Depository institutions

Depository institutions are financial entities that receive deposits from individuals and businesses, exchanging them for the payment of interest. The term “depository institutions” also refers to entities in which money or property is deposited for storage or protection. These institutions could be banks, associations, or entities that hold securities and assets in securities trading operations. Depository institutions aim to provide protection and achieve liquidity in the markets, as they invest the deposited funds to protect them, provide loans to others, and participate in purchasing various securities. In conclusion, depository institutions must provide an effective system for transferring funds, returning the value of deposits on the same conditions upon request. The importance of depository institutions lies in providing funds to individuals and companies who need them, and they also provide individuals with surplus funds the opportunity to employ them and earn interest on them. These institutions provide various services, such as check clearing, account management, and credit cards, and base their main income on using the money they receive from depositors to make loans and purchase securities that pay a higher interest than those paid to depositors.

Types of depository institutions:
The types of depository institutions are represented by three types of financial companies, which are as follows:

  • Commercial banks.
  • Savings institutions.
  • investment funds.

First: Commercial banks:

A commercial bank is a licensed company that takes deposits and makes loans. Some commercial banks offer a wide range of banking services and have extensive international operations.

Second: Savings institutions:

Savings institutions include savings and loan associations, savings banks, and credit unions. Savings and loan associations are depository institutions that accept deposits and make personal, business, and home equity loans. A thrift or thrift bank is a depository institution that takes savings deposits and often makes home loans. Credit unions are depository institutions owned by a social or economic group that take savings deposits and often make personal loans.

Third: Money market investment funds:

A money market mutual fund is a mutual fund managed by a financial institution, whose shares in the fund are sold and the assets are held. The money a commercial bank receives from depositors and other funds it borrows is stored in four types of assets.

Bank reserves: It consists of banknotes and coins in the bank's treasury or in a reserve deposit account with the central bank. It is used for cash withdrawal needs and payments to other banks.

Liquid assets: They include payday loans to other banks, government treasury bills, and commercial bonds. These assets are the first line of defense in the event of a need for liquidity.

Money bills: Includes government bonds and other bonds. These assets can be sold and converted into reserves, but at prices that change, so they carry more risk than liquid assets.

Loans: Money committed for an agreed-upon period is used to finance investments, purchases of homes, cars, etc. These funds are considered the bank's assets with the highest risk and return.

Economic importance of depository institutions:

Depository institutions earn a portion of their profits by paying lower interest rates on deposits than they earn on loans. These institutions offer multiple benefits, including creating liquidity, pooling risk, reducing the cost of borrowing, and reducing the cost of monitoring borrowers.

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