THE BANKING SYSTEM
Some people do not think of a bank as a business. However, banks operate in much the same way as stores, factories, and other companies. As a business, a bank sells services such as checking and payment accounts, savings accounts, loans, and investments.
Banks are regulated more strictly than most other businesses. If a business fails, some people lose money. If a bank fails, thousands of people are affected.
Federal Reserve System
Most banks attempt to attract the deposits of customers. However, as an individual, you cannot open an account in a Federal Reserve Bank because it is a bank for banks.
The federal government set up the Federal Reserve System (Fed) to supervise and regulate member banks and to help banks serve the public efficiently. All national banks are required to join the Federal Reserve System, and state banks may join. Banks that join the system are known as member banks. The United States is divided into 12 Federal Reserve districts, with a central Federal Reserve Bank in each district, as shown in Figure 17-1.
Federal Reserve ActivitiesA Federal Reserve Bank serves member banks and the economy in several ways. One service provided by the Fed is the holding of reserves. Banks cannot lend all of the money they receive from customers. They are required to keep a part of the money deposited by customers on deposit with the Federal Reserve System. The Fed holds these deposits in case the banks need additional funds to meet the daily customer demand.
Federal Reserve Districts
As a result, a bank will lend only a certain percentage of deposited funds. It keeps the rest in reserve. This regulation is designed to help the banking system and the economy operate efficiently and to protect deposits.
For example, suppose a customer deposits $1,000 and the bank is required to hold 15 percent of all deposits in reserve. This means the bank can lend $850, which is 85 percent of the new deposit (85% × $1,000 = $850).
Another service of the Federal Reserve System is clearing checks for member banks. Clearing refers to the process of paying checks and other payments among different banks. The Fed electronically processes millions of payments each day, making sure that the correct amounts are added to and subtracted from the appropriate accounts.
Some people do not think of a bank as a business. However, banks operate in much the same way as stores, factories, and other companies. As a business, a bank sells services such as checking and payment accounts, savings accounts, loans, and investments.
Banks are regulated more strictly than most other businesses. If a business fails, some people lose money. If a bank fails, thousands of people are affected.
Federal Reserve System
Most banks attempt to attract the deposits of customers. However, as an individual, you cannot open an account in a Federal Reserve Bank because it is a bank for banks.
The federal government set up the Federal Reserve System (Fed) to supervise and regulate member banks and to help banks serve the public efficiently. All national banks are required to join the Federal Reserve System, and state banks may join. Banks that join the system are known as member banks. The United States is divided into 12 Federal Reserve districts, with a central Federal Reserve Bank in each district, as shown in Figure 17-1.
Federal Reserve ActivitiesA Federal Reserve Bank serves member banks and the economy in several ways. One service provided by the Fed is the holding of reserves. Banks cannot lend all of the money they receive from customers. They are required to keep a part of the money deposited by customers on deposit with the Federal Reserve System. The Fed holds these deposits in case the banks need additional funds to meet the daily customer demand.
Federal Reserve Districts
As a result, a bank will lend only a certain percentage of deposited funds. It keeps the rest in reserve. This regulation is designed to help the banking system and the economy operate efficiently and to protect deposits.
For example, suppose a customer deposits $1,000 and the bank is required to hold 15 percent of all deposits in reserve. This means the bank can lend $850, which is 85 percent of the new deposit (85% × $1,000 = $850).
Another service of the Federal Reserve System is clearing checks for member banks. Clearing refers to the process of paying checks and other payments among different banks. The Fed electronically processes millions of payments each day, making sure that the correct amounts are added to and subtracted from the appropriate accounts.
Banking and the Economy
The actions of the banking system affect you in many ways. Several million people work in banks, savings and loan associations, credit unions, and other financial institutions. The following activities are just some of the ways that individuals, businesses, and governments use banking services.
TYPES OF FINANCIAL INSTITUTIONSWhen someone says, “I'm going to the bank,” the person might actually mean a credit union or a cash machine. There are many types of financial institutions that provide a wide range of products and services. Figure 17-2 shows how financial institutions are classified.
Deposit InstitutionsDeposit institutions, also called depository intermediaries, accept deposits from people and businesses and use them to finance their business.
Commercial Banks The most common way for a bank to be organized is as a commercial bank . Commercial banks are often called full-service banks because they offer a wide range of financial services. Commercial banks offer checking accounts, provide savings accounts, make loans to individuals and to businesses, and offer other services. In large banks, different departments may handle these services. There may be a loan department, a trust department, a real estate department, and an investment department. Many banks have full-service branch offices in shopping centers and grocery stores.
Savings and Loan Associations Traditionally, a savings and loan association (S&L) specialized in savings accounts and making loans for home mortgages. Deregulation in the 1980s allowed these institutions to expand the array of services they could offer. They have become more like banks. Today, many S&Ls use the words savings bank in their names.
