Economics Chapter 10 Section 2 & 3 Notes Money and Banking Economics Chapter 10 Section 2 & 3 Notes

Financial Institutions in the United States Type 1: Commercial Banks Privately owned commercial banks are oldest type of banks initially created to provide business loans today, checking and savings accounts, loans, investments, credit cards All national, about 16 percent of state commercial banks belong to the Fed

Financial Institutions in the United States Type 2: Savings Institutions S&Ls first chartered by states in 1830s took savings deposits; provided home mortgage loans today, provide many of same services as commercial banks Since 1933, federal government also charters S&Ls many federally chartered S&Ls call selves savings banks

Financial Institutions in the United States Type 3: Credit Unions In 1909, first credit union chartered; 1934, federal system created offer savings and checking accounts; specialize in auto, mortgage loans deposits insured by National Credit Union Association (NCUA) Credit unions have membership requirements cooperatives: nonprofit organizations owned by, operated for members

Section 3 Innovations in Modern Banking

What Services Do Banks Provide? Service 1: Customers Can Store Money Banks store currency in vaults; insured against theft, other loss Customers also store money in bank accounts; insured against bank failure papers and valuables in safe deposit boxes

What Services Do Banks Provide? Service 2: Customers Can Earn Money Savings accounts, some checking accounts pay interest Money market accounts, CDs pay higher interest rate

What Services Do Banks Provide? Service 3: Customers Can Borrow Money Banks lend money through fractional reserve banking percent of deposit banks must keep is set by Fed Banks make loans to customers it approves loans have set time period and interest rate; property is collateral Credit card purchases are loans; interest charged after one month

Banking Deregulation Bank Mergers Deregulation led to mergers; no more restrictions on interstate banking Advantages: more competition meant low interest rates, more services also more branches; economies of scale, especially for technology Disadvantages: fewer banks to choose from fear larger banks uninterested in small customers, local communities

Banking Deregulation Banking Services Financial Services Act of 1999 lifted last restriction on banks Banks, insurance companies, investment companies compete sell stocks, bonds, insurance, traditional banking services Customers continue to use different companies for different services