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Transcript of BANKING. Bank A commercial institution licensed as a receiver of deposits. Banks are mainly...
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Money held in a checking account is very liquid, and can be withdrawn using checks, automated cash machines and electronic debits, among other methods.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