Depository Institutions

7 Key excerpts on "Depository Institutions"

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  eBook - ePub

  The Tools & Techniques of Financial Planning, 14th Edition

  • Stephan Leimberg, Carolynn Tomin, William B. Reeve(Authors)
  • 2023(Publication Date)
  • The National Underwriter Company

    (Publisher)

  Basically, households save for different reasons than firms invest. Households try to minimize risk and have their savings readily accessible, or liquid. Firms are risk takers and need funds that will be tied up for a long time. By pooling the funds of savers and making loans to individual businesses, financial intermediaries reduce the costs of negotiation and search. 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.

  16.2 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.

  16.2a 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. A bank’s business, however, does not end there.

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  International Regulatory Rivalry in Open Economies: The Impact of Deregulation on the US and UK Financial Markets

  The Impact of Deregulation on the US and UK Financial Markets

  • Doha M. Abdelhamid(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Chapter 7 US Financial Institutions and Deregulation I. Introduction As the title of this chapter illustrates, the goal of this chapter is two-fold: first, to provide a coverage on the type, activity and regulatory constraints imposed over US-based financial institutions (financial service providers (FSPs) and institutional investors (Ils)); second, to discuss the innovations, changes in strategic corporate and regulatory orientations towards the challenges brought forward by deregulation. The chapter ends with a synthesis on the fruits of the deregulation era on US’ financial institutions. II. Depository Institutions US Depository Institutions include commercial banks (or simply banks), savings and loan associations (S&Ls), mutual savings banks (MSBs), and credit unions (CUs). All are financial intermediaries that accept deposits. These deposits represent the liabilities (debt) of the deposit-accepting institution. With the funds raised through deposits and other funding sources, Depository Institutions make direct loans to various entities and also invest in securities. Their income is derived from two sources: the income generated from the loans they make and the securities they purchase, and fee income. It is common to refer to S&Ls, MSBs, and CUs as ‘thrifts,’ which are specialized types of Depository Institutions. Traditionally, thrifts have not been permitted to accept deposits transferable by check (negotiable) through checking accounts. Instead, they have obtained funds primarily by tapping the savings of households. Since the early 1980s, however, thrifts have been allowed to offer negotiable deposits entirely equivalent to checking accounts, although they bear a different name. They are known as Negotiable Order of Withdrawals (NOW) accounts. Depository Institutions are highly regulated for historical reasons and the important role that they play in the US financial system.

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  Introduction to Business

  • Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, James C. Hyatt(Authors)
  • 2018(Publication Date)
  • Openstax

    (Publisher)

  Households are shown as suppliers of funds, and businesses and governments are shown as demanders. However, a single household, business, or government can be either a supplier or a demander, depending on the circumstances. Financial institutions are the heart of the financial system. They are convenient vehicles for financial intermediation. They can be divided into two broad groups: Depository Institutions (those that accept deposits) and nonDepository Institutions (those that do not accept deposits). Exhibit 15.5 The Financial Intermediation Process * Only the dominant suppliers and demanders are shown here. Clearly, a single household, business, or government can be either a supplier or demander, depending on circumstances. (Attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license.) Depository Financial Institutions Not all depository financial institutions are alike. Most people call the place where they save their money a “bank.” Some of those places are indeed banks, but other Depository Institutions include thrift institutions and credit unions. Chapter 15 Understanding Money and Financial Institutions 593 Commercial Banks A commercial bank is a profit-oriented financial institution that accepts deposits, makes business and consumer loans, invests in government and corporate securities, and provides other financial services. Commercial banks vary greatly in size, from the “money center” banks located in the nation’s financial centers to smaller regional and local community banks. As a result of consolidations, small banks are decreasing in number. A large share of the nation’s banking business is now held by a relatively small number of big banks. There are approximately 5,011 commercial banks in the United States, accounting for nearly $16 trillion in assets and $9 trillion in total liabilities. 10 Banks hold a variety of assets, as shown in the diagram in Exhibit 15.6.

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  Basic Finance

  An Introduction to Financial Institutions, Investments, and Management

  • Herbert Mayo, , , (Authors)
  • 2018(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 2 The Role of Financial Markets and Financial Intermediaries 21 Savings and loan associations developed later, primarily as a source of mortgage loans. Initially, S&L members (depositors) pooled their money to build housing. (The members were, in effect, the owners of the S&L.) Members borrowed the funds and when all the borrowed funds were repaid, the association was dissolved. Since these S&Ls were self-liquidating, they could not grow. They simply served a specific need of their members. Today the S&L has evolved into a thrift institution that accepts deposits from anyone and makes a variety of loans. S&Ls, however, continue to place more empha-sis on mortgage loans than do commercial banks. To attract deposits, S&Ls (and other thrifts) tend to pay a rate of interest that is slightly higher than the rates paid by commercial banks. 2.7 Regulation of Commercial Banks and Thrift Institutions Commercial banks and other savings banks are subject to government regulation, whose purpose is to protect the banks’ creditors, especially their depositors. The very nature of banking implies that when a commercial bank fails, substantial losses could be sustained by the bank’s depositors. This is exactly what occurred during the Great Depression of the 1930s, when the failure of many commercial banks imposed sub-stantial losses on depositors. These losses led to increased regulation of commercial banks and the establishment of federal deposit insurance, both of which are designed to protect depositors. Such protection promotes a viable banking system and eases the flow of savings into investment.

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  Introduction to Finance

  Markets, Investments, and Financial Management

  • Ronald W. Melicher, Edgar A. Norton(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  68 CHAPTER 3 Banks and Other Financial Institutions “Balances due from Depository Institutions” reflect, in large part, the keeping of substantial deposits with correspondent banks. Correspondent banks typically are located in large cities, and these relationships can help speed the check-clearing process, as discussed earlier in the chapter. “Balances due from Federal Reserve Banks” reflect reserves held at Federal Reserve Banks. Bank and other Depository Institutions are required to keep a percentage of their deposits as reserves either with the Reserve Bank in their districts or in the form of vault cash. As noted, the Monetary Con- trol Act requires uniform reserve amounts for all Depository Institutions to enhance monetary control and competitive fairness. As withdrawals are made and total deposit balances decrease, the amount of the required reserves also decreases. The vault cash reserves that have been freed may then be used to help meet withdrawal demands. 3.7.1.2 Securities Securities are the second major group of bank assets and account for about one-fifth of total assets. Securities issued by the U.S. Treasury and by U.S. government corporations and agencies account for about three-fourths of the total securities held by banks. Commercial banks also hold debt securities issued by state and local governments, as well as other types of debt instruments. Equity securities include investments in mutual funds and other equity securities, such as the holding of capital stock in a Federal Reserve Bank. Member banks of the Fed must hold shares of stock in the Federal Reserve Bank in their district. 3.7.1.3 Loans Loans account for about three-fifths of bank assets, making this the most important account category. Loans secured by real estate comprise about two-fifths of total bank loans and also represent one-fourth of total bank assets. In a secured loan, specific property is pledged as collateral for the loan.

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  Commercial Banking in an Era of Deregulation

  • Emmanuel Roussakis(Author)
  • 1997(Publication Date)
  • Praeger

    (Publisher)

  Many government activities are financed through bank loans and through bank purchase of bonds issued by municipalities, states, or the federal government. Short-term loans are issued to government bodies to cover cash-flow contingen- cies. When banks buy bond issues, they help finance government capital development in the form of construction, purchase of capital equipment, and other activities. Depository Function Banks are in the business of borrowing money, principally in the form of deposits; therefore they offer deposit accounts in a variety of forms. Commercial banks hold deposit funds in the form of transaction (demand) accounts and nontransaction (time and savings) accounts. The purposes for which funds are deposited with banks vary. One of the primary reasons for holding bank balances is to use the payment facilities of the banking system. Balances held for this purpose take the form of demand deposits. Predictable daily cash-flow needs obviously call for immediately available funds in a checking account. Because of the purpose for which they are held, balances in these accounts are referred to as transaction or working balances. In other cases, deposits are used as a reserve against contingencies. Whether maintained by individuals or businesses, these precautionary balances can take the form of demand, time, or savings deposits. For example, individuals may hold balances for the possibility of an unexpected emergency, to provide for 8 Commercial Banking retirement, or for other, nonspecific needs. Businesses maintain such balances to offset disruptions in production caused by strikes or recession. Many com- panies do well in periods of prosperity, but in periods of recession their incomes decline and their capital may dissipate. Funds may be placed in demand, time, or savings deposit accounts to fund future expenditures.

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  Economics

  Theory and Practice

  • Patrick J. Welch, Gerry F. Welch(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  financial institutions have changed significantly. We have seen increased similarities in the roles of financial insti- tutions, consolidations and mergers that have created very large organizations, banks and other financial Depository Institutions move into new nonbank industries, and movement away from savings banks. More recently, we have been through a serious financial crisis, one of the most severe the United States has faced. Legislative Changes In 1980, one of the most significant laws pertaining to money and banking was passed: the Depository Institutions Deregulation and Monetary Control Act. This law made financial Depository Institutions more similar in the deposit accounts they offer and the types of loans they make and eliminated much of the distinction between commer- cial banks and other financial Depository Institutions. The Monetary Control Act also Correspondent Banking Interbank relationship involving deposits and various services. Depository Institutions Deregulation and Monetary Control Act (1980) Legislation that increased the similarity among many financial institutions and increased the control of the Federal Reserve system. TEST YOUR UNDERSTANDING CHANGES IN A B ANK’ S R ESERVE ACCOUNT a 1. The First National Bank of Latrobe starts its day with $18,993,560 in its reserve account. During the day $1,256,780 in checks is deposited and cleared, and $1,379,000 in checks written by the bank’s customers is cleared. How much is in First National’s reserve account at the end of the day? 2. California One begins its day with $35,664,440 in its reserve account at the Fed. During the day it returns $2,350,000 to the Fed in currency that has accumulated in its vaults. What is the bank’s reserve account balance after the cash is returned? 3. The MBMB Bank of El Campo has $12,450,221 in its reserve account at the beginning of the day. During the day, $644,970 in deposited checks and $788,450 in checks written by MBMB’s customers are cleared.

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