BANKING

Bank

A commercial institution licensed as a receiver of deposits. Banks are mainly concerned with making and receiving payments as well as supplying short-term loans to individuals.

What is a bank?

A Bank is a BusinessBanks sell their services to earn moneyEarn a profit to survive

They market and manage those services in a competitive field

Role of Banks

Provide a medium of exchangeAn agreed upon system for measuring the

value of goods and services

Banks provide securityVaults, employ guards, surveillance cameras

Facilitate the flow of money throughout our economy

Banks make borrowing easierBanks help money flow from lender to borrowerHelp people pay for most valuable possessions

Where do they get money to lend?

From people who open accounts

Banks act as mediators between people who save and people who want to borrow

Your savings are combined with others’ to form a big pool of money to make loans

Doesn’t belong to president, board of directors, or stockholders

Obligated not to take big risks when they make loans

What financial services do banks sell?How do they make money?

Car loansHome mortgage

loansBusiness loansChecking accountsSavings accountsCredit card servicesSafety deposit boxes

Certificate of deposits (CD’s)

Money market accounts

Individual retirement accounts (IRA’s)

Overdraft feesATM Fees

Checking AccountSavings Account

CD’sMoney Market Accounts

IRA’s

Checking Account

Ablility to keep your money in the account and write a check when you want to pay a bill or transfer money to someone else.

Advantages:• Safety and convenience• Record of payments

Disadvantages:• No interest earned• Fees applied

A transactional deposit account held at a financial institution that allows for withdrawals and deposits.

Money held in a checking account is very liquid, and can be withdrawn using checks, automated cash machines and electronic debits, among other methods.  

In exchange for the liquidity, checking accounts typically do not offer a high interest rate

FDIC guaranteed up to $250,000 per individual depositor.  

Checking accounts are offered by most banking institutions for a minimal fee or no fee at all. 

Many people can now use checking accounts to set up automatic payment of routine monthly expenses with a one-time setup.  

For the large commercial banks, checking accounts are considered loss leaders because they have become highly commoditized (hence the low fees for their use).

 The goal of most banks is to entice the customer to use more profitable features such as personal loans, mortgages and certificates of deposit (CDs).  

compare checking accounts location

branch offices; hours of operation; availability of ATMs

fees

monthly fees; per check fees; printing of checks; balance inquiry fees; ATM fees

other charges

overdraft charge; stop-payment fees; certified check fees

interest

rate earned; minimum deposit to earn interest; compounding method; fee charged for falling below necessary balance

restrictions

minimum balance; deposit insurance; holding period for deposited checks

special features

direct deposit; automatic payments; overdraft protection; online banking; discounts or free checking for students, seniors, or employees of certain companies

teens – lesson 6 - slide 6-B

Savings Account

Safe place to keep money and earn interest

Don’t need a lot of money Withdraw at anytime

Certificate of Deposit

A deposit in a savings institution that earns a fixed interest rate for a specific period of time

Fixed interest rateMinimum depositBears a maturity date Range from one month to five yearsPenalty for early withdrawalCDs are generally issued by commercial banks Safety – insured by FDIC

CD cont..

A certificate of deposit is a promissory note issued by a bank.

It is a time deposit that restricts holders from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a penalty. 

For example, let's say that you purchase a $10,000 CD with an interest rate of 5% compounded annually and a term of one year. At year's end,  the CD will have grown to $10,500 ($10,000 * 1.05).

CD Cont.

CDs of less than $100,000 are called "small CDs

CDs for more than $100,000 are called "large CDs" or "jumbo CDs".

Almost all large CDs, as well as some small CDs, are negotiable.

CD PenaltiesWhat to look for…….

It pays to shop: Minimum deposit, yeilds and penalties very widely within markets for specific terms

Some penalties not only wipe out interest, but also eat into principle

Institutions change terms depending on geography and competition in the market

Some institutions clearly want to compete for you CD dollars; others don’t

Money Market Account

Is a deposit for which the interest rate changes over time

Interest rate – generally higher than regular savings account

Provide variable rates – may go up or downMinimum balance requirementFlexibility- can withdraw money at any time without

penaltySafety – covered by FDICLimited number of transfers or withdrawals per

month

MMA cont…

These accounts are usually managed by banks or brokerages, and can be a convenient place to store money that is to be used for upcoming investments or has been received from the sale of recent investments. They are very safe and highly liquid investments.

