LOS c: Describe the economic functions of and differentiate among the various depository institutions and explain the impact of financial regulation, deregulation, and innovation.
At a recent staff meeting of Economic Advisers Inc., a think-tank located in Washington, DC, Mitchell Jung made the following statements regarding the main economic functions of depository institutions.
Statement 1: One of the main economic functions of depository institutions is to act as financial intermediaries. By doing so, they lower the borrowers’ cost of funds from what it would otherwise be if borrowers had to seek out individuals willing to lend.
Statement 2: Depository institutions create liquidity by using loans they take in to have funds available to pay interest on short-term deposits.
Are Statement 1 and Statement 2 as made by Jung CORRECT?
Depository institutions have four main economic functions:
- they create liquidity by using the short-term deposits they take in to make longer-term loans;
- by acting as financial intermediaries, depository institutions lower the cost of funds for borrowers from what they would be if they had to seek out individuals willing to lend;
- depository institutions are in a better position than individuals would be to monitor the risk of the projects for which borrowers are using the loaned funds; and
- because they each make many loans, depository institutions can reduce risk through diversification of individual loan risks.
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发表于 2010-4-17 11:06
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