Custodian intermediaries receive deposits from customers and use the money to run their business. These institutions may have other sources of income, but the daily bread of their business is managing deposits, paying interest on them, and lending money out of those deposits.
In this article, we will discuss the main types of depository institutions:
1. Commercial banks:
Banking means accepting deposits of money from the public for lending or investment. Commercial banks provide financial services to businesses, including credit and debit cards, bank accounts, deposits and loans, as well as secured and unsecured loans.
Commercial banks are the most important financial intermediaries. Commercial banks in modern capitalist societies act as financial intermediaries, collecting funds from depositors and lending the same funds to borrowers. Commercial banks play a key role in the financial system by receiving deposits from households and businesses and investing most of those deposits, either by making loans to households and businesses or by buying securities, such as bonds. government bonds or securitized loans.
Due to deregulation, commercial banks also compete more with investment banks in money market operations, bond underwriting, and financial advisory work.
Commercial banks are owned by shareholders who expect a profit on their investments. Commercial banks can work with businesses and individuals. Commercial banks that specialize only in business banking are sometimes called wholesale banks. There are two types of commercial banks, public sector banks and private sector banks.
- Public sector banks: Public sector banks are those in which the government has a major stake and they generally have to focus on social objectives rather than profitability.
- Private sector banks: Private sector banks are owned, managed and controlled by private sponsors and are free to operate according to market forces.
Depositors’ claims against the bank, their deposits, are liquid, which means that banks are supposed to redeem deposits on demand, instantly. Banks’ claims on their borrowers are much less liquid, which gives them much more time to repay amounts owed to banks. Because a bank cannot recover money lent to immediate borrowers, it can face bankruptcy if all of its depositors show up on any given day for all their money.
2. Savings and Loan Associations:
Savings and Loans Associations (S&Ls) can go by different names. Building and loan associations, family banks, and cooperative banks are all names for savings and loan associations. A savings and credit association (or S&L), also known as a savings bank, is a financial institution that specializes in accepting savings deposits and making mortgages and other loans. Savings and credit associations receive most of their deposits from individuals.
Licensed by state or federal governments, these institutions have grown with a focus on home loans to individuals. The most important objective of these institutions is to grant mortgage loans on residential properties. They are the primary source of financial assistance for a large number of American homeowners. As housing finance institutions, they give priority attention to single-family residences and are equipped to lend in this area. Today, they offer most of the same services as commercial banks. The savings and credit associations are not owned by outside investors, but by the depositors themselves, who receive shares in the company.
Some of the most important features of a savings and loan association are:
- It is usually a privately owned and operated real estate finance institution.
- It receives savings from individuals and uses these funds to grant long-term amortized loans to home buyers.
- It grants loans for the construction, purchase, repair or refinancing of houses.
- It is state or federal charter.
A mutual savings bank is a financial institution similar to savings and credit associations. They take deposits primarily from individuals and focus on private real estate mortgages and are licensed by a central or regional government, with no share capital. Mutual savings banks are also owned by depositors, who are owned by their members who subscribe to a common fund. From this fund, receivables, loans, etc. are paid. The profits after deductions are shared among the members. The institution is intended to provide a safe place for individual members to save and invest those savings in mortgages, loans, stocks, bonds and other securities and share any resulting profits or losses. Members own the business.
These state-chartered banks are sometimes granted greater powers over assets and liabilities than S&Ls, but usually not as much as those of commercial banks. Mutual savings banks and savings and credit associations are sometimes called savings institutions.
A credit union is a member-owned financial cooperative, democratically controlled by its members, and operated to promote savings, offer credit at competitive rates, and provide other financial services to its members. Credit unions are also owned by depositors, but users of credit unions must be members. Membership is usually based on some type of association, such as a common employer, a certain line of work, a geographic region, or even a social or religious affiliation. Many credit unions also provide services to support community development or sustainable international development at the local level and could be considered community development financial institutions.
Credit unions are non-profit financial institutions that exist for the benefit of members. Any money beyond costs is returned to members in the form of dividends on savings, reduced fees for services, or lower rates for loans. Worldwide, credit union systems vary widely in terms of total system assets and average asset size of institutions, ranging from voluntary operations with a handful of members to institutions with billions of dollars in assets and hundreds of thousands of members.