Private financial institutions include entities such as banks and hedge funds that are wholly owned by shareholders.
Private financial institutions are entities such as banks and hedge funds that are owned entirely by shareholders, with no government involvement. These entities are still subject to government regulation and oversight, but they operate with different end missions in mind. Its primary responsibility is to its shareholders, unlike public institutions, which have a public service mission, often development-oriented. Public financial institutions are wholly or partially owned by the government and may include various government investors in the case of organizations such as the World Bank.
In some cases, the number of shareholders in private financial institutions may be limited.
Positions held by shareholders may vary. In a credit union, every customer is also a shareholder, with the number of shares determined by the size of the deposit. The credit union has an obligation to generate returns for its customers, who also have the opportunity to vote on the cooperative’s directors and policies. This model may also include a link to another entity, such as a company that creates a credit union for its employees.
Other private financial institutions are held separately by shareholders who may or may not be depositary members, and customers with funds on deposit do not necessarily own shares. These organizations invest the funds to provide shareholder returns and can offer benefits such as interest on savings accounts to their customers. These private financial institutions may also engage in activities such as investing shareholder funds in stocks, bonds and other financial instruments to generate profit.
These institutions can offer a variety of benefits to their shareholders. In some cases, the number of shareholders in private financial institutions may be limited; a single family, for example, could hold a majority stake in a bank, and the sale of shares could be restricted. Others are publicly traded and may have a large number of shareholders thanks to stock dividends and new issuance launches. Shareholders can receive dividends on their shares and have the opportunity to vote in elections to determine the shape of the institution’s policies.
Numerous regulations cover transactions in private financial institutions. This includes privacy requirements to protect the security of member information, as well as legal requirements regarding reserve funds and other matters. These organizations are not accountable to the public in the same way as public institutions, but are subject to controls to limit the possibility of financial panics and crises that could create a ripple effect. In contrast, a public financial institution, like a development agency, needs to provide funds for public works, publish information about its activities, and work with the public good in mind.