Question

Identify the major types of financial institutions (depository institutions, contractual savings organizations, securities firms, and finance firms) and their significance in the financial system. Describe how the institutions were affected by the financial crisis.

Answer 1

Major type of financial institution are depository institutions along with contractual saving organisation and securities firm and finance firm.

These types of financial institution will be helping in maintenance of higher amount of liquidity and credit availability in the system and they will be acting as the financial intermediaries who will be channelizing the resources out of the service and they will be providing them to the borrowers and they will also make money in return & they will be trying to stabilize the monetary flow in the system and follow the guidelines which had been issued by the controlling authority as well as the central bank's so they can properly manage the level of monetary flow in the economy in a better manner and maintain the stability in the economy.

At the time of the crisis of 2008, financial institutions were highly impacted because there was financial Contagion due to failure of financial organisations and there was a risk that entire financial system could collapse because they were exposed to bad lending and bad assets quality as well so they had to write off their Assets and their liability soared, and they were filing up insolvencies because they did not have enough assets on their books to repay liabilities and till they were bailed out by the Federal Reserve so bad landing as well as bad asset quality along with Euphoria in the market led to collapse of the financial system in 2008.