Question

1. Classify the types of financial institutions mentioned in the content of the course so far, as either depository or nondepository. Explain the general difference between depository and nondepository institution sources of funds. It is often stated that all types of financial institutions have begun to offer services that were previously offered only by certain types. Consequently, many financial institutions are becoming more similar. Nevertheless, performance levels still differ significantly among types of financial institutions. Why?

Answer 1

The differences between Depository and Non Depository Financial Institutions are as follows:

S.No	Depository Financial Institution	Non Depository Financial Institution
1	These are institutions which accept demand deposits from people and pay them interest on the deposited cash. People can withdraw their money at any time.	These are institutions wherein they are not legally allowed to accept demand deposits. These institutions mobilize funds from other sources. eg. Selling securities, (stocks, bonds etc.) Premiums, loans from banks, money market borrowings, unit values from public for mutual funds etc.
2	Examples of depository FI's are Commercial bank, Savings Institution and Credit union	Examples of Non Depository FI's are Mutual Funds, Insurance companies, Pension Fund, Brokerage firms, Investment companies, Finance companies
3	These institutions provide a payment system which include checks, electronic funds transfers and also debit cards	These institutions don't issue checks or electronic fund transfers or debit cards.
4	Depository institutions have reserve requirements with Fed and are required to have deposit insurance (FDIC)	These institutions don't have such requirements.

Based on the above differences between Depository and Non depository institutions their performance levels still differ significantly from each other.