Individual Retirement Account

An IRA is a personal savings plan that provides income tax advantages to individuals saving money for retirement

5 Types of IRA’s

TraditionalRothEducaitonalSEP IRA – Simplified Employee PlanSimple IRA

401K

Retirement savings plan that is funded by employee contributions and matching contributions from the employer

Taken from pre-tax salary

Advantages

Employee is allowed to contribute pre-tax money, so reduces the amount of tax paid our of each pay check

Employer contributions and any growth tax-free until withdrawal

Employees can decide where to direct future contributions and/or current savings

Advantages continued

Company matching contributions is like extra money

All contributions can be moved from one company’s plan to another is you change jobs

Protected by pension laws

Disadvantages

Expensive to access before age 59 ½Employer matching contributions are

usually not vested (i.e. do not become the property of the employee) until a number of years have passed

Example:• 100 % after 3 years “cliff plan”• 100 % after 6 year “graded plan” or 20% per year in

years 2 through 6)

401 K cont.

Participants in 401 K have different investment options

Mostly all mutual fundsEmployee chooses how to invest the

savings and allowed to change where current savings are invested and/or where future contributions go

Definition

Advantages Disadvantages

How should a 401k be balanced?

Aggressive--for those with 35 or more years until retirement50%--large cap stocks15%--mid cap stocks

15%--bonds10%--small cap stocks

10%--international stocks

Moderate--for those with 20 years until retirement35%--large cap stocks

35%--bonds10%--mid cap stocks

10%--small cap stocks10%--international stocks

Conservative--for those within 10 years of retirement40%--bonds

30%--large cap stocks10%--mid cap stocks

10%--international stocks10%--cash

Definition

Advantages Disadvantages

A bank if a financial intermediary, an agent for using and protecting your money………..

1. Safeguard

2. Transfer

3. Exchange

4. Lend

Types of banks

Many banks provide a multitude of financial services of many types beyond the traditional practices of holding deposits and lending money.

Commercial Banks

Commercial bank: A private banking institution that offers a full range of banking services to businesses and the general public.

Checking SavingsCredit CardsInvestment options

Originally concentrated on meeting the needs of businesses

Top Ten U.S Commercial Banks by Revenue

Company Revenues

Citigroup $131,045

Bank of America Corp. 83,980

J.P. Morgan Chase & Co. 79,902

Wells Fargo 40,407

Wachovia Corp. 35,908

U.S. Bancorp 16,596

Capital One Financial 12,085

National City Corp. 11,036

SunTrust Banks 10,886 Bank of New York Co. 8,312

Thrift Institutions / Retail Banks

Savings BankS&L (Saving and

Loan)Cooperative BanksCredit Unions

Concentrated on meeting the needs of customers who were ignored by commercial banks

Helped customers to save money, acquire loans, and invest.

Savings Banks

Founded in 1800’sTarget market – blue collar workers,

clerks, domestic workersStarted to encourage efforts to save

among people who did not earn much money

S & L’s and Cooperative Banks

Founded 1800’sEstablished to help factory workers and

other wage earners become homeownersAccepted savings deposits and used

money to make home loansTargeted people who were not welcome

at traditional banks

Credit Union

Began in 1900’sTo help ordinary people borrow in times of

emergency• Home repair• Medical emergencies

Started by people with a common bond• Work at same factory• Share same faith• Farm in same community

Credit Union…..

Credit unions are not-for-profit Member-owned Democratically controlled financial

cooperatives operated entirely by and for their members.

Run by a volunteer board of directors

Once you deposit money in a credit union, you become a member, not just a customer, because your deposit is considered your share of the ownership in the credit union.

Credit Unions Cont…..

Exist solely to meet their member’s financial needs

After expenses are paid and reserves are met, “profits” are returned to their members in the form of:

Lower loansHigher savings ratesFree or low cost services

Credit Unions are Exempt fromFederal Taxes

Why tax free?

Non-profitOwned by membersRely heavily on volunteersBring success to people who were turned-

down by commercial banksAlternative to “for profit’ bankingCompetition for commercial banks to keep

them “honest”

Central Bank

The banking institution that controls a country's money supply, interest rates, and banking policy. The Federal Reserve System is the central bank in the U.S.

Banking Today

Changes in regulations, technology, and competition have pushed banking to become organizations that must respond rapidly to business conditions to survive.

MergersTechnologyCompetition

Mergers

Occurs when one or more banks join or acquire another bank or banks.

