What Are Private Financial Institutions?

Private financial institutions are entities like banks and hedge funds that are owned entirely by shareholders, without a government stake. These entities are still subject to government regulation and oversight but they operate with different end missions in mind. Their primary responsibility is to their shareholders, unlike public institutions, which have a public service mission, often development-oriented. Public financial institutions are owned wholly or in part by the government, and may include multiple government investors in the case of organizations like the world bank.

The positions occupied by shareholders can vary. At 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 an opportunity to vote on the credit union's officers and policies. This model can also include a link to another entity, like a corporation that creates a credit union for its employees.

Other private financial institutions are owned separately by shareholders who may or may not be depository members, and customers with funds on deposit do not necessarily own shares. These organizations invest the funds to provide returns for shareholders, and may offer benefits like interest on savings accounts to their customers. These private financial institutions can also engage in activities like investment of shareholder funds into stocks, bonds, and other financial instruments to generate a profit.

Such institutions can offer a variety of benefits to their shareholders. In some cases, the number of shareholders at private financial institutions may be limited; a single family, for instance, could hold a majority share in a bank, and the sale of shares might be restricted. Others have shares traded on the open market, and may have large numbers of shareholders thanks to stock dividends and releases of new issues. Shareholders can receive dividend payouts on their shares, and have an opportunity to vote in elections to determine the shape of the institution's policies.

Numerous regulations cover operations at private financial institutions. These include privacy requirements to protect the security of member information, as well as legal requirements concerning funds on reserve and other matters. These organizations are not accountable to the public in the way that public institutions are, but they 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.