Financial Intermediaries – Depository
In this article, we will discuss the main types of depository institutions:
A1. Commercial Banks:
Banking means accepting deposits of money from the public for the purpose of lending or investment. Commercial Banks provide financial services to businesses, including credit and debit cards, bank accounts, deposits and loans, and secured and unsecured loans.
Commercial banks are the most important financial intermediaries. Commercial banks in modern capitalist societies act as financial intermediaries, raising funds from depositors and lending the same funds to borrowers. Commercial banks play a key role in the financial system by taking in deposits from households and firms and investing most of those deposits, either by making loans to households and firms or by buying securities, such as government bonds or securitized loans.
Due to deregulation, commercial banks are also competing more with investment banks in money market operations, bond underwriting, and financial advisory work.
Commercial banks are owned by stockholders who expect a profit on their investments. Commercial banks may work with both businesses and individuals. Commercial banks that specialize only in business banking are sometimes called wholesale banks. There are two types of commercial banks, public sector and private sector banks.
- Public Sector Banks: Public sectors banks are those in which the government has a major stake and they usually need to emphasize on social objectives than on profitability.
- Private sector banks: Private sector banks are owned, managed and controlled by private promoters and they are free to operate as per market forces.
The depositors’ claims against the bank, their deposits, are liquid, meaning banks are expected to redeem deposits on demand, instantly. Banks’ claims against their borrowers are much less liquid, giving borrowers a much longer span of time to repay money owed banks. Because a bank cannot immediately reclaim money lent to borrowers, it may face bankruptcy if all its depositors show up on a given day to withdraw all their money.
A2. Savings and Loan Associations:
Savings and loan associations (S&Ls) may go by various names. Building and loan associations, homestead banks, and cooperative banks are all names for savings and loan associations. A savings and loan association (or S&L), also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans. Savings and loan associations receive most of their deposits from individuals.
Chartered by either state or federal governments, these institutions grew by focusing on real estate lending for people. The most important purpose of these institutions is to make mortgage loans on residential property. They are the primary source of financial assistance to a large segment of American homeowners. As home-financing institutions, they give primary attention to single-family residences and are equipped to make loans in this area. Today, they offer most of the same services as commercial banks. Savings and loan associations are owned not by outside investors, but by depositors themselves, who receive shares of the company.
Some of the most important characteristics of a savings and loan association are:
- It is generally a locally owned and privately managed home financing institution.
- It receives individuals' savings and uses these funds to make long-term amortized loans to home purchasers.
- It makes loans for the construction, purchase, repair, or refinancing of houses.
- It is state or federally chartered.
A3: Mutual Savings Banks:
A mutual savings bank is a financial institution similar to savings and loan associations. They receive deposits primarily from individuals and concentrate on private real-estate mortgages and are chartered by a central or regional government, without capital stock. Mutual savings banks are owned by depositors as well, that is owned by its members who subscribe to a common fund. From this fund claims, loans, etc., are paid. Profits after deductions are shared between the members. The institution is intended to provide a safe place for individual members to save and to invest those savings in mortgages, loans, stocks, bonds and other securities and to share in any profits or losses that result. The members own the business.
These state-chartered banks are sometimes granted greater powers with regard to assets and liabilities than S&Ls, but usually not as much as those of commercial banks. Mutual savings banks and savings and loan associations are sometimes called thrift institutions.
A4. Credit Unions:
A credit union is a member-owned financial cooperative, democratically controlled by its members, and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members. Credit unions also are owned by depositors, but the users of credit unions must be members. Membership is usually based on some type of association, such as a common employer, a certain line of work, a geographical region, or even a social or religious affiliation. Many credit unions also provide services intended to support community development or sustainable international development on a local level, and could be considered community development financial institutions.
Credit unions are not-for-profit financial institutions that exist to benefit the members. Any money beyond costs is returned to the members in the form of dividends on savings, reduced fees for services, or lower rates for loans. Worldwide, credit union systems vary significantly in terms of total system assets and average institution asset size, ranging from volunteer operations with a handful of members to institutions with several billion dollars in assets and hundreds of thousands of members.