Mutual Savings Banks A mutual savings bank is a savings bank that is owned by, and operated for the benefit of, its depositors. The profits are distributed in proportion to the amount of business each participant does with the company. While a mutual savings bank provides a variety of services, it is organized mainly for savings and home loans. Mutual savings banks are located mainly in the northeastern United States.
Credit Unions A user-owned, not-for-profit, cooperative financial institution is called a credit union . People in the same company, government agency, labor union, or profession often form credit unions. Serving members only, credit unions accept savings deposits and make loans for a variety of purposes. When people deposit money in a credit union, they become members because deposits are considered partial ownership in the credit union. Today, credit unions also offer a wide range of financial services. The National Credit Union Administration (NCUA), a federal agency, regulates these financial institutions.
Non-Deposit Financial InstitutionsThe other major category of financial institutions is non-deposit institutions or non-depository intermediaries . They do not take or hold deposits. They earn their money selling specific services or policies.
The actions of the banking system affect you in many ways. Several million people work in banks, savings and loan associations, credit unions, and other financial institutions. The following activities are just some of the ways that individuals, businesses, and governments use banking services.
- Borrow money to build roads
- Borrow money to buy seeds for crops
- Deposit cash from business operations
- Finance a college education
- Invest for retirement
- Obtain a mortgage
- Process credit card transactions
- Save for a vacation
TYPES OF FINANCIAL INSTITUTIONSWhen someone says, “I'm going to the bank,” the person might actually mean a credit union or a cash machine. There are many types of financial institutions that provide a wide range of products and services. Figure 17-2 shows how financial institutions are classified.
Deposit InstitutionsDeposit institutions, also called depository intermediaries, accept deposits from people and businesses and use them to finance their business.
Commercial Banks The most common way for a bank to be organized is as a commercial bank . Commercial banks are often called full-service banks because they offer a wide range of financial services. Commercial banks offer checking accounts, provide savings accounts, make loans to individuals and to businesses, and offer other services. In large banks, different departments may handle these services. There may be a loan department, a trust department, a real estate department, and an investment department. Many banks have full-service branch offices in shopping centers and grocery stores.
Savings and Loan Associations Traditionally, a savings and loan association (S&L) specialized in savings accounts and making loans for home mortgages. Deregulation in the 1980s allowed these institutions to expand the array of services they could offer. They have become more like banks. Today, many S&Ls use the words savings bank in their names.
Mutual Savings Banks A mutual savings bank is a savings bank that is owned by, and operated for the benefit of, its depositors. The profits are distributed in proportion to the amount of business each participant does with the company. While a mutual savings bank provides a variety of services, it is organized mainly for savings and home loans. Mutual savings banks are located mainly in the northeastern United States.
Credit Unions A user-owned, not-for-profit, cooperative financial institution is called a credit union . People in the same company, government agency, labor union, or profession often form credit unions. Serving members only, credit unions accept savings deposits and make loans for a variety of purposes. When people deposit money in a credit union, they become members because deposits are considered partial ownership in the credit union. Today, credit unions also offer a wide range of financial services. The National Credit Union Administration (NCUA), a federal agency, regulates these financial institutions.
Non-Deposit Financial InstitutionsThe other major category of financial institutions is non-deposit institutions or non-depository intermediaries . They do not take or hold deposits. They earn their money selling specific services or policies.
Life Insurance Companies People commonly buy life insurance to provide financial security for their dependents. Besides protection, many life insurance companies also offer financial services such as investments. Through careful investing in new and existing companies, life insurance companies help to expand business in the economy.
Investment Companies People can choose investment opportunities for long-term growth of their money through investment companies. Many investors own shares of one of the more than 60,000 mutual funds worldwide. Investment companies make these mutual funds available.
Consumer Finance Companies A business that specializes in making loans for long-lasting or durable goods, such as cars and refrigerators, and for financial emergencies is a consumer finance company. Because consumer finance companies make loans, they are a part of the financial services industry. Unlike banks and other financial institutions, consumer finance companies do not accept savings deposits.
Mortgage Companies Buying a home is an important activity in society. Mortgage companies, along with other financial institutions, provide loans for buying a home or other real estate.
Check-Cashing Outlets People who do not have bank accounts may use check-cashing outlets (CCOs) to cash paychecks and to obtain other financial services. CCOs offer a wide range of services such as electronic tax filing, money orders, private postal boxes, utility bill payment, and the sale of bus and subway tokens. Often, services provided at a CCO are more expensive than at other businesses.
Pawnshops Pawnshops make loans based on the value of some tangible object, such as jewelry or other valuable items. Pawnshops commonly charge higher fees than other financial institutions and should usually be avoided.
SELECTING A FINANCIAL INSTITUTIONTo obtain the best value for your financial services dollar, comparison shop. You should think about the services offered, safety, convenience, fees and charges, and restrictions.
Services OfferedAs financial institutions offer additional financial services, your choices may become confusing. There are four basic types of banking services you will use.
