Question

Discussion：Greatest fear of a depository institution and what transactions cause it.

Answer 1

Depository institutions are savings banks, commercial banks, credit unions . These banks accepts deposits from individual and lends to some other individual. The greatest fear of these depository institutions is that, what if they run out of money.

The transactions that cause this is, when banks lend money to individuals but they are unable to repay the loan. When this happens in billions of dollars the entire banking sector falls down as it happened with the great financial crisis due to the subprime adjustable rate mortgages. They fear weakening of their balance sheet, so they must grant loans carefully to people after a thorough research of their fianncial backgroiund and credit record.

answered by: anonymous