1.1 Introduction to Banking1.2 Role of Banks in the Economy1.3 How the Banking System Works1.4 Other Financial Institutions
Lesson 1.1 INTRODUCTION TO BANKING Define the business of banking Identify trends in modern banking
WHAT IS A BANK? A bank is a business.Banks sell their services to earn money.Banks must earn a profit to survive.
A UNIQUE BUSINESS The services banks offer to customers have to do almost entirely with handling money for other people.- Money is a medium of exchange—an agreed upon system for measuring values of goods and services.
- Money shows how much something is worth.
A bank is a financial intermediary for the safeguarding, transferring, exchanging, or lending of money.- An intermediary is a facilitator acting between parties.
- Banks facilitate the flow of money throughout our economy.
TYPES OF BANKS Commercial banksRetail banksCentral banks
BANKING TODAY Traditionally, banking was viewed as a solid and slow-moving industry.Banking today is an exciting, fast-moving, around-the-clock, around-the-world activity.
MERGERS A merger occurs when one or more banks join or acquire another bank or banks.Mergers increase the size of banks, giving them more resources.Mergers decrease the number of banks.Mergers have created an opening for a new wave of small local banks.
Bank Country Bank CountryMizuho Financial Group JapanCitigroup United StatesJP Morgan Chase Co. United StatesBank of Tokyo-Mitsubishi JapanHSBC Holdings United KingdomHypo Vereinsbank GermanyUBS SwitzerlandBNP Paribas FranceBank of America Corp. United States
TECHNOLOGY Impact on bankers- Accounting, auditing, and examining functions have been taken over by fast and efficient technology.
- Funds transfer, record keeping, and financial analyses have become instantaneous.
Impact on consumers- Automated teller machines (ATMs)
- “Smart” cards
- Online banking
COMPETITION As government regulations have changed, competition between banks has become fiercer.Banks compete with each other and with other businesses that sell financial services.
Lesson 1.2 ROLE OF BANKS IN THE ECONOMY List banking activities that contribute to economic stability Explain how banking expands the economy
BANKS AND ECONOMICS Money is a medium of exchange and the basis of the modern economy.Banks and other institutions play a critical role in performing services that are essential to the functioning of an economy.
KEEPING YOUR MONEY SAFE Record keepingIdentificationEnforcementTransfer security
SPREADING THE WEALTH Banks play a key role in transferring money to provide growth and stabilizing the monetary supply.Bank lending makes money available to consumers and businesses to make purchases they might not otherwise be able to make.
TRANSFERRING Between banksBetween banks and individual customersBetween banks and industryBetween banks and governmentsBetween governments
LENDING Loans to businessesLoans to governmentsLoans to individuals- Credit cards
- Home loans
- Automobile loans
CREDITWORTHINESS Evaluating the creditworthiness of customers is a banking function that affects the economy at large.Banking policies and regulations regarding creditworthiness and the ratio of loans to deposits help guarantee a secure financial environment.
GUARANTEEING THE MONEY In the United States, banks and the government work together to form the banking system and to make sure the money supply is adequate, appropriate, and trustworthy.Much of this guarantee is backed through the central banking function of the Federal Reserve.Individual banks work with the government to implement monetary policy, perform exchange functions, and defeat counterfeiters of currency.Banks guarantee their own policies.
THE SUBSTANCE OF SOCIETY A great part of the economic system is psychological.Banks are at the heart of our financial system, and their effect on your life cannot be calculated.
Lesson 1.3 HOW THE BANKING SYSTEM WORKS Explain how banks acquire money to do business
MONEY AT WORK Banks earn money in various ways.Most of their income comes from the interest that people or businesses pay as they repay a loan.When banks lend money, they put it to work.
THE SPREAD The difference between what a bank pays in interest and what it receives in interest is called the spread, or net interest income.The spread is not pure profit. The spread is income, or revenue.Profit is what is left of revenue after costs are deducted.
OTHER FUNDS In addition to interest income, banks have other sources of income.They charge for various services such as rental of safe-deposit boxes, account maintenance fees for checking accounts, fees for online bill payments, and ATM transaction fees.Banks make money on investments.Banks may have funds at their disposal from stockholder investments.
ASSETS AND LIABILITIES An asset is anything of value. In financial terms, that usually means money.A liquid asset is anything that can readily be exchanged, like cash.A liability, in financial terms, is a cash obligation.
TWO PRINCIPLES OF BANKING A bank’s liabilities exceed its reserves.A bank’s liabilities are more liquid than its assets.
BANKS WORKING FOR YOU Banking has changed radically in the last 20 years.Large regional banks have huge resources.Smaller banks use the flexibility that sometimes comes with smaller size to their advantage.
CHANGES IN TRADITIONAL SERVICES Branch locationsExtended hoursDrive-up windowsVariety of checking accountsSavings optionsPersonal service
NEW SERVICES Credit cardsInnovative lendingAutomated teller machines (ATMs)Smart cardsOnline banking
Explain depository financial institutions Explain nondepository financial institutions
TYPES OF FINANCIAL INSTITUTIONS Depository intermediaries - Obtain funds from the public
- Use the funds to finance their business
Nondepository intermediaries- Do not take or hold deposits
- Earn their money by selling specific services or policies
DEPOSITORY INTERMEDIARIES Commercial banksMutual savings banksCredit unions
NONDEPOSITORY INTERMEDIARIES Insurance companiesTrusts companies/pension fundsBrokerage housesLoan companiesCurrency exchanges
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