Chapter 10: Money and Banking Section 3: Innovations in Modern Banking pg.304-311

What Services Do Banks Provide? Service 1: Customers Store Money Banks began as safe places to store money and other valuables. Customers deposit money in the bank, and the bank stores currency in vaults and is also insured against theft and other loss. Banks are also a safe place to store important papers and valuables—through the use of safe deposit boxes.

What Services Do Banks Provide? Service 2: Customers Can Earn Money Savings accounts and some checking accounts pay some level of interest. Banks offer other accounts, such as money market accounts and certificates of deposit (CDs), that pay higher rate of interest.

What Services Do Banks Provide? Service 3: Customers Can Borrow Money Banks allow customers to borrow money through the practice of fractional reserve banking. The percent of deposits that banks must keep in reserve is set by the FED. One common loan is a mortgage, often a 30 year loan to buy real estate. If the borrower defaults on the loan, the lender takes control of the property and sells it to cover the mortgage. A purchase made on a credit card is also a loan. If you don’t pay off whatever you buy with this card within a month you’ll owe the bank extra in interest.

Banking Deregulation The Banking Act of 1933 tightly regulated the amount of interest that banks could pay on deposits and could charge on loans. Regulations also prevented banks from operating in more than one state. Many states also had limitations on the number of branches that a bank could have within the state. Deregulation in the 1980s & 1990s ended these restrictions and brought major changes to the banking industry.

Bank Mergers The end of restrictions on interstate banking led to a large number of mergers. Mergers created a few very large banks with national operations. By 2004, Bank of America & JP Morgan Chase & Co. had become the largest banks, with assets around $1 trillion each. The other 95% of commercial banks had assets of $1 billion or less. The benefit of the mergers was an increase in the number of bank branches, but the number of small banks declined. By the 2000s, banking had become an oligopoly, with the big banks offering standardized products & prices that were not as good as they had been prior to the mergers.

Banking Services The Financial Services Act of 1999 lifted the last restrictions from the Banking Act of 1933 that had prevented banks, insurance companies, and investment companies from selling the same products and competing with one other. This change allowed banks to sell stocks, bonds, and insurance. At the same time, some investment companies and insurance companies began offering traditional banking services. Your book indicates that banks have not been successful in selling insurance and people continue to look for traditional companies for insurance and traditional banks for banking. The End of Glass-Steagall

Deregulation & the Financial Crisis That Started in 2007 Real estate prices ballooned, in part b/c of lax lending standards. Banks lowered their standards b/c they stopped holding mortgage for the life of the loan and began to bundle them and sell them. The easy profits encouraged banks to generate more mortgages by lowing their lending standards. Then these mortgage-backed securities went from “hot investments” to “toxic assets.” Credit markets around the world seized up as banks lost faith that the loans would be repaid. Some believe deregulation did this and others do not.

Technology and Banking Computer technology has changed the way customers use banks, this is referred to as electronic banking. Automated Teller Machines (ATMs), electronic devices that allow bank customers to make deposits, withdrawals, and transfers and check their account balances at any time without seeing a bank officer. Debit Cards, cards that can be used like an ATM card to withdraw cash of like a check to make purchases. Stored-Value Cards-cards that represent money that the holder has on deposit with the issue, such as a department store. (a gift card)

Electronic Banking This allows customers who have set up accounts with a bank to perform practically every transaction without setting foot in a bank. Through the use of the Internet, customers can arrange for direct deposit of their paychecks, transfer funds from account to account, and pay their bills. Information security and identity theft are now issues that have to be dealt with.