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Q#05: Discuss the role of depository & non depository institutions for contributing in growth of financial...


Q#05: Discuss the role of depository & non depository institutions for contributing in growth of financial institutions

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Expert Solution

Depository institution (banks),which includes commercial banks,savings and loan,credit unions ,receive money from depositors to lend money to borrowers.Non-depository institutions such as finance companies,rely on other source of funding such as commercial paper market.

Most of the money and credit readily available to the economy comes from financial intermediaries. Depository institutions — banks that accept deposits — contribute to the economy by lending much of the money saved by depositors. However, deposits do not provide allan economy's funding, since only the wealthy save a significant amount of money and most of it is not in low-interest paying deposits which are taxable as ordinary income. The wealthy put most of their money into assets such as stocks, real estate, and municipal bonds, which not only offer greater returns, but the returns are often taxed less than ordinary income. People who are not wealthy do not save very much, at least in the United States, because they need the money for everyday wants and needs. Although wealthy individuals have a lot more money than lower-income individuals, there are many more people in the lower-income classes; hence, the aggregate of the money held by the lower-income classes exceeds the aggregate held by the wealthy.

Nondepository institutions include insurance companies, pension funds, securities firms, government-sponsored enterprises, and finance companies. There are also smaller nondepository institutions, such as pawnshops and venture capital firms, but they constitute a much smaller portion of sources of funds for the economy.


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