Depository Institutions
Depository institutions are financial institutions that accept and manage deposits from customers. They include commercial banks, savings and loan associations, and credit unions. These institutions play a crucial role in the economy by providing a safe place for individuals and businesses to deposit their money, as well as offering various financial services such as loans and mortgages.
6 Key excerpts on "Depository Institutions"
- Stephan Leimberg, Robert J. Doyle, Michael S. Jackson, Martin J Satinsky(Authors)
- 2019(Publication Date)
- The National Underwriter Company(Publisher)
...They also acquire expertise in both evaluating and monitoring investments. Some financial intermediaries also provide the liquidity households demand. Financial intermediaries reduce risk through diversification. They invest in a large number of projects whose returns, although uncertain, are independent of one another. Every household has a small stake in many projects. Together, financial intermediaries can achieve the average return on investment with greater certainty than any single household can. This chapter will explain the role of banks and other Depository Institutions in the economy, the differences among the various Depository Institutions, the role of bank regulators, including both state and federal regulators, the role of the Federal Reserve System and the workings of the deposit insurance programs, the banking structure in the U.S., and the purpose and characteristics of a number of other financial intermediaries. These other financial institutions include finance companies, investment banks and brokerage firms, investment companies and mutual funds, and a number of other pooled investment financial intermediaries—unit trusts, REITs, mortgage-backed bonds, REMICs, exchange-traded funds, and insurance companies. BANKS AND THE ECONOMY Bank is a term people use broadly to refer to many different types of financial institutions. What people call their bank may be a bank and trust company, a savings bank, a savings and loan association, or other depository institution. What Is a Bank? Banks are privately owned institutions that, generally, accept deposits and make loans. Deposits are money people leave in an institution with the understanding that they can get it back at any time or at an agreed-upon future time. A loan is money lent out to a borrower to be generally paid back with interest. This action of taking deposits and making loans is called financial intermediation...
eBook - ePubMoney and Banking
An International Text
- Robert Eyler(Author)
- 2009(Publication Date)
- Routledge(Publisher)
...The use of customer funds, in any form, allows the financial institution to invest in markets with expected higher rates of return in such a way as to gain from a spread on the initial costs. This spread is the focus of all financial institutions, and is called different names in different markets. However, each institution described below has the goal of achieving the largest spread. Let’s begin with the quintessential depository institution, the commercial bank. Depository Institutions Commercial banking Banks promise security for depositors and sometimes an explicit rate of return. Without an explicit rate of return, the promise of security provides an implicit rate of return. Commercial banking has its roots in business banking, providing liquidity and business services for firms first and foremost. Commercial banks have expanded beyond business customers to household deposits to be lucrative sources of both funding and new business for banking products. The credit card industry, for example, grew as a result of a larger proportion of households taking advantage of offers made by banks to establish personal lines of credit. These lines of credit evolved into the credit card industry we know today. However, banks are ultimately focused on drawing in funding and sell other banking services and deposits to business and household customers. These include interest-bearing accounts, such as certificates of deposit, and other investment vehicles that are considered low risk and provide low-cost funding for banks. Savings banks and savings and loan associations The thrift industry, composed of Depository Institutions that focus on household deposits and lending to households, has generally been split into two submarkets. The first is savings banks and savings and loan associations (S&Ls). A savings bank looks a lot like a commercial bank in structure...
eBook - ePubThe Bank Credit Analysis Handbook
A Guide for Analysts, Bankers and Investors
- Jonathan Golin, Philippe Delhaise(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
...In contrast, nonfinancial firms, with a few exceptions, are lightly regulated in most jurisdictions, and governments generally take a hands-off policy toward their activities. In most contemporary market-driven economies, if an ordinary company fails, it is of no great concern. This is not so in the case of banks. Because they depend on depositor confidence for their survival, and since governments neither want to confront irate depositors, nor more critically, contend with a significant number of banks unable to function as payment and credit conduits, deposit-taking institutions are rarely left to fend for themselves and go bust without a passing thought. Even where deposit insurance exists and depositors remain pacified, the failure of a single critical financial institution may be plausibly viewed by policymakers as likely to have a detrimental impact on the health of the regional or national financial system. Moreover, the costs of repairing a banking crisis typically far outweigh the costs of taking prudent measures to prevent one. Governments therefore actively monitor, regulate, and—in light of the importance of banks to their respective economies—ultimately function as lenders of last resort through the national central bank, or an equivalent agency. Owing to the privileged position that banks commonly enjoy, their credit analysis must give due consideration to an institution’s role within the relevant financial system. Its position will affect the analyst’s assessment concerning the probability, and degree, of support that may be offered by the state—whether explicitly or more commonly implicitly—in the case the bank experiences financial distress. Making such assessments not only calls for consideration of applicable laws and regulations, but also relevant institutional structures and policies, both historic and prospective...