Mergers

Pros Increase size giving

them more resources.Created on opening for

a new wave of small local banks

Allows for easy transfer of funds internationally

ConsDecrease number of

banksFewer banks control

more of the nation’s money

Consumers face higher fees

Less community involvement

Technology

NO business has been more affected by the growth of computers and telecommunications

AccountingAuditingTransfersRecord keepingFinancial analysis

Instantaneous!!!!

No banker’s hoursATM’s

Competition

Government regulations have changed making competition between banks fiercer.

Sales oriented Advertising

Money laundering: Criminal elements deposit income earned from criminal activity into banks and use it without the government's knowledge. The process by which this "dirty money" is deposited in a bank account and made to appear legal is known as money laundering. In a recent scandal involving the Bank of Commerce and Credit International (BCCI), criminal elements within the bank laundered money.

Federal Government Guarantees Deposits

Deposit insurance: The Federal Deposit Insurance Corporation (FDIC) insures individual bank accounts up to $100,000 and joint bank accounts up to $200,000.

The Role of Banks in the Economy

Banks and Economics

Bank Services Critical to the Economy

1. Keeping your money

2. Transferring

3. Lending

4. Creditworthiness

5. Guaranteeing the money

6. The substance of society

Keeping your money safe…

1. Record keeping Maintaining and storing accurate records

Keeping your money safe…

IdentificationNot allowing unauthorized individuals into you

accountSecurityWorking closely with technology experts and law

enforcement

Keeping your money safe…

Enforcement used to safeguard money that involves those who are attempting to take it.

Physical securityTracking down fraudMaking collectionsCatching bank robbers, white-collar embezzlers,

people who default on loans

Keeping your money safe…

Transfer securityKeeping your money safe when transferring

between banks and banks, banks and customers, banks and government

Keeping your money safe…

Sound business practicesUsing good judgment and management of the day to

day operationsTraining employees in procedures and practicesKnowing when and to whom to extend credit

Transferring…..

Banks move moneyBetween banksBetween banks and individual customersBetween banks and industryBetween banks and governmentBetween governments

Lending…….

Loans to businessesLoans to governmentLoans to individuals

Credit cardsHome loansAutomobile

Creditworthiness….

Banks need to evaluate loan applications carefully because their profits depend on upon being repaid

If they overextend with uncollected loans they could fail

Guaranteeing Money

Banks and government work together to make sure the money supply is adequate, appropriate

Backed by Federal ReserveBanks word with government to defeat

counterfeiters of currencyBanks guarantee their own policies

Substance of Society

Psychological belief and trust in banking institutions.

How the Banking System Works

How banks make money….

The Spread

Depositors – people who put money in the bank

Interest – percentage earned over a period of time to the depositor

Using the accumulated funds of the depositors , the bank makes loans to those they think will repay

The Spread….

The bank charges more money than they pay in interest to depositors, so when the money is repaid, more come in than went out.

The difference between what the bank pays in interest and what it receives

The spread is revenue or income, but costs have to be considered

Costs ….

Maintaining security of moneyPaying tellers, accountants, computer

techniciansOverhead

Profit

What’s left at the end

What’s left of revenue after costs are deducted.

Other Sources of Income

Charge for various service such as

Safe deposit boxesAccount maintenance

fees for checking and on-line services

InvestmentsBanks have become

large and careful investors due to their ability to put together large amounts of money to invest

Asset

Anything of valueUsually means

money

Banks assetsLoans and

investments it has made

Liquid asset

Anything that could be readily exchangedSuch as cash

Liability

In financial terms – cash obligation

Bank liabilitiesDeposits – a customer

has the right to request their funds and bank has to pay them

Borrowed money – obligation that must be paid

Banks Working for you…..

Niche MarketsSmaller banks that

target particular consumers

Identifying a need not being met or served by a group

Targeting particular customers in defined locations, or by particular services

Advantage:Flexibility that comes

with a smaller size

Deregulation

Loosening of government control over the banking industry

Allowed banks to be more competition and offer more services:

Credit cardsTechnology

ATM, Smart cards, on-line banking

Innovative lending Second mortgage

loans/home equity loansDifference between the

value of your home and the amount the homeowner still owes

Depository intermediaries

Those financial institutions that obtain funds form the public and use them to finance their business

Credit Unionso Owned by depositorso Must be a membero Not-for profit – money beyond cost go

to members in form of dividends, reduced fees , or lower rates on loans

Commercial Banks Owned by stockholders

Savings and Loans Owned by depositors who receive

shares in the company Focus on real estate lending Same services as commercial banks

Mutual Savings Bankso Similar to S&Lo Thrift institutionso Few remain due to crisis in 1980’s