What is a bank?
A bank is a business.
But unlike some businesses, banks don’t manufacture products or extract
natural resources from the earth. Banks sell financial services such as car loans, home mortgage
loans, business loans, checking accounts, credit card services, certificates of deposit, and
individual retirement accounts.
Some people go to banks in search of a safe place to keep their money.
Others are seeking to borrow money to buy a house or a car, start a business, expand a farm, pay
for college, or do other things that require borrowing money.
Where do banks get the money to lend? They get it from people who open accounts. Banks act
as go-betweens for people who save and people who want to borrow. If savers didn’t put their
money in banks, the banks would have little or no money to lend.
Your savings are combined with the savings of others to form a big pool of money, and the
bank uses that money to make loans. The money doesn’t belong to the bank’s president, board
of directors, or stockholders. It belongs to you and the other depositors. That’s why bankers
have a special obligation not to take big risks when they make loans.
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Slide 1 - Electronic Bank Service
ACTIVITY 1
Why Do You
Need a Bank?
Overview
•
•
•
•
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Purposes of Banks
Types of Financial Institutions
Safety of Financial Institutions
Privacy of Financial Institutions
BBS - Activity 1
Commercial banking, based on the fractional reserve
system, has an ancient origin. The system allows a bank to
keep a percentage of the money on reserve and use the
remaining amount to make loans. Therefore, the two
principal functions of today’s commercial banks are to
oversee deposits (suchas checking and savings) and lend
money.
Their income comes from interest on loans, investments,
and various service charges.
Bank types
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Slide 1 - Electronic Bank Service
ACTIVITY 2
The Many Services
of a Bank
Overview
• Identify financial services provided by a bank.
• Decide on services of personal benefit.
• Recognize the impact of state and federal
regulations upon the security of a bank.
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BBS - Activity 2
TRADITIONAL BANK SERVICES DESCRIPTION
Bank Checking account
Bank Savings account
Loans
Cashier’s Checks
Money Remittance
(Wire Transfer)
where funds can be withdrawn by writing a check,
using an ATM or debit card, or making personal
withdrawals.
where money usually remains for a account long
period of time. Interest is earned on the account.
Money can be withdrawn at any time.
A sum of money borrowed from a financial
institution at an agreed rate of interest.
A check issued by a bank, drawn on its own funds
and signed by the cashier.
Process of moving money from one bank to
another, sometimes between countries.
Travelers’ Checks
Documents that function as cash. Can be replaced if
lost or stolen. Often used when traveling to other
countries.
Safe Deposit Box
Locked box rented in a secure area of the bank. A
place to store valuables.
BANK CARD TYPES
TYPE
• Check Cards or
Debit Cards
• Stored Value Cards
DESCRIPTION
• Bank cards that allow for the payment
of goods and services to be subtracted
directly from a bank account.
• Can be used with merchants that take
major credit cards—known as point of
sale (POS) transactions.
• Bank cards with preset, limited value.
• Used to pay for goods and services.
• Alternative to cash.
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Slide 2 - Bank Card Types
AREAS OF INTEREST
SHOPPING
AROUND
(THINGS TO ASK
ABOUT WHEN
OPENING A
CHECKING
ACCOUNT)
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Opening an account
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Location of the bank
Location of ATMs
Banking hours
Fees associated with the checking account: How
many? How much? When? Some account fees may
include:
a) Non-primary bank ATM transactions
b) In-branch transaction fees
c) Per-check fees
Available overdraft protection
Cost of checks
Minimum balance required
Minimum transactions or limits
If they have interest-bearing accounts
Check color and design
Other?
Slide 1 - Shopping Around
Deposits and Reserves
• Primary Reserves
• Cash on hand
• Deposits due from other
banks
• Excess reserves
• any other resources a bank
uses to create money
through business
transactions
• Reserve requirement
• Secondary reserves
•Securities purchased from
Fed
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Banks create money through
the multiplier effect
Slide 2 - Commonly Accepted Forms of ID
The Multiplier effect
Money on deposit, minus the reserve requirement, can be
loaned out to customers as loans and create more deposits.
•You deposit $1,000
Of the $900 deposit, the bank
must reserve 10%
•The bank holds back 10% reserve
•$900 can be loaned out
•That $900 is used to buy
something and the seller deposits
$900 in another bank
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$810 is available to be loaned
out
Deposit 1- $1,000 – 10% = $900
Deposit 2- $900 - 10% = $810
Deposit 3 - $810 - 10%= $729
Money created
$2439
Try this one
Remember ….
Deposit – Reserve = New Deposit
How much money is created from a deposit of $15,000, after the 4th deposit
and using 10% as the reserve requirement.
Deposit 1- $15,000 = $13,500
Deposit 2 -$13,500 = $12,150
Deposit 3 -$12,150 = $10,935
Deposit 4 -$ 10,935= $ 9841.50
Total
$46,426.50
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Slide 1 - Writing a Check
How well do you remember?
Factors affecting Interest Rates and Business
Market forces determine most interest rates
Economic conditions
Cost of money …
controlled by the Fed’s monetary policy
Federal funds rate = the amount of interest charged for
short-term, interbank loans
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Discount rate = the interest rate the fed sets and
charges for loans to member banks
Prime rate = the rate banks charge their best and most
reliable customers. Movement of this rate usually follows
the discount rate
Calculating Simple Interest
Interest = the price paid for the use of money
To calculate simple interest…
The original amount or Principal
X Rate charged
X Time
I=PxRxT
Try it…
If you borrowed $4500 for a period of six months at a rate of 8%
How much is the interest you will pay?
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Interest-bearing Accounts
Interest = the price paid for the use of money
Banks calculate interest they pay, on some fixed interval:
once a year – (annually) expressed as 1
every six months – (semi-annually) expressed as .5
every three months – (quarterly) expressed as .25
and even once a month (monthly) expressed as 1/12 or .08333
To calculate simple interest earned on a savings account with 2,200, in
nine months, with an interest rate that pays 4-1/2 percent…
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I= Px
Rx
T
? = 2,200 x .045 x
.75
Interest = $74.25
At the end of 9 months, another 74.25 is added to the balance but
interest is calculated on the original principal
Interest-bearing Accounts
Interest = the price paid for the use of money
Banks calculate interest they pay, on some fixed interval:
once a year – (annually) expressed as 1
every six months – (semi-annually) expressed as .5
every three months – (quarterly) expressed as .25
and even once a month (monthly) expressed as 1/12 or .08333
To calculate compound interest earned on a savings account with
2,200, in nine months, with an interest rate that pays 4-1/2 percent…
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I= Px
Rx
T
? = 2,200 x .045 x
.75
Interest = $74.25
At the end of nine months interest is calculated on the accumulated
balance and not the original principal …
COMPOUND INTEREST
Interest-bearing Accounts
I= Px
Rx
? = 2,200 x .045 x
T
.75
Interest = $74.25
At the end of nine months interest is calculated on the accumulated
balance and not the original principal …
Balance = $2,274.25
$2,274.25
$2376.59
$2376.59
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X .045 = $102.34
+ $102.34 = $2376.59
x .045 = $106.95
+ $106.95 = $2483.54
APR = annual percentage rate
-the nominal rate on which interest is calculated per year
APY = annual percentage yield
represents the effects of compounding
… varies according to the APR and the frequency of
compounding
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