depository institutions n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Depository Institutions PowerPoint Presentation
Download Presentation
Depository Institutions

Loading in 2 Seconds...

play fullscreen
1 / 25

Depository Institutions - PowerPoint PPT Presentation


  • 372 Views
  • Uploaded on

Depository Institutions . Depository Institutions. Include: Institutions which take deposits Deposits represent Liabilities (debt) for DI’s Include: Banks Savings & Loan institutions Savings Banks Credit Unions. Asset/liability problem of Depository institutions.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Depository Institutions' - jonco


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
depository institutions1
Depository Institutions

Include:

  • Institutions which take deposits
  • Deposits represent Liabilities (debt) for DI’s

Include:

  • Banks
  • Savings & Loan institutions
  • Savings Banks
  • Credit Unions
asset liability problem of depository institutions
Asset/liability problem of Depository institutions
  • A depository institution seeks to earn a positive spread between the assets it in invests in (loans and securities) and the costs of funds(deposits and other sources)
how do di s make money
How do DI’s make money?
  • 3 ways:
    • Loans
    • Make direct loans to entities
    • Securities investments
    • Investing in securities & holding portfolios
    • Fees
    • Charged to their customers
asset liability problem of depository institutions1
Asset/liability problem of Depository institutions
  • Risks faced by the depository institutions
  • Credit risk-default risk that the borrower will default on his loan obligation or that the issuer of the security that the depository institution holds defaults on its obligation.
  • Regulatory risk-regulators will change the rules so as to impact the earnings of the institution unfavorably
asset liability problem of depository institutions2
Asset/liability problem of Depository institutions
  • Funding risk
  • Illustration
  • Suppose that the depository institution raises $100 million by issuing a deposit account that has a maturity of one year and by agreeing to pay 7% interest
  • Suppose that $100 million is invested in a government security that matures in 15 years , paying an interest rate of 9%
asset liability problem of depository institutions3
Asset/liability problem of Depository institutions
  • If interest rates declines, the spread will increase
    • If Interest rates rise

What position should you have?

    • If interest rates fall

What position should you have?

asset liability problem of depository institutions4
Asset/liability problem of Depository institutions
  • When interest rates are expected to decline, depository institutions borrow short and lent long
  • When interest rates are expected to rise, depository institutions borrow long and lent short
asset liability problem of di s
Asset-Liability Problem of DI’s?
  • Threats of positioning:
    • Adverse financial consequences
      • If expectations are not realized, Huge losses can occur
    • No one can predict interest rates consistently
    • Highly risky?
    • Becomes same as gambling
    • Long run losses highly likely?
liquidity concerns
Liquidity concerns
  • A depository institution must be prepared to satisfy withdrawals of funds by depositors and to provide loans to customers
  • 4 ways to solve liquidity issues?
  • Attract additional deposits
  • Borrowing from the federal agency or other financial institutions
  • Sell securities that it owns
  • Raise short term funds in the money market
commercial banks
Commercial Banks
  • 5 largest banks of Pakistan
commercial banks1
Commercial Banks
  • Bank services:
  • Individual banking
  • Institutional banking
  • Global banking-
  • Corporate financing
  • Capital market products
  • Foreign exchange products and services
bank funding
Bank Funding
  • Three sources of funds for banks:
  • Deposits
  • Non deposit borrowing
  • Common stocks and retained earnings
bank funding1
Bank Funding
  • Deposits
  • Demand deposits
  • Savings deposits
  • Time deposits
bank funding2
Bank Funding
  • Reserve requirements and borrowing in the federal funds market
  • All banks must maintain a specified percentage of their deposits in a non- interest bearing account at the State bank.
  • Reserve ratio
  • Required reserve
bank funding3
Bank Funding
  • Excess reserves- when actual reserves exceed required reserves.
  • Banks temporarily short of funds can borrow reserves from banks that have excess reserves.
  • The market where banks can borrow or lend reserves is called the federal funds market.
  • The interest rate that is charged to borrow funds in this market is called the federal funds rate.
bank funding4
Bank Funding
  • Borrowing at the Fed discount window:
  • Banks temporarily short of funds can borrow from the Fed at its discount window
  • Collateral is necessary to borrow
  • Discount rate- the interest rate that the Fed charges to borrow funds at the discount window
  • Borrowing from the Fed is done basically to meet short term liquidity needs
bank funding5
Bank Funding
  • Other non deposit borrowing
  • Issuing obligations in the money market, or intermediate to long term in the form of issuing securities in the bond market.
regulation
Regulation
  • Ceilings imposed on the interest rates that can be paid on deposit accounts
  • Geographical restrictions on branch banking
  • Permissible activities for commercial banks
  • Capital requirements for commercial banks
savings and loan associations
Savings and loan Associations
  • Provision of funds for financing of a home.
  • The collateral for the loans would be the home being financed
  • Mutually owned or corporate stock ownership
savings and loan associations1
Savings and loan Associations
  • Assets:
  • Traditionally, the only assets in which S&L’s were allowed to invest have been mortgages, and government securities.
  • Problem:
  • Maturity matching problem
savings and loan associations2
Savings and loan Associations
  • Other investments:
  • Consumer loans( loans for home improvement , automobiles, education , business or credit cards)
  • Non consumer loans ( commercial , corporate , business or agriculture loans)
  • Junk bonds
  • Investment in short term assets for operational or regulatory purposes.
savings and loan associations3
Savings and loan Associations
  • Funding:
  • Savings and time deposits
  • Negotiable order of withdrawal (NOW) accounts
  • Money market deposit accounts (MMDA)
credit unions
Credit unions
  • “Common bond” requirement for credit union membership
  • No corporate ownership
  • Purpose:
  • Serve member’s saving and borrowing needs
  • Credit unions are owned by their members, member deposits are called shares.