Here is the primary question for the discussion board:
Briefly discuss the purpose and role that each type of financial institutions (depositary, contractual, and investment) play in the U.S. economy. How do each of these institutions intersect with the various types of markets, i.e., capital, money, spot (cash), derivatives, Forex and Interbank, primary, and secondary (inclusive of OTC)?
Here is my initial response: The Financial institution is a body that conducts financial transaction. Financial institutions like depository, contractual and investment have a primary goal of providing liquidity to the economy as a whole and make available a level of economic activity that otherwise would not be possible. This is possible by offering credit to consumers, pooling risk among customers and managing markets. Pooling risk among customers is done by markets acting like repositories of risk. Investment companies are one of the strengths of the U.S. economy. To eliminate the possible weakness, the investment companies may institute new types of shares in the future. There is a need for a venture capital funds and funds composed of tax-exempt securities. Management should continue to be efficient, honest, and economical (ETF, 2012). Strength of the economy is the fact that the depository financial institutions provide free checking and savings account when a certain number of deposits are made.
A big problem in the U.S. economy is the fact that depository institutions are too big. When an individual deposits the money to the bank, the bank actually legally owns it. Therefore, if the bank fails, the deposited money will be used for a rescue fund. A number of steps have already been taken to reduce the probability of banks’ failures but more must be done in order to protect the Americans. For example, consumers no longer need to stash their money in their homes instead financial institutions provide that security to allow them to store their money. In return they are able to get loans to provide liquidity to the market.
ETF. (2012). The economic role of the investment company. Retrieved on May 7, 2016 from http://www.etf.com/publications/journalofindexes/joi-articles/11136-the-economic-role-of-the-investment-company.html?nopaging=1
Reply to this response:
Hi Brad, you did a great job of summarizing the similarities an dissimilarities between the three different types of financial institutions. Your point about pooling risk among customers being done by markets acting like repositories of risk is very astute because the risk is literally held in the market. In any different number of scenarios where sometimes even a single variable can change, the market can react in many ways, both positive and negative. Holding risk on a bubble can be catastrophic if the market begins to collapse. Consider the housing market in 2008 for example. The repository of risk, or the lenders of the mortgages in this case making up the market, was especially insecure because of the amount of low rated loans were given out. Once this market crumbled, others soon followed. To your point, the market inherently holds risk no matter what, but I think the key is truly forecasting the variability potential and controlling or managing that risk to ensure that the economy overall does not fail. Great post!