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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