Types of financial institution

Financial institutions in the United Kingdom divide into three broad categories: (i) the deposit-taking institutions such as banks and building societies; (ii) institutions such as insurance companies and pension funds which collect and invest longer-term savings; and (iii) the specialized financing agencies, such as Finance for Industry and the National Enterprise Board.

The common feature of the first category is that they take deposits that are generally highly liquid, i.e. of a short-term nature, and use them to make loans or to acquire other assets with longer average maturities. In 1981 it was estimated that UK banks accounted for about 47% of all sterling assets of the financial institutions, a further 43% being held by building societies. The latter are mutual organizations whose prime function is to lend on mortgage for house purchase. Their loans are long term, commonly 25 years, although the average life of individual mortgage agreements in practice is only around seven years. The lending business of commercial banks is more broadly based, loans varying in size and terms from an overdraft of a few hundred pounds or less, to term loans of several hundred million pounds to multinational companies or sovereign governments for a number of years. A loan too large for one bank to take on can sometimes be provided by a number of banks acting as a syndicate.

A notable characteristic of insurance companies and pension funds is that the funds placed with them are for the most part contractual, so that the inflow of funds is relatively steady and predictable and the funds are placed generally for the long term.