eBook - ePub- John Roscoe Turner(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...Surplus funds flow into the bank and become the basis of credit issues, which flow out to the places where capital is needed. Thus banks become equalizing agencies of finance throughout the community. Small driblets of idle capital are collected by the banks and consolidated into huge funds capable of meeting the demands for large capital on the part of great industrial establishments. In this way the banks put idle capital to work and they arrange capital in such volumes that it can work most effectively. 10. Deposits. Individuals might retain their own funds, might disappoint the burglars by hiding them in unsuspected places, or at enormous expense keep burglar-proof vaults, but a division of labor is better which allows one man to make it his business to provide a place of safekeeping and so do this work for all. Those who intrust their funds to a bank are called depositors and the funds so intrusted are deposits. The bank holds itself ready to pay the depositor at any moment, or "on demand." Individuals would rather leave their means "on deposit" than to bear the risk and inconvenience of carrying them about. Consequently, even the most wealthy carry little money with them; they carry instead the right to draw money. Thus risks and inconvenience are reduced to a minimum. But the money deposited is small in comparison with the deposits made through discounting. A simple illustration will show how deposits are thus made. A merchant who sells on time furnishes a farmer with tools, fertilizer, and seed, taking in exchange his note for $500, which will mature four months hence, when he sells the crop. The merchant cannot exchange this note to distant commercial houses for goods, as such houses would not take the note of a man, though of high moral honor and financial ability, who is unknown except in his home community. But such houses make it a practice to accept the credit of banks...
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...Until 2008, all types of bank deposits received were insured up to a limit of $100,000. This limit was increased to $250,000 during the financial crisis of 2008–2009. To protect depositors when an insured bank fails, the FDIC pays depositors up to the $250,000 insurance limit and recovers as much money as possible from the failed institution’s assets—primarily loans, real estate, and securities. To help prevent bank failure, the FDIC sometimes arranges a merger between a sound bank and a failing bank; this allows the failing bank to keep its doors open, thus preserving the confidence of the banking public. This chapter has examined the nature of money and the operation of our banking system. The next chapter will broaden our understanding of these topics by considering the Federal Reserve and monetary policy. Check Point Identify the major assets and liabilities of a typical commercial bank. How do banks create money? Why does the banking system have a money multiplier? How does the Federal Deposit Insurance Corporation promote stability in the nation’s banking system? Chapter Summary Money is the set of assets in the economy that people use regularly to purchase goods and services from others. Money has three functions in the economy: It is a medium of exchange, a unit of account, and a store of value. These functions distinguish money from other assets such as stocks, bonds, and real estate. Are credit cards money? Not at all! When you use a credit card to make a purchase, you obtain a short-term loan from the financial institution that issued the card. Credit cards are thus a method of postponing payment for a brief period. In shopping for a credit card, it is important to consider features such as the card’s annual percentage rate, the grace period, fees such as an over-limit fee or late payment fee, and the annual cost of the card. The basic money supply (M1) in the United States consists of coins, paper money, checking accounts, and traveler’s checks...
- Maureen Burton, Reynold F. Nesiba, Bruce Brown(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
...In 2008, the ongoing financial crisis is also facilitating the disappearance of the large investment banking firm. Note that Lehman Brothers has declared bankruptcy; Merrill Lynch has been bought by Bank of America; Bear Stearns has been bought by J.P. Morgan Chase, and Goldman Sachs and Morgan Stanley have converted their charters to bank holding companies. Although the goal, financial stability, may remain the same, regulations perceived as advancing this goal may change over time. Finally, profit-seeking financial firms will seek to exploit any regulatory anomaly. They may obey the letter of the law, but chances are they will circumvent the regulatory intent. Thus, firms may influence the nature of future regulatory changes deemed to be both prudent and effective. Creation of effective regulations requires anticipation of the likely responses of those being regulated. In the next chapter, we look at insurance companies. Summary of Major Points Because the failure of a depository institution has system-wide repercussions, Congress has enacted legislation to regulate the financial services industry with the goal of averting such a failure. A segmented financial services industry resulted in a segmented regulatory structure. Regulation is by institution group or financial market (product). All Depository Institutions are regulated by the Fed with regard to reserve requirements. The FDIC also regulates banks and thrifts that opt for federal deposit insurance. Many other regulatory agencies regulate specific institutions. In addition, agencies such as the SEC regulate stocks and bonds. Other agencies regulate other financial products such as futures and options. Some product groups establish self-regulatory bodies. At the present time, no agency is in charge of regulating the money market. The regulatory structure is in an ongoing evolutionary process. Beginning in 1980, the banking system was deregulated...
