An individual purchases a long-term annuity policy from an insurance firm and contributes to a pension scheme to fund retirement. Which of the following features fundamentally distinguishes these non-bank financial intermediaries from commercial banking institutions?
- They mobilize long-term savings and underwrite risks without operating cheque-clearing systems or creating demand depositsAnswer
- BThey expand the total money supply directly through the commercial deposit credit multiplier process
- CThey serve as lenders of last resort to maintain liquidity across short-term money market institutions
- DThey enforce monetary policy by adjusting mandatory cash reserve ratios for commercial financial institutions
Answer
Non-bank financial intermediaries mobilize long-term savings and underwrite risks without operating cheque-clearing systems or creating demand deposits.
Non-bank financial intermediaries (such as insurance companies, pension funds, and building societies) specialize in mobilizing long-term contractual savings and pooling risk. Unlike commercial banks, they do not accept demand deposits transferable by cheque, nor do they participate directly in the central clearinghouse system to create credit.
Step-by-Step Solution
Key Concept
Operational and functional boundaries of Non-Bank Financial Intermediaries (NBFIs)