What is the difference between a finance company and a bank?
There’s actually not a lot of difference between a bank and a finance company as they both accept funds from the public to be used for any manner of lending. Lending can include loans for housing, car finance, business ventures, personal loans and more.
The main difference would be the risk level and the fact that banks are more regulated than a finance company. A finance company will lend to those unable to obtain funds from a bank. In saying that, there is a place for finance companies as there are many projects that would never get off the ground if non-bank lending was unavailable.
Either financial institution could fail (an inability to meet its credit obligations) if there was a run on its money or a case of fraud or of mismanagement. In New Zealand we are seeing the failure of many finance companies but we have seen bank crisis and bank failures in the past. There has been the Great Depression, the Japanese banking crisis in the 1990’s or the Savings and Loan Crisis in the USA in the 70’s and 80’s. Of course there’s also been fraud such as in the case of Barings Bank, one of the oldest merchant banks in the UK.
An interesting paper on Bank Failures in Mature Economies was prepared in April 2004 for the Basel Committee on Banking Supervision.