Banks and Other Financial Institutions
Goals:
Key Terms:
The Banking System – Have you ever thought of a bank as a business? Many people do not think of banks in this way. Yet, a bank is a business just like a stroe or factory. As a business, a bank sells services such as checking and payment accounts, savings accounts, loans, and investments.
Banks are regulated more strictly than most businesses. If a business fails, some people lose money. If a bank fails, thousands of people are affected.
The Federal Reserve System – Most bank attempt to attract the deposits of customers. However, as an individual, you cannot open an account at the Feral Reserve Bank because it is a bank for banks.
The federal government set up the Federal Reserve System (Fed) to supervise and regulate banks and to help banks serve the public efficiently. All national banks are required to join the Federal Reserve System , and state banks may join. Banks that join the system are known as member banks. The United States is divided into 12 Federal Reserve districts with a central Federal Reserve Bank in each district.
Federal Reserve Activities – A Federal Reserve Bank serves member banks and the economy in several ways. One service provided by the Fed is the holding of reserves. Banks cannot lend out all of the money they receive from customers. They are required to keep a part of the money deposited by the customers on deposit with the Federal Reserve System. The Fed holds these deposits in case the banks need additional funds to meet the daily customer demand.
As a result, a bank will lend only a certain percentage of deposited funds. It keeps the rest in reserve.
For example, suppose a customer deposits $1000 and the bank is required to hold 15% in reserve. This means the bank can lend $850 - 85% of the new deposit.
Another service of the Fed is clearing checks for member banks. Clearing refers to the paying of checks among different banks in different locations. The Fed processes millions of checks each day to make sure that the correct amounts are added to and subtracted from the appropriate accounts.
Banking and the Economy – The actions of the banking system affect you in many ways. Several million people work in banks, savings and loan associations, credit unions and other financial institutions. The following activities are just some of the ways that individuals, businesses and governments use banking services.
- Borrow money to build roads
- Borrow money to buy seeds for crops
- Deposit cash from business operations
- Finance a college education
- Invest for retirement
- Obtain a mortgage
- Process credit card transactions
- Save for a vacation
The savings you and others deposit make banking services possible. Deposits do not remain idle in bank vaults. They are put to work. When you and others deposit your money in a bank, you are helping to create jobs and economic growth that benefit your community and your society.
Types of Financial Institutions – Traditionally, a savings and loan association (S&L) specialized in savings accounts and making loans for home mortgages. Deregulation in the 1980s allowed these institutions to expand the array of services they could offer. They have become more like banks.. Today, many S&Ls use the words savings bank in their name.
Mutual Savings Banks – A mutual savings bank is a savings bank that is owned by, and operate for the benefit of, its depositors. The profits are distributed in proportion to the amount of business each participant does with the company. While a mutual savings bank provides a variety of services, it is organized mainly for savings and home loans. Mutual savings banks are located mainly in the northeastern United States.
Credit Unions – A user-owned, not-for-profit, cooperative financial institution is called a credit union. People in the same company, government agency, labor union, or profession often form credit unions. Serving members only, credit unions accept savings deposits and make loans for a variety of purposes. When people deposit money in a credit union, they become members because deposits are considered partial ownership in the credit union. Today, credit unions also offer a wide range of financial services. The National Credit Union Administration (NCUA), a federal agency, regulates these institutions.
Non-Deposit Financial Institutions – The other major category of financial institutions in non-deposit institutions or non-depository intermediaries. They do not take or hold deposits. They earn their money selling specific services or policies.
Life Insurance Companies – People commonly buy life insurance to provide financial security for their dependents. Besides protection, many life insurance companies also offer financial services such as investments. Through careful investing in new and existing companies, life insurance companies help to expand the economy.
Investment Companies – People can choose investment opportunities for long-term growth of their money through investment companies. Many investors own shares of one of the more than 60,000 mutual funds worldwide. Investment companies make these mutual funds available.
Consumer Finance Companies – A business that specializes in making loans for long-lasting or durable goods, such as cars and appliances, and for financial emergencies is a consumer finance company. Because consumer finance companies make loans, they are part of the financial services industry. Unlike banks and other financial institutions, consumer finance companies do not accept deposits.
Mortgage Companies – Buying a home is an important activity in society. Mortgage companies, along with other financial institutions, provide loans for buying a home or other real estate.
Check-Cashing Outlets – People who do not have bank accounts may use check-cashing outlets (CCOs) to cash paychecks and to obtain other financial services such as electronic tax filing, money orders, private postal boxes, utility payment, and the sale of bus and subway tokens. Some services provided at a CCO are more expensive than at other businesses.
Pawnshops – Pawnshops make loans based on the value of some tangible object, such as jewelry or other valuable item. Pawnshops commonly charge higher fees than other financial institutions and should be avoided.
Selecting a Financial Institution – To obtain the best value for your financial services dollar, comparison shop. You should think about the services offered, safety, convenience, fees, and charges, and restrictions.
Services Offered - There are four basic types of banking services you will use.
1 – Savings Accounts
2 – Checking and payment accounts
3 – Loans and other credit plans
4 – Other services, such as safe-deposit boxes and investment advice.
As you work through the market-place maze, it is important for you to determine which banking services meet your needs. Do not be attracted by fancy financial product names or flashy services that you might never need or use.
Safety – The federal agency that helps regulate banks and other financial institutions is the Federal Deposit Insurance Corporation (FDIC). It protects depositor’s money in case of the failure if the bank or financial institution that regulates it. The FDIC insures all accounts in the same name at each bank up to an amount of $100,000 ($250,000). Although the FDIC is a government agency. Banks provide money for its operation. Almost 99% of all banks are FDIC members.
The National Credit Union Administration (NCUA) regulates credit unions. The NCUA insures depositor’s funds up to $100,000 ($250,000).
Although most banks and financial institutions have federal deposit insurance, do ot assume that this is the case at every financial institution. Make sure the institution where you keep your savings is insured.
Convenience
Fees and Charges
Restrictions
Assignments:
Define Key Terms (pg. 422)
Go to FDIC - Learning Bank
In a Word document, tell me the
1 - Who
2 - What
3 - Where
4 - When - Give the two events that you deem as most important for the time
period. Tell me why you think these events are more important than
the ones you did not choose.
5 - Why
6 - How
of the Federal Deposit Insurance Company (FDIC)
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