Banking

What is Banking

• • Banking can be defined as the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit.

Is the engaging in the business of keeping money for savings and checking accounts or for exchange or for issuing loans and credit.

Banking Institutions

• • • • all banks offer services to the community some offer more or less services than others Banking is one of the key drivers of the U.S. economy. It provides the liquidity needed for families and businesses to invest for the future. – The degree to which an asset or security can be bought or sold in the market without affecting the asset's price.

Liquidity

– A measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to do this.

Money is the most liquid asset.

– Asset –something of value Copyright © 2008 Pearson Addison Wesley. All rights reserved.

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Figure 15-1 Degrees of Liquidity

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CommercialBanks

• • • known as a full service bank because of all the services they offer they offer services to businesses and individuals they handle : – time and demand deposits – business and consumer loans – rent safe deposit boxes – offer bill paying and payroll preparation services – collect promissory notes – sell insurance – offer tax and financial advice – some sell stocks, mutual funds, and bonds

Commercial Banks

• • • • • commercial banks will charge fees for all these services – this is how they make their income they known as the business bank commercial banks are businesses – some even sell stock in their company on the New York Stock Exchange commercial banks work very closely with the Federal Reserve Bank – that is the government bank Commercial banks provide the widest variety of banking services of any financial institutions.

Commercial Banks

• • • Many people prefer to keep their checking and savings accounts in the same bank for ease in transferring funds and making deposits and withdrawals.

Most large commercial banks have many branches, making it easy to find one near your home or job.

Commercial banks may be either nationally chartered or state chartered.

Mutual Savings Banks

• • • • • these are banks that offer a variety of banking services to individuals rather than businesses.

These types of banking institutions are on the east coast of the United States They are owned by the depositors – There are some that are owned publicly These are also called savings banks They handle savings and checking accounts for the individuals rather than businesses

Savings Bank

• • • • Most of the income that savings banks earn come from issuing mortgages – These are long term loans on real estate – This is only for real estate to individuals – Loans for commercial property are provided by commercial banks Savings banks also earn income from the services they offer such as checking and safe deposit boxes Savings banks offer higher accounts interest rates savings accounts than comm.. banks Savings banks are usually referred to as mutual savings banks.

Savings Bank

• • • • These financial institutions are few in number 500 of them in roughly a dozen states, mostly throughout New England and the Northeast-but substantial in size. Savings banks are state chartered and are insured by the FDIC. Two primary services offered by these institutions are – savings accounts and – loans on property, including mortgages and home improvement loans.

Because of deregulation of the banking industry in the 1980s, savings banks also offer checking accounts and other types of consumer loans.

Savings and Loans

• • • similar to savings bank except that 90% or their income comes from issuing mortgages S & Ls must be connected with a commercial bank to get access to national markets They specialize in savings accounts and this money is used to make mortgages

S&L

• • • • Mortgages are the most secure type of loan - S&Ls offer many of the services of commercial banks, including interest-bearing checking accounts, special savings plans, loans to businesses, major credit cards, and ATMs.

In the 1980s, many S&Ls failed as a result of careless loan practices and poor investments. Since then, many have merged with other banks. All S&Ls today are insured by the FDIC.

Credit Unions

• • • • Credit unions are not-for-profit organizations established by 'groups of employees in similar occupations who pool their money. To use a credit union, you must be a member of the employee group. Credit unions generally offer higher interest rates on savings and lower interest rates on loans. Their membership in the NCUA (National Credit Union Administration) provides insurance for depositors' accounts, up to $100,000.

Credit Unions

• • • • • Credit unions are owned by their members. A savings account at a credit union is usually called a share account. Credit union members save their money in form of "shares,”or part ownership in the credit union. From funds accumulated by these shares, the credit union makes loans to its members. Credit unions also offer IRAs (Individual Retirement Accounts), share draft accounts (checking accounts), consumer loans, certificates of deposit, and other services. Credit unions are growing rapidly in most parts of the country and consequently are offering more diversified services.

Brokerage

• • • • • Brokerage firms buy and sell different types of securities. Securities are stocks and bonds issued by corporations f securities government. Stocks represent equity, or ownership. Bonds represent debt, or a loan.

– In other words, when you buy stock, you become an owner of the company. – When you buy a bond, you are loaning money to the company or to the government. – Investors buy and sell securities through a stockbroker who works for the brokerage firm.

Brokerage firms allow you to open accounts and they invest that money in stocks.

You may tell the brokerage firm what you want to invest in.

– This is usually the best way – It is always good to know where your money is going

FDIC

• • • - called the Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring depositors for at least $250,000 per insured bank; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails. Almost all commercial banks are insured by the Federal Deposit Insurance Corporation (FDIC). This insurance protects depositors from loss due to bank failure, up to $100,000 per account