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Depository And Non Depository Institutions For Financial Institutions And Markets MCOM Sem 3 Delhi University Notes

Depository And Non Depository Institutions For Financial Institutions And Markets MCOM Sem 3 Delhi University Notes

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Depository And Non Depository Institutions For Financial Institutions And Markets MCOM Sem 3 Delhi University Notes

Depository And Non Depository Institutions For Financial Institutions And Markets MCOM Sem 3 Delhi University : A depository is a facility such as a building, office or warehouse where something is deposited for storage or safeguarding. It can refer to an organization, bank or an institution that holds and assists in the trading of securities. The term can also refer to a depository institution that accepts currency deposits from customers.

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Government or private organization (such as building society, insurance company, investment trust, or mutual fund or unit trust) that serves as an intermediary between savers and borrowers, but does not accept time deposits. Such institutions fund their lending activities either by selling securities (bonds, notes, stock/shares) or insurance policies to the public. Their liabilities (depending on the liquidity of the liability) may fall under one or more money supply definitions, or may be classified as near money.

BREAKING DOWN ‘Depository’

A depository institution provides financial services to personal and business customers. Deposits in the institution include securities such as stocks or bonds. The institution holds the securities in electronic form also known as book-entry form, or in dematerialized or paper format such as a physical certificate.

Functions

Transferring the ownership of shares from one investor’s account to another investor’s account when a trade is executed is one of the primary functions of a depository. This helps reduce the paperwork for executing a trade and speeds up the transfer process. Another function of a depository is it eliminates the risk of holding the securities in physical form such as theft, loss, fraud, damage or delay in deliveries.

Depository services also include checking and savings accounts, and the transfer of funds and electronic payments through online banking or debit cards. Customers give their money to a financial institution with the belief the company holds it and gives it back when the customer requests the money.

These institutions accept customers’ money and pay interest on the money over time. While holding the customers’ money, the institutions lend it to other people or businesses in the form of mortgages or business loans and generate more interest on the money than the interest paid to customers.

Types

The three main types of depository institutions are credit unions, savings institutions and commercial banks. The main source of funding for these institutions is through deposits from customers. Customer deposits and accounts are FDIC insured up to certain limits.

Credit unions are nonprofit companies highly focused on customer services. Customers make deposits into a credit union account, which is similar to buying shares in that credit union. The credit union earnings are distributed in the form of dividends to every customer.

Savings institutions are for-profit companies also known as savings and loan institutions. These institutions focus primarily on consumer mortgage lending but may also offer credit cards and commercial loans. Customers deposit money into an account, which buys shares in the company. For example, during a fiscal year, a savings institution may approve 71,000 mortgage loans, 714 real estate loans, 340,000 credit cards and 252,000 auto and personal consumer loans while earning interest on all these products.

Commercial banks are for-profit companies and are the largest type of depository institutions. These banks offer a range of services to consumers and businesses such as checking accounts, consumer and commercial loans, credit cards and investment products. These institutions accept deposits and primarily use the deposits to offer mortgage loans, commercial loans and real estate loans.

Depository And Non Depository Institutions For Financial Institutions And Markets MCOM Sem 3 Delhi University Notes

Depository And Non Depository Institutions For Financial Institutions And Markets MCOM Sem 3 Delhi University :

Depository vs non-depository financial institutions?

Today’s dumb question(s) from teaching monetary and financial institutions:

1. What is the difference between a “depository” and a “non-depository” financial institution?

2. Why is that difference economically important?

The usual answer I find goes something like this: “a depository institution accepts deposits, while a non-depository institution does not accept deposits“. It then lists examples of “depository” institutions (banks, credit unions, savings and loans); and examples of “non-depository” institutions (mutual funds, pension companies, insurance companies).

Depository And Non Depository Institutions For Financial Institutions And Markets MCOM Sem 3 Delhi University Notes

Depository And Non Depository Institutions For Financial Institutions And Markets MCOM Sem 3 Delhi University : But what is the definition of a “deposit”? I can “deposit” $1,000 in my chequing or savings account or in a term deposit at my bank (a “depository” financial institution). But can’t I also “deposit” $1,000 in my mutual fund or pension plan?

