Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
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CHAPTER 3
Depository Institutions
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
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Learning Objectives
- What is a depository institution
- What is the asset/liability problem faced by depository institutions
- How does a depository institution generate income
- What are the differences between commercial banks, savings and loan associations, savings banks, and credit unions
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Commercial Banks
- Bank Services
- Individual banking
- Institutional banking
- Global banking
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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Commercial Banks (continued)
- Bank Funding
- Deposits
- Nondeposit borrowing
- Common stock and retained earnings
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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Commercial Banks (continued)
- Deposits
- Demand deposits (checking accounts)
- Time deposits (certificates of deposit)
- Money market demand account (MMDA)
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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Commercial Banks (continued)
- Nondeposit borrowing
- Federal Reserve Bank
- Discount window
- Reserve Requirements
- All 12 Federal Reserve Banks
- Penalty for failure to satisfy reserve requirements
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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Savings and Loans Associations (continued)
- Funding
- Negotiable order of withdrawal (NOW) accounts
- Money market deposit accounts (MMDA)
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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Savings Banks
- Similar to S&L’s
- Greater portfolio diversification
- Corporate bonds
- Treasury and government securities
- Municipal securities
- Common stock
- Consumer loans
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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Savings Banks
- Were able to handle funding risk better than S&L’s
- Principal source of funds
- deposits
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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Credit Unions
- Smallest and youngest of the depository institutions
- “Common bond” requirement for membership
- Member owned
- Member deposits are called shares
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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Summary
- Depository institutions raise funds, make loans and invest in securities
- They seek to earnings through positive spread between assets and cost of funds
- Basil Committee on Banking Supervision establishes risk and management guidelines for banks
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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Summary (continued)
- Commercial banks may be classified as individual, institutional and global
- The Federal Reserve Banks establish reserve requirements for banks
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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
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