Question

why are depository institutions are more prone to runs than other financial intermediaries.

Answer 1

Financial intermediaries acts as brokeres in the sense that they facilitate the deals between two parties. Their income comes from the commission and brokerage fees. These intermediaries do not have any stake in the transaction and all the risks are bore by thr individual parties in the transaction. Due to this, these intermediaries are not highly leveraged and thus in case of any adverse economic scenario, do not face the risk of closing down.

Depository institutions on the other hand, are entrusted with the deposits of the general public and institutions. These institutions earn by advancing these deposits as loans to customers at a higher interest rate, thus earning the differential of the interest margin. In case of adverse scenario, if a large chunk of loans become non-performing ie. becomes junk, the depositors may panic and start withdrawing their deposits. Due to this, the institution may face a run because it won't be in a situation to return the depositors money.