1. Banking Systems, 2e © Cengage/South-Western Slide 1 1.2 ROLE OF BANKS IN THE ECONOMY List banking activities that contribute to economic stability. Explain how banking expands the economy. GOALS

2. Banking Systems, 2e © Cengage Learning/South-Western Slide 2 Identity theft Creditworthy TERMS

3. Banking Systems, 2e © Cengage Learning/South-Western MoneyMoney Money is a “medium of exchange” & the basis of the modern economy. Money maintains local, national & global economies. Banks are fundamental to the flow of that money. Slide 3

4. Banking Systems, 2e © Cengage Learning/South-Western Main Functions of Banks Safeguarding money Transferring money Lending money Exchanging money Evaluating creditworthiness of customers Each of these roles has a ripple effect in the economy that helps keep money moving. Slide 4

5. Banking Systems, 2e © Cengage Learning/South-Western Slide 5 Ways Banks Safeguard your Money 1.Record keeping 2.Identity theft 1.When someone achieves financial gain by using another person’s personal information to unlawfully assume the identity of the other person 3.Enforcement - not only is this physical security but it also includes tracking down fraud, embezzlers, making collections, and pursuing legal action against those who inflict losses on the bank

6. Banking Systems, 2e © Cengage Learning/South-Western Safeguarding cont’d. 4. Transfer security (especially technological security) 5. Sound business practices also safeguard your money (good judgment and management of daily operations) 6. Federal and/or state bank examiners closely review the records of banks to protect consumers

7. Banking Systems, 2e © Cengage Learning/South-Western Slide 7 How Banks Aid the Flow of Money in an Economy Transferring Money Lending Money Creditworthiness

8. Banking Systems, 2e © Cengage Learning/South-Western Slide 8 TRANSFERRING MONEY Banks move money between: Banks Banks and individual customers Banks and industry Banks and governments Governments of countries

9. Banking Systems, 2e © Cengage Learning/South-Western Transferring Money helps Businesses Allows businesses to have access to “capital” Businesses use that capital to expand With that expansion, jobs are created Businesses use capital to produce more products & perform more services All of this makes the economy grow Slide 9

10. Banking Systems, 2e © Cengage Learning/South-Western Transferring Money between Countries Exchange rates measure the relative strength of one form of currency against another. These variable rates are often indications of the strength of a nation’s economy. Slide 10

11. Banking Systems, 2e © Cengage Learning/South-Western The Ability to Transfer Money between Financial Institutions Depends on: The stability of the institutions The stability of the countries where the banks reside The security of the money supply itself Slide 11

12. Banking Systems, 2e © Cengage Learning/South-Western Slide 12 LENDINGLENDING Lending makes up most of a bank’s business. Types of loans provided are: Automotive Home Business Government Credit card The judicious use of credit stimulates the economy

13. Banking Systems, 2e © Cengage Learning/South-Western Slide 13 CREDITWORTHINESSCREDITWORTHINESS A creditworthy customer has A good credit rating Sufficient collateral for loans An ongoing income sufficient to make timely loan payments Banking policies and regulations help guarantee a secure financial environment. Creditworthiness Ratio of loans to deposits

14. Banking Systems, 2e © Cengage Learning/South-Western

15. Banking Systems, 2e © Cengage Learning/South-Western Slide 15 HEALTHY, RATIONAL LOANS Matching appropriate loans to qualified consumers is essential for a stable economy. The mortgage crisis occurred because unqualified buyers were granted loans they could not reasonably be expected to pay back in a timely fashion.

16. Banking Systems, 2e © Cengage Learning/South-Western What happens when banks lend their money too freely? Mortgage crisis that began escalating in the summer 2007. Banks were allowing people to borrow more money than they really should have. Slide 16

17. Banking Systems, 2e © Cengage Learning/South-Western Ripple Effect People were buying and building homes that they really couldn’t afford Families were spending everything they made & going crazy using credit As the economy grew worse the ripple effect became more apparent. People lost their jobs so they couldn’t make their house payments. Houses got foreclosed. Slide 17

18. Banking Systems, 2e © Cengage Learning/South-Western Ripple Effect Continued Banks got scared so they stopped lending money to almost everyone (businesses included) No one could get a mortgage so the construction industry dried up Cities faced increased costs of having to maintain the safety of abandoned properties (sometime entire neighborhoods) Slide 18

19. Banking Systems, 2e © Cengage Learning/South-Western Slide 19 GUARANTEEING THE MONEY Banks and the government work together to form the banking system. They make sure the money supply is: Adequate Appropriate Trustworthy The Federal Reserve is part of the guarantee process. Banks guarantee their own policies.

20. Banking Systems, 2e © Cengage Learning/South-Western Slide 20 THE SUBSTANCE OF SOCIETY A great part of the economic system is psychological. Banks are at the heart of our financial system, and their effect on your life cannot be calculated.