety of their
the United States create a rich mosaic in the financial sys- operations, they relied on maturity-based hedging of
tem. Some institutions acquire funds and make them mostly short-term liabilities with short-term self-liquidat-
available to users. Others act as middlemen between ing commercial loans as assets. This also meant that
deficit and surplus units. Still others invest (manage) households, farmers, students, and other groups did not
funds as agents for their clients. The key categories of have access to financial capital as commercial banks were
financial institutions are: deposit taking; finance and not equipped to manage risks inherent in such loans.

312 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION