Depository Institution
1a) Explain the characteristics of the three types of depository institutions.
Depository institution is a firm that takes deposits from households and firms and makes loans to other households and firms. There are three types of depository institutions that are commercial banks, thrift institutions and money market mutual funds.
i) Commercial banks Is a firm that is licensed by the Comptroller of the Currency or by a state agency to receive deposits and make loans. The aim of a bank is to maximize the net worth of its stockholders. To achieve this objective, the interest rate at which a bank lends exceeds the interest rate at which it borrows. But a bank must perform a delicate balancing act. Besides, a bank must be prudent in the way it uses its deposits, balancing security for the depositors against profit for its stockholders. To achieve securities for its depositors, a bank divides the funds it receives in deposits into two parts that are reserves and loans.
Reserves are the cash in the bank’s vault plus its deposits at Federal Reserves banks. A bank keeps only small fraction of its funds in reserves and lends the rest. It has three types of assets which are firstly, liquid asset. For example, U.S government Treasury bills and commercial bills. The second asset is investment securities, that are longer- term U.S government bonds and other bonds.
Loans are commitments of fixed amounts of money for agreed-upon periods of time. Example of loan is outstanding balances on credit card accounts.
ii) Thrift institutions
The thrift institutions are savings and loan associations, savings banks, and credit unions.
Savings and loan association is a depository institution that receives checking and savings deposits and that make personal, commercial and home purchase loans.
Saving banks is a depository institution that accepts savings deposits and makes mostly home-purchase loans. Some savings banks that are called mutual savings banks are
Depository institution is a firm that takes deposits from households and firms and makes loans to other households and firms. There are three types of depository institutions that are commercial banks, thrift institutions and money market mutual funds.
i) Commercial banks Is a firm that is licensed by the Comptroller of the Currency or by a state agency to receive deposits and make loans. The aim of a bank is to maximize the net worth of its stockholders. To achieve this objective, the interest rate at which a bank lends exceeds the interest rate at which it borrows. But a bank must perform a delicate balancing act. Besides, a bank must be prudent in the way it uses its deposits, balancing security for the depositors against profit for its stockholders. To achieve securities for its depositors, a bank divides the funds it receives in deposits into two parts that are reserves and loans.
Reserves are the cash in the bank’s vault plus its deposits at Federal Reserves banks. A bank keeps only small fraction of its funds in reserves and lends the rest. It has three types of assets which are firstly, liquid asset. For example, U.S government Treasury bills and commercial bills. The second asset is investment securities, that are longer- term U.S government bonds and other bonds.
Loans are commitments of fixed amounts of money for agreed-upon periods of time. Example of loan is outstanding balances on credit card accounts.
ii) Thrift institutions
The thrift institutions are savings and loan associations, savings banks, and credit unions.
Savings and loan association is a depository institution that receives checking and savings deposits and that make personal, commercial and home purchase loans.
Saving banks is a depository institution that accepts savings deposits and makes mostly home-purchase loans. Some savings banks that are called mutual savings banks are