2. DEPOSITORY INSTITUTIONS
• A financial institution that obtains its funds mainly
through deposits from the public.
This includes commercial banks, savings
and loan associations, savings banks and credit unions.
• Depository institutions which includes commercial banks,
savings and loans, and credit unions, receive money from
depositors to lend out to borrowers.
Their income derive from two sources:
• Interest from the loans made and securities invested in.
• Non-Interest Income (Fees)
3. Depository Institutions
Types
Commercial Banks (Check-writing Institutions)
Savings and Loans (NOW accounts)
Savings Banks (NOW accounts)
Credit Units (Share Draft accounts)
Basic Business
Receive Deposits (Funds Borrowed from Customers) – Demand
Deposits
Charge Fees for Services
Invest: Loans to Customers or Securities
Provide Conveniences (Checking or NOW Accounts)
4. Asset Liability Problem of
Depository Institution
Spread income / Margin:A depository institution seeks to earn a
positive spread between the assets it invest in (loan and securities) and the cost
of its funds (deposit and other sources). The spread is referred to as spread
income or margin.
The risks that a depository institution faces include:
Credit Risk (Default Risk)
Regulatory Risk
Funding (Interest rate) Risk
Liquidity Risk
5. Commercial Banks
A commercial bank is a type of financial institution that accepts
deposits, offers checking account services, makes business, personal
and mortgage loans, and offers basic financial products like certificates
of deposit (CDs) and savings accounts to individuals and small
businesses.
Role of Commercial banks: The main role of the commercial banks
is taking deposits and making loans.
Others;
Carrying out currency exchanges
Providing credits by discounting commercial loans
Safekeeping of customer valuables such as gold, securities etc.
Supporting government activities with credit
Purchasing government securities
7. Bank Funding / Source of Fund
Deposits
• Current
Deposit
• Saving
Deposit
• Time
Deposit /
Certificate
deposit
Non Deposit
Borrowing
• Interbank
funds
borrowed
• Borrowing
from;
• Central
bank
• Others
banks
• Abroad
• Debentures
Common stock
& Retained
Earning
8. Capital Requirement for Banks
Basel Agreement: What should be the capital of
the bank?
o Basel I Framework (Core Capital)
o Basel II Framework (Supplementary Capital)
9. Risk Weighted Asset
0% - Risk free
20% - Municipal general obligation
50% - Municipal revenue bonds
100% - Commercial Loan, mortgage and
corporate bonds.