1-1: Briefly discuss the purpose and role that each the three principal types of
ID: 2724025 • Letter: 1
Question
1-1: Briefly discuss the purpose and role that each the three principal types 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/or secondary (inclusive of OTC)? Considering your analysis of institutions and markets, what strengths and weaknesses exist in our current economy that inhibit optimal performance in these areas? Propose at least one measure or solution to improve or eliminate the weaknesses you’ve identified.
Explanation / Answer
An institution such as depository is situated in U.S. and is entitled to accept money. There are various types of depository’s viz. savings, banks, credit unions and association of loans. The bank’s asset gets accumulated in four different categories such as loans, securities, cash and other assets. The securities are held by the bank in order to gain additional reserves. Banks are required to adhere and meet the requirements of reserve as set by the Federal Reserve.
An institution such as contractual includes pension funds and insurance companies. The source of funding involves contractual arrangements that undertaken for long term period. There exists steady flow pertaining to the funding. There are two types of insurance company’s viz. casualty and property insurance, secondly stock company or mutual company
Investment banking takes into consideration creation of capital for government, different entities and other companies. They are into the business of providing aid in sale of securities and underwriting of the new debt. They help in acquisitions, mergers, broker trades and reorganization.
The strength is easy trade and movement of money amongst large number of people. Financial institution helps cover the risk underlying acquisitions, mergers, underwriting of a share issue. Contractual institution helps provide financial security against any loss caused to the bearer. Depository institution helps in circulating money in the economy by taking money from the people having excess amount and providing the same to the people who want to fund their business proposals or other needs. The underlying weakness of all these institution is they can be used for anti money laundering, absorption of black money, conversion of money from illegitimate source to legitimate source and unwanted transfer from money from the economy to some other countries.
The solution for dealing with the weakness requires tightening the compliance and pre requisite for the people dealing with the instruments offered by this institution, keeping a check on high value transaction and scrutinizing the suspicious accounts that possess doubtful transactions. Hence, it is ascertained that adhering to the above mentioned measures the weakness of these institution can be cured to great extent.
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