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 Depository Institution
 

      Banks
 

      Thrift institutions
 

      Mutual Funds


Their Functions:

 

      Create liquidity: Use short-term deposits to make long-term loans.
 

      Act as financial intermediaries: Lend at lower cost than borrowers could achieve by seeking out individual lenders.
 

      Pool default risks: Hold a portfolio of loans & monitor their risks.

 

Risk management by Depository
 

      Proportion of various types of loans
 

      Percentage of deposits
 

      Types of deposits
 

      Share of owner’s capital
 

      Deposit expansion multiplier = 1 / required reserve ratio.
 

      Potential increase in money supply = Deposit expansion multiplier * Increase in excess reserves.

 





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