**DEPOSITORY INSTITUTIONS: ACTIVITIES AND CHARACTERISTICS

Asset/Liability ProblemDepository institutions are the financial intermediaries, which are allowed/licensed by the central banks to accept deposit for doing lending businessSpread Income or Margin Income on borrowing and lending is the primary income.Liability management is the main concern and the institutions face following types of risksCredit RiskRegulatory RiskInterest Rate Risk

Equity Securities and Retained Earnings Deposits based sources of fundsDemand DepositsTime DepositsNon-deposit BorrowingDiscount Window of Central BankInter bank loan Market (Repos) Issuance of Debt Securities

Major Sources of Bank Funds

Liquidity ConcernsWays to obtain funds to accommodate withdrawals and loan demand:Attract additional depositsUse currently-owned securities as collateral for loans from other institutionsRaise short-term / long term funds in the money/capital marketsSell currently-owned securitiesBorrow from central bank by discounting eligible securities under possession

Types of Depository InstitutionsCommercial Banks are financial intermediaries which collects all types of deposit and offers short term and self liquidating loans to its clients.NBFIs are such financial intermediaries which are allowed to collected limited forms of term deposit s and use the funds in term loan and lease.Savings Banks are mostly mutually owned (or cooperative banks) organizations whose main source of funds come from the members savings and are used for mortgage lending.Credit Unions are cooperative societies that generate compulsory savings from members and lend the same to members on rotation.

Bank ServicesConsumer BankingInstallment loans for consumer durables, Residential mortgage loans, credit card loans, Brokerage services,Other Loans like student loans, healthcare, etc.Remittances

Other Bank Services

Corporate finance, institutional bankingCommercial real estate finance, Leasing,FactoringCapital market financingForeign exchange market products and servicesGuaranteesAdvisory services

Bank IncomeSpread between interest income and cost of fundsBid-Ask spread on financial assetsCapital gains on securities and gains on foreign currency transactionsCommissions on services rendered or guarantees extended

Some Bank RegulationsInterest Rates on Deposit AccountsGeographical Restrictions on Branch BankingPermissible Activities for Commercial BanksCapital Requirements for Commercial BanksLoan concentration and single loan limitBoard structure and Accounts

Types Geographical Restrictions in BDUrban vs. rural branchesBranch on same areaInternational branch operation

Capital RequirementsBasle Accord on Bank Regulation and Supervisory PracticesCapital adequacy standards (10per cent of risk assts must be held as total capital)Risk-based capital guidelines where commercial loans and guarantees are considered as 100% risky assets, Real estate 50%. Semi government loan 20% and govt loan 0% risky.

Non Bank Financial InstitutionPrincipal assets

MortgagesLease (financing) hold assetsGovernment securitiesStocks Principal sources of fundsInstitutional borrowingTime depositsBondsAsset backed securitiesRegulation Non Bank financial Inst Act 1993

US Experience on The S&L CrisisBorrowing short and lending longInterest rate ceilings on depositsVolatile interest ratesFraudulent management activitiesHigh-risk strategiesInvestment in Junk Bonds

Savings Banks (Cooperative Credit Unions in BD)Mutually member owned or general stockholder ownedPrincipal assetsMostly Residential mortgages and Consumer durable loansPrincipal source of funds Savings Deposits by the members

Credit UnionsOwned by similar nature of owners /membersPrincipal assets includeSmall consumer loansResidential mortgagesSecuritiesPrincipal source of fundsMember deposits in the form of capital