Daffodil International University

Faculties and Departments => Business Administration => Business & Entrepreneurship => BBA Discussion Forum => Topic started by: Golam Kibria on June 17, 2012, 12:43:18 AM

Title: Depository Intitutions
Post by: Golam Kibria on June 17, 2012, 12:43:18 AM
Depository Institutions :

Depository institutions are the financial intermediaries which are allowed or licensed by the central banks to accept deposit for doing lending business. Commercial Banks are the prime forms of depository institutions.

By Golam Kibria.
Title: Re: Depository Intitutions
Post by: Golam Kibria on June 17, 2012, 12:47:23 AM
How depository institutions make money ?

Depository  institutions seek to generate income by the return  on assets  they earn and the cost of their funds. They by money and sell money. How do they buy and sell money ?Life insurance companies and property and casualty insurance companies are also in the spread business.

Explain liability and types of liability available ?

By liabilities of a financial institution we mean the amount and timing of cash outlays that must be made to satisfy the contractual terms of obligation issued. The liabilities of any financial institution can be categorized into four types.

•Type 1 liabilities :
Here both the timing and the amount of cash outlay is known with certainty. Depository institutions know the amount they are committed to pay (principle + interest), on the maturity of a fixed rate deposit. A Type 1 liability requiring financial institutions to pay $50,000 six months from now is an example. GIC- Guaranteed investment contract, is the obligation of the life insurance company  to guarantee an interest rate for a sum of money(premium), up to a specified maturity date.

•Type 2 Liability :
The amount of cash outlay is known, but the timing of cash outlay is uncertain. For an annual premium, life insurance companies agree to make specified dollar payments to policy beneficiaries upon the death of the insured.

•Type 3 liabilities : The timing of cash outlay is known but the amount is uncertain.  An obligation issued whose interest rate adjusts periodically according to some benchmark. CD(??) have a stated maturity. CD can be fixed and can be floated. If a depository institution issues a three year floating rate CD that adjusts every three months, than the interest rate paid is three months T-bill point + 1% point. Here the maturity is three years but the amount depository institutions need to pay is uncertain.

•Type 4 liability : Both the timing and amount of cash outlay is uncertain. General insurance products and pension obligation. Why are these type 4 liabilities  for issuer to policyholder, in light of automobile and home insurance policy ???

How to manage liquidity in cases of uncertainty ?

•Converting or renegotiating debt instruments , changing the nature of obligation. Depositors and institutions withdraw funs prior to maturity dates incurring early withdrawal penalty.

•Life insurance products have cash-surrender value. At specified dates, policyholders can exchange policy for a lump-sum payment. These lump-sum payments penalize policyholders for turning in policy. Some life insurance companies have loan value that means policyholders have the right to borrow against cash value of the policy.

•Such practice creates drag on liquidity, draining the cash out from institutions.

Source : http://www.lawyersnjurists.com/resource/course-materials/finance/depository-institutions-make-money-2/ (http://www.lawyersnjurists.com/resource/course-materials/finance/depository-institutions-make-money-2/)
Title: Re: Depository Intitutions
Post by: tree on June 25, 2012, 05:34:33 PM
There are 4 types depository institution

Commercial bank:are financial intermediates which all types of deposit and offers short term and self liquidating loans to its clients.
NBFIs: are such financial intermediates which are allowed to collected limited forms of term deposit's and use the funds come from the members savings and use for mortgage lending.

Saving bank: are mostly mutually owned (or cooperative banks) organizations which main source of funds come from the  members savings and use for mortgage lending.

Credit unions: are cooperative societies that generate compulsory savings from members and lend the same to members on rotation.