1. Banks and How They Operate
Ch 24.1, 24.3

2. Money Currency – Paper and coin money
Replaced the barter system in traditional economies
Functions of money
Medium of Exchange
Used to trade/purchase goods/services
Store of Value
Ability to store or save
Medium/Measure of Value
Can be divisible
Each one must be equal to the other
Not easy to counterfeit

3. We value and accept money because know with confidence that someone will accept its value or worth.
If not for this confidence, we would not accept it as payment
Money by itself has no other value. The material used to make coins and paper are worth less than the value of the items as currency

4. Banking
Brings savers (sellers) & borrowers (buyers) together in the market
Savers = deposits
Borrowers = loans
Banks are a business and have profit motive
Make money off of fees and interest on loans
Take deposits and make loans

5. Types of Banks
Commercial Banks – full service to individuals & businesses (Most common)
Credit Unions – non-profit – sponsored by large businesses, labor unions or government institutions – offer full services at usually lower prices to workers of said sponsor.
Savings & Loan Associations – traditionally loaned money to people buying homes & issued only savings accounts

6. Commercial Banks

7. Credit Unions

8. Types of Deposit Accounts
Checking Account
Allows customers to write checks, use debit cards or withdraw money from an ATM (Automated Teller Machine)
Money transactions are quick and efficient
Money does not stay in the account for long – used for daily necessities; food, bills, clothing, payments
Depositor usually receives no interest
Transfer of funds electronically

9. Checking Accounts

10. . Banks pay interest to customers based on how much money is deposited
2. Savings Account
Banks pay interest to customers based on how much money is deposited
Money remains untouched for longer periods of time so money grows larger the longer it is there.

11. Sample Bank Book

12. Ex. I bought a $1,000 CD for 1 year at 4%
3. Certificate of Deposit (CDs)
Customers loan a certain amount to the bank for a certain amount of time
Ex. I bought a $1,000 CD for 1 year at 4%
Higher rates of interest than savings
Customers can’t withdraw their money without a penalty

13. Safeguarding Our Financial Institutions
The safety of our banks and the confidence of depositors stems from two things: Regulation and Insurance
Banks have to follow the rules and be accountable for their practices under federal guidelines; this lowers the chance that a bank will make risky loans.
The FDIC – Federal Deposit Insurance Corporation - insures individual accounts in banks. If the bank fails, the FDIC will return to depositors the amount of the deposit up to a maximum of $100,000. – most banks are FDIC insured
Created after the stock market crash of 1929 and the resulting bank collapses that wiped out people’s savings

14. Making Loans Banks lend money to people and 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

15. 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.
The Federal Reserve
Panic of 1907 resulted in the passing of -
Federal Reserve Act of 1913 i- establishes the FED as the central bank of the U.S. (Bank for Banks)

16. 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.

17. 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

18. FDIC helped restore the public’s confidence in banks.
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)

19. 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.
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.

20. Some think it will violate customers privacy (affiliated co.)
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.)