1. Ch. 24 Section 3 How Banks Operate

2. Banking Services Banks are started by investors, who pool their financial assets to provide banking services for people in the community Banks cannot rely on initial investors, depositors are needed to survive. If ten people put $10,000 cash into a new bank most of this money would be used for customer loans

3. Accepting Deposits To earn money, banks accept deposits to create different types of accounts and then use these deposited funds to make loans Banks hope to attract customers who make deposits; what services do they offer: 1.Checking accounts 2.Savings accounts 3.Certificates of deposit (CDs)

4. Accepting Deposits (cont.) Checking Accounts Allow customers to write checks or use check cards to pay bills or transfer money from one person to another Money is not kept here long; used for daily necessities: food, clothes, bills, etc. Usually pay no rate of interest

5. Accepting Deposits (cont.) Savings Accounts This is usually for people who have money they can untouched for longer periods of time Earns interest based on the amount in the account Longer the money is left in, the larger it grows

6. Accepting Deposits (cont.) Certificate of Deposit Require customers to give a certain amount to the bank for a specific period of time Money earns high interest during that time, but if customers take it out early, they will have to pay a substantial penalty (losing control of your money for a period of time.) Higher interest rates compared to a savings account

7. Making Loans Banks lend money not only to people but to businesses. Loaning money increases the money supply Imagine, if you deposit $1000, it is loaned to someone who in turn deposits the money they have borrowed and then it is loaned to others Constant circulation and money begins to grow

8. Quick History of Banking National Banking Act of 1863 Created a system of dual banking in which banks could have either a state or federal charter. Federally chartered banks issued national banknotes or national currency It was uniform in appearance and backed by U.S. government bonds.

9. Quick History of Banking (cont.) The Federal Reserve Banking crises finally hit a head in the Panic of 1907. Federal Reserve Act of 1913 is passed which establishes the FED as the central bank of the U.S. (Bank for Banks) By 1914, the issuing of Federal Reserve notes became the major form of currency in circulation

10. Quick History of Banking (cont.) The Great Depression After the crash of 1929, the banking industry to a major hit during the Great Depression of the 1930’s. Bankrupt people and businesses could not repay their loans and banks lost their depositors money. (life savings were lost) This financial panic caused many banks to collapse in on themselves; many were left weakened.

11. Quick History of Banking (cont.) President Franklin D. Roosevelt declared a “banking holiday” in 1933 to keep depositors from bankrupting the banking system by withdrawing all their money. Banks were allowed to reopen when they could prove that the money in their reserves was greater than or equal to the money that had been deposited in. If not financially sound, banks were not allowed to open

12. Quick History of Banking (cont.) Glass-Steagall Act of 1933 Passed by Congress in 1933 establishing the Federal Deposit Insurance Corporation (FDIC) FDIC helped restore the public’s confidence in banks. A person’s deposits would be insured for up to $100,000. (safety net for depositors)

13. Quick History of Banking (cont.) From roughly 1933 to the early 1970’s, the government tightly regulated financial institutions. Congress began deregulating in the late 1970’s – relaxing the restrictions of Savings and Loan Associations By 1982, Congress decided to allow S&Ls to make higher risk investments.

14. Quick History of Banking (cont.) When those investments went bad, hundreds of S&Ls failed. The government insured S&L deposits, but the bail out cost the taxpayers of this country just short of $200 billion dollars.

15. Quick History of Banking (cont.) Gramm-Leach Bliley Act of 1999 Permitted bank holding companies greater freedom to engage in a full range of services including banking, insurance, and securities. opens up competition among banks, securities companies and insurance companies. Some argue it may weaken competition (only the strongest survive, squeeze out the weak) Some think it will violate customers privacy (affiliated co.)