A depository institution is a financial intermediary that obtains a significant proportion of its
funds from customer deposits. Industrial corporations tend to obtain a greater proportion of their
funds from stockholders, bondholders, and other types of creditors.
The major sources of funds for commercial banks in the U.S. are reported on the liability side
of the balance sheet:
Transaction accounts (demand deposit and NOW accounts); and Time deposits (small
savings accounts and time deposits over $100,000).
Borrowed funds: Federal funds; Repurchase agreements; Eurodollar deposits; bankers
Equity: Common stock; long-term subordinated debt.
The major uses of funds for commercial banks in the U.S. are reported on the asset side of the
Commercial and industrial; Real estate and consumer.
Government (Federal and municipal) securities.
Vault cash; Reserves at the Federal Reserve Bank.
According to Figure 11-4, the four asset types are securities, business loans, mortgages, and
Over the longer term, there has been a drop in securities and an increase in
More recently, we have seen a drop in business loans an increase in securities
holdings, and a continued increase in mortgages. Among the reasons for this changing
composition are the growth in the commercial paper market, the securitization of mortgages, and
the credit crunch of 1989-92. Credit or default exposure is the primary risk from these assets.
Investment securities consist of items such as interest-bearing deposits purchased from other
FIs, federal funds sold to other banks, repurchase agreements, U.S. Treasury and agency
securities, municipal securities issued by states and political subdivisions, mortgage-backed
securities, and other debt and equity securities. Investment securities generate interest income for
the bank and are also used for trading and liquidity management purposes. Many investment
securities held by banks are highly liquid, have low default risk, and can usually be traded in
According to Table 11-2, the principal sources were deposits, borrowings and other liabilities.
Of these, deposits comprised 72.8% of total liabilities.
The deposits consist of transaction
accounts such as non interest bearing deposits and interest bearing NOW accounts and
nontransaction accounts in the form of small savings accounts (time deposits) and large
negotiable certificates of deposits. The short term nature of these liabilities exposes the banks to
interest rate risk.