Table of Contents
What Is a Depository?
Let me explain what a depository is. It's a facility or institution, like a bank or credit union, that accepts deposits of money or securities for safekeeping and helps with their trading.
The term depository can mean a place where you deposit something for storage or protection, or an institution that takes currency deposits from customers, such as a bank or savings association. It can also be an organization, bank, or institution that holds securities and assists in trading them. Any deposits you place in a depository must be returned in the same condition when you request them.
Depositories give you security and liquidity in the market. They use the money you deposit for safekeeping to lend to others, invest in other securities, and provide a system for transferring funds.
Key Takeaways
A depository can be a facility or institution, such as a building, office, or warehouse, where you deposit something for storage or safeguarding. Depositories may also be organizations, banks, or institutions that hold your currency or securities and help with trading securities. They provide you with security, liquidity, and a way to transfer funds.
Understanding Depositories
Depositories are buildings, offices, and warehouses that let consumers and businesses deposit money, securities, and other valuable assets for safekeeping. These can include banks, safehouses, vaults, financial institutions, and other organizations.
Depositories serve multiple purposes for you and the general public. First, they eliminate your risk of holding physical assets by providing a safe place to store them. For example, banks and other financial institutions offer you places to deposit your money through time deposit and demand deposit accounts.
A time deposit is an interest-bearing account with a specific maturity date, like a certificate of deposit (CD). A demand deposit account holds your funds until you need to withdraw them, such as with a checking or savings account.
Your deposits can also be securities, like stocks or bonds. When you deposit these assets, the institution holds them either in electronic form, known as book-entry form, or in paper form, such as a physical stock certificate.
Depository organizations also help create liquidity in the market. You give your money to a financial institution; the company holds it for a time and returns it when you want it back. These institutions accept your money and pay interest on your deposits over time. While holding your money, they lend it to others in the form of mortgage or business loans, generating more interest on the loaned money than what they pay you.
Example of a Depository
Take Euroclear as an example—it's a clearinghouse that acts as a central securities depository for its clients, many of whom trade on European exchanges. Most of its clients are banks, broker-dealers, and other institutions professionally involved in managing new issues of securities, market-making, trading, or holding a wide variety of securities.
Euroclear settles domestic and international securities transactions, covering bonds, equities, derivatives, and investment funds. It accepts domestic securities from more than 40 markets, covering a broad range of internationally traded fixed- and floating-rate debt instruments, convertibles, warrants, and equities. This includes domestic debt instruments, short- and medium-term instruments, equities and equity-linked instruments, and international bonds from major markets in Europe, Asia-Pacific, Africa, and the Americas.
Special Considerations
One primary function of a depository is transferring the ownership of shares from one investor's account to another when a trade is executed. This reduces the paperwork for executing a trade and speeds up the transfer process.
Another function is eliminating the risk of holding securities in physical form, such as theft, loss, fraud, damage, or delay in deliveries.
If you want to purchase precious metals, you can buy them in physical bullion or paper form. Gold or silver bars or coins can be purchased from a dealer and kept with a third-party depository. Investing in gold through futures contracts isn't the same as owning gold—instead, gold is owed to you.
A trader or hedger looking to take actual delivery on a futures contract must first establish a long (buy) futures position and wait until a short (seller) tenders a notice to delivery. With gold futures contracts, the seller commits to deliver the gold to you at the contract expiry date. The seller must have the metal—in this case, gold—in an approved depository. This is represented by holding COMEX-approved electronic depository warrants, which are required to make or take delivery.
Types of Depositories
The three main types of depository institutions are credit unions, savings institutions, and commercial banks. Their main source of funding is through deposits from customers like you. Your customer deposits and accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits.
A depository's institutional function or type determines which agency or agencies oversee it.
Credit unions are nonprofit companies highly focused on customer services. When you make deposits into a credit union account, it's similar to buying shares in that credit union. Credit union earnings are distributed as dividends to every customer.
Savings institutions are for-profit companies also known as savings and loan institutions. These focus primarily on consumer mortgage lending but may also offer credit cards and commercial loans. When you deposit money into an account, it buys shares in the company. For example, a savings institution may approve 71,000 mortgage loans, 714 real estate loans, 340,000 credit cards, and 252,000 auto and personal consumer loans while earning interest on all these products during a single fiscal year.
Commercial banks are for-profit companies and the largest type of depository institutions. These banks offer you a range of services such as savings accounts, consumer and commercial loans, credit cards, and investment products. They accept your deposits and primarily use them to offer mortgage loans, commercial loans, and real estate loans.
Depository vs. Repository
A depository is not the same as a repository, though they can often be confused. A repository is where things are kept for safekeeping, but unlike a depository, the items in a repository are generally abstract, such as knowledge. For instance, data can be kept in a software repository or a central location where files are housed. Investopedia is also considered a repository—in this case, for financial information.
What Is a Depository Institution?
A depository institution is a financial institution whose main source of funds is deposits from customers like you. A commercial bank is a type of depository institution, as is a credit union or a savings and loan association.
What Is a Non-Depository Financial Institution?
A non-depository institution is a type of financial institution that does not primarily rely on customer deposits for its main income. Instead, it acts as a third party to financial transactions. One example is a life insurance company. Insurance companies accept payment for insurance products, but they do not typically hold funds for safekeeping, as a depository does.
What Are the Benefits of a Depository Institution?
There are several advantages to using a depository institution such as a bank. First, depositories provide safekeeping for your assets, cash, and valuables, eliminating the risk of theft and loss. They typically pay interest on your deposits, which will grow your balance. Depositories also create liquidity by lending out money.
The Bottom Line
A depository is a place where you deposit, or place, assets such as cash or securities. Depository institutions can include banks, credit unions, and savings and loans institutions. When you place your funds in a depository, the organization often pays you interest on your deposit. It may also loan out those funds in the form of mortgages or personal loans. However, a depository must return your deposit when you request it. The Federal Deposit Insurance Corporation guarantees your deposits at participating institutions, up to certain limits.
Other articles for you
An open offer is a method for companies to raise cash by allowing shareholders to buy additional stock at a discount, similar to but distinct from a rights issue.
Net asset value per share (NAVPS) is a key financial metric that calculates a fund's value per share by dividing its net assets by outstanding shares.
The average cost method calculates inventory value by averaging the cost of all items purchased or produced in a period.
A Normal-Course Issuer Bid (NCIB) is a program allowing Canadian public companies to repurchase and cancel their own shares to manage stock value and control.
Empire building involves expanding an individual or organization's power and influence, often prioritizing control over efficiency and shareholder benefits.
The 25% rule serves as a guideline in public finance for limiting government debt to 25% of the annual budget and in intellectual property for setting royalties at 25% of gross profits.
Liquidation preference is a contractual right that prioritizes preferred stockholders in receiving payments during a company's liquidation.
An income property is real estate bought or developed to generate rental income and potential appreciation, involving considerations like risks, mortgages, and management.
A qualified mortgage is a type of home loan that meets specific regulatory requirements to protect lenders and borrowers while facilitating secondary market sales.
Dividend per share (DPS) measures the total dividends a company pays out per ordinary share, serving as a key indicator of financial health and investor returns.