Question

Why are financial institutions regulated? How are they regulated? What are liabilities of depository institutions? What are the assets of depository institutions? How can depository manage the risk associated with each? What are depository institution regulated even more than other financial institutions?

Answer 1

Financial Institutions are regulated to maintain liquidity of the institution, preventing fraud and malpractice in money transfer and lending activity and also to prevent money laundering activity.

Central Bank of each country regulates financial institutions through banking guidelines.

Liabilities of depository institutions are demand deposit and term deposits mainly.

Assets of the depository institutions are loans and advances and banks fixed property mainly.

Depository institutions should maintain adequate liquidity to fulfill the withdrawal requests of their demand and term deposits. Also, they should verify the credit worthiness of an individual/organization before givings loans. These are 2 basic principal to manage the risk associated with each.

Financial institution does take people's demand deposit but they take term deposit. Whereas, depository institution takes both demand and term deposit. As people use demand deposit to carry out their day to day expenses so demand deposit should be available whenever required. So, depository institution should always maintain adequate liquidity to meet people's demand deposit's withdrawal request and that's why they are more regulated.