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What is a depository institution, and what types of depository institutions are found in the United States? How do they act as intermediaries between savers and borrowers? Why do they play this role?

Some economists argue that deregulated deposit rates combined with deposit insurance led to the insolvency of many depository institutions. On what basis do they make such an argument?

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What is a depository institution, and what types of depository institutions are found in the United States? How do they act as intermediaries between savers and borrowers? Why do they play this role?

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What is a depository institution, and what types of depository institutions are found in the United States?

Depository institution is a financial institution that obtains its funds mainly through deposits from the public. Federal depository institutions are regulated by the Federal Deposit Insurance Corporation (FDIC).

source: http://financial-dictionary.thefreedictionary.com/Depository+institution

Types of Depository Institutions in US: Commercial banks, savings banks, a trust company, a savings and loan association, a building and loan association, a homestead association, a cooperative bank, an industrial bank, or a credit union;

source: http://www4.law.cornell.edu/uscode/uscode12/usc_sec_12_00003201----000-.html

How do they act as intermediaries between savers and borrowers? Why do they play this role?

Financial intermediaries are the institutions which are intermediaries between savers and investors, moving funds between the two. Depository institutions, which is a kind of financial intermediary obtain their funds primarily from deposits from the public. Examples of these institutions include commercial banks, savings and loan associations, savings banks, and credit unions. From a consumer's perspective, depository institutions now all provide similar banking services?car loans, credit cards, home equity lines of credit, mortgage loans, checking accounts, and time deposits. Demand and time deposits account for most of depository institutions' liabilities.

source: http://www.frbsf.org/education/curriculum/borrowers.pdf

Thus, we can observe that depository acts as an intermediary by borrowing the surplus money from savers and then redistributing it to borrowers in the form of loans, mortgages,etc. thus, they channel savings from savers to borrowers.

The fundamental rationale for the existense and role of such institutions is that they can intermediate more ...

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Sandeep Bardia, MBA
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  • MBA, Rochester Institute of Technology
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