Question

Explain in general terms how savings institutions differ from commercial banks with respect to their sources of funds and uses of funds. Discuss each source of funds for SIs. Identify and discuss the main uses of funds for SIs.

Describe the liquidity and credit risk of savings institutions, and discuss how each is managed.

What is an adjustable-rate mortgage (ARM)? Discuss potential advantages such mortgages offer a savings institution.

Answer 1

Q-1

Savings Institutions differ from commercial banks because a large portion of their deposit comes from savings accounts from retail customer, these banks cannot offer traditional demand deposit being offered by commercial banks. The commercial banks are more focused on loans towards consumer loans or industrial loan where as saving institutions are more focused on mortgage loan as major use of their funds.

The major sources of funds for the savings institutions are from

· the savings account and deposit from the retail customer.

· They can also issue equity shares or stocks to raise money from the market.

· These banks can also borrow from the federal home loan bank

· They can also raise money by issuing instruments like Certificate of deposit and other money market instruments.

These funds are mainly used by the

· bank to meet its business lending needs.

· Meet its reserve requirement need

· Provide loans to consumers mainly related to housing.

· Investing in mortgage backed security

· Investing in securities issued by federal reserve to maintain high liquidity.