I can “deposit” my grandfather’s watch, or my $1,000 in Bank of Canada notes, in a safety deposit box. And then return later and get back the exact same watch or banknotes I deposited. Unless there’s a fire, or someone (including the bank) has stolen them. I know exactly what “deposit” means in that case. But that’s not what modern banks do with our money. Even banks with 100% reserves don’t do that exactly (though what they do is economically equivalent, since I don’t care whether the serial numbers on the notes I get back match those on the notes I deposited).

Pawnshops would be a perfect example of “depository” institutions under that definition, but they seem to be counted as examples of “non-depository” institutions.

Maybe what they mean by “deposit” is when I “deposit” $1,000 the bank promises to give me back exactly $1,000, even if it’s not the exact same notes with the exact same serial numbers. But that definition doesn’t work when there is interest on deposits.

Maybe what they mean by “deposit” is: when I “deposit” $1,000 the bank promises to give me back some fixed amount of money, where the amount promised is not contingent on anything. If that’s how we define “deposit”, then a defined benefit pension plan is not a “deposit”, since the total amount paid to me depends on how long I live, so the definition works in that example to rule out pension companies as “depository” institutions. But a fixed term annuity, that was paid out to me or my heirs, would count as a “deposit” under that definition. And if I bought a Bank of Montreal bond that would also count as a “deposit” under that definition.

(And a term deposit is no different from a discount bond in that sense, because both promise to pay a fixed amount of money at a fixed future date. And a demand deposit paying a variable rate of interest is no different from a money market mutual fund that implicitly promises never to “break the buck” in that sense either. Nor is buying shares in an equity mutual fund that included sufficient put options to prevent the value of those shares at some future date dropping below the initial “deposit”.)

I can’t come up with a definition of “deposit” that would work to divide financial institutions into “depository” and “non-depository” institutions to match the lists of examples of each. And even if I could come up with a definition that did work, I’m not at all sure it would be an economically relevant distinction.

I’m beginning to think it is a legal distinction rather than an economic distinction, and it reflects a difference in how the two are regulated. Which suggests that those regulatory differences might not make economic sense.

My preferred distinction would be between financial institutions whose liabilities are and are not used as media of exchange. Some financial institutions issue money, and some do not, and that is an economically important distinction. The liabilities of pawnshops and mutual fund companies (their receipts) are not used as money, but the liabilities of banks (or some of their liabilities) are used as money (whether they be 100% or fractional reserve banks).

Over to you guys. Maybe one of you can make sense of it.

Depository And Non Depository Institutions For Financial Institutions And Markets MCOM Sem 3 Delhi University Notes

Depository And Non Depository Institutions For Financial Institutions And Markets MCOM Sem 3 Delhi University : The textbook I am using (by Stephen Ceccetti and Angela Redish) makes this distinction, and has a separate chapter discussing each of the two types of financial institutions. It gives examples of the two types of financial institutions, but it doesn’t really define what the difference is, or say why it is economically important. An internet search is giving me lots of very similar results. I sense that a lot of people make this distinction and think it is important. But I don’t get it.

Difference between depository and non depository institution?

Depository institutions

—is a financial institution (such as a savings bank, commercial bank, savings and loan association, or credit union) that is legally allowed to accept monetary deposits from consumers.It contribute to the economy by lending much of the money saved by depositors.

financial non depository institutions

are financial intermediaries that do not accept deposits but do pool the payments of many people in the form of premiums or contributions and either invest it or provide credit to others. Hence, nondepository institutions form an important part of the economy. These institutions receive the public’s money because they offer other services than just the payment of interest. They can spread the financial risk of individuals over a large group, or provide investment services for greater returns or for a future income.

Nondepository institutions include insurance companies, pension funds, securities firms, government-sponsored enterprises, and finance companies. There are also smaller nondepository institutions, such as pawnshops and venture capital firms, but they constitute a much smaller portion of sources of funds for the economy

Depository And Non Depository Institutions For Financial Institutions And Markets MCOM Sem 3 Delhi University Notes

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