1. Savings accounts
2. Checking and payment accounts
3. Loans and other credit plans
4. Other services, such as safe-deposit boxes and investment advice
As you work through the marketplace maze, it is important for you to determine which banking services meet your needs. Do not be attracted by fancy financial product names or flashy services that you might never need or use.
SafetyThe federal agency that helps to regulate banks and other financial institutions is the Federal Deposit Insurance Corporation (FDIC) . It protects depositors' money in case of the failure of a bank or financial institution that it regulates. The FDIC insures all accounts in the same name at each bank up to an amount of $250,000. Although the FDIC is a government agency, banks provide money for its operation. Almost 99 percent of all banks are FDIC members.
The National Credit Union Administration (NCUA) regulates credit unions.
NCUA insures a depositor's funds, through its National Credit Union Share Insurance Fund. Some state-chartered credit unions use a private insurance program.
Although most banks and financial institutions have federal deposit insurance, do not assume that this is the case at every financial institution. Make sure the institution where you keep your savings is insured.
ConvenienceDo you want online banking services? Do you want branch offices near your home or work? These are some of the factors you will need to think about as you decide about convenience. There is usually a trade-off. While more convenience may mean higher costs, in recent years online banking has resulted in lower costs for many consumers.
Fees and ChargesFinancial services have costs. Compare your needs with the price you pay. Remember, seemingly low fees for using an ATM or having a checking account can add up to hundreds of dollars in a short time.
RestrictionsCosts are not always measured in dollars. If you must keep $500 on deposit to get “free” checking you may be losing the chance to earn interest on those funds at another institution.
If you must keep money on deposit for two years to earn a higher rate, you are restricted from using those funds for some unplanned purpose. Always balance your needs with the conditions imposed upon you. When you are not satisfied, shop around to compare the services and costs of other financial institutions.
Investment Companies People can choose investment opportunities for long-term growth of their money through investment companies. Many investors own shares of one of the more than 60,000 mutual funds worldwide. Investment companies make these mutual funds available.
Consumer Finance Companies A business that specializes in making loans for long-lasting or durable goods, such as cars and refrigerators, and for financial emergencies is a consumer finance company. Because consumer finance companies make loans, they are a part of the financial services industry. Unlike banks and other financial institutions, consumer finance companies do not accept savings deposits.
Mortgage Companies Buying a home is an important activity in society. Mortgage companies, along with other financial institutions, provide loans for buying a home or other real estate.
Check-Cashing Outlets People who do not have bank accounts may use check-cashing outlets (CCOs) to cash paychecks and to obtain other financial services. CCOs offer a wide range of services such as electronic tax filing, money orders, private postal boxes, utility bill payment, and the sale of bus and subway tokens. Often, services provided at a CCO are more expensive than at other businesses.
Pawnshops Pawnshops make loans based on the value of some tangible object, such as jewelry or other valuable items. Pawnshops commonly charge higher fees than other financial institutions and should usually be avoided.
SELECTING A FINANCIAL INSTITUTIONTo obtain the best value for your financial services dollar, comparison shop. You should think about the services offered, safety, convenience, fees and charges, and restrictions.
Services OfferedAs financial institutions offer additional financial services, your choices may become confusing. There are four basic types of banking services you will use.
1. Savings accounts
2. Checking and payment accounts
3. Loans and other credit plans
4. Other services, such as safe-deposit boxes and investment advice
As you work through the marketplace maze, it is important for you to determine which banking services meet your needs. Do not be attracted by fancy financial product names or flashy services that you might never need or use.
SafetyThe federal agency that helps to regulate banks and other financial institutions is the Federal Deposit Insurance Corporation (FDIC) . It protects depositors' money in case of the failure of a bank or financial institution that it regulates. The FDIC insures all accounts in the same name at each bank up to an amount of $250,000. Although the FDIC is a government agency, banks provide money for its operation. Almost 99 percent of all banks are FDIC members.
The National Credit Union Administration (NCUA) regulates credit unions.
NCUA insures a depositor's funds, through its National Credit Union Share Insurance Fund. Some state-chartered credit unions use a private insurance program.
Although most banks and financial institutions have federal deposit insurance, do not assume that this is the case at every financial institution. Make sure the institution where you keep your savings is insured.
ConvenienceDo you want online banking services? Do you want branch offices near your home or work? These are some of the factors you will need to think about as you decide about convenience. There is usually a trade-off. While more convenience may mean higher costs, in recent years online banking has resulted in lower costs for many consumers.
Fees and ChargesFinancial services have costs. Compare your needs with the price you pay. Remember, seemingly low fees for using an ATM or having a checking account can add up to hundreds of dollars in a short time.
RestrictionsCosts are not always measured in dollars. If you must keep $500 on deposit to get “free” checking you may be losing the chance to earn interest on those funds at another institution.
If you must keep money on deposit for two years to earn a higher rate, you are restricted from using those funds for some unplanned purpose. Always balance your needs with the conditions imposed upon you. When you are not satisfied, shop around to compare the services and costs of other financial institutions.