Chapter 3


Depository Institutions

     Commercial Banks


Nondepository Institutions

     Insurance Companies

     Brokerage Firms

     Investment Companies

     Pension Funds


Depository Institutions



Credit Unions

15,000 of 30,000 Banks failed during the depression, resulting in the passage of banking reforms.


Glass-Steagall Act

Separated commercial banking from investment banking

Introduced FDIC insurance









DIDMCA  1980

Removed interest rate ceilings

Established uniform reserve requirements

Authorized NOW accounts

Gave S & Ls increased lending power


The U.S. has a dual banking system.

Early limits on intra- and interstate branching restricted bank growth. Recent reinterpretation of laws has relaxed restrictions.

Consolidation is now rapidly


Savings and Loans

Original mandate was to provide mortgage loans

Thrift crisis occurred when interest rates rose in the late 1970s


(a.) Thrift Crisis

Rising interest rates caused  disintermediation

Thrift replaced lost deposits with expensive borrowed money

Loans earned less than cost of funds

Congress responded by deregulating industry

Fraud and a faltering economy led to losses

Congress re-regulated thrifts in 1989 (FIRREA)

Losses to taxpayers were $145 billion (about $580 per man, woman and child
in the U.S.)

Credit Unions

Enjoy non-profit tax status

Require common bond for membership


Insurance Companies provide

Life insurance

Property and casualty insurance

People buy insurance because they are risk averse and prefer the certainty equivalent rather than take the risk of a major loss.


Tables help insurance companies accurately predict fund requirements

Table 3.5     Expectation of Life at Various Ages in the United States

Age                                     Male                          Female                       Average

   0                                      72.5                             79.1                            75.7

 15                                       58.2                             65.0                            61.6

 25                                       49.0                             55.2                            52.2

 35                                       39.8                             45.6                            42.8

 45                                       31.0                             36.2                            33.7

 55                                       22.5                             27.2                            25.0

 65                                       15.4                             19.2                            17.5

 75                                         9.5                             12.2                            11.1

 85                                         5.3                               6.7                              6.2


Other Intermediaries

                                           Brokerage Firms

                                           Investment Companies

Mutual Funds

                                           Closed- vs. Open-End

                                           Load vs. No-Load

                                           Net Asset Value

Pension Funds

                                           Private Plans

                                           Public Plans

                                           Social Security