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Cash
Coins
Travelers’
(Demand Deposits)
Checks
Checks
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Savings
Money
Accounts Market (CD’s)
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Mutual
Funds
Types of Financial Institutions
• Commercial Banks
– Commercial banks offer checking services, accept deposits, and make
loans.
• Savings and Loan Associations (S & L’s)
– Savings and Loan Associations were originally chartered to lend money for
home-building in the mid-1800s.
• Savings Banks
– Savings banks traditionally served people who made smaller deposits and
transactions than commercial banks wished to handle.
• Credit Unions
– Credit unions are cooperative lending associations for particular groups,
usually employees of a specific firm or government agency.
• Finance Companies
– Finance companies make installment loans to consumers.
Banking Services
• Banks perform many functions and offer a wide
range of services to consumers.
Storing Money (Service #1)
Banks provide a safe, convenient place for people to store their money.
Credit Cards
Banks issue credit cards — cards entitling their holder to buy goods and
services based on each holder's promise to pay later.
Saving Money: (Service #2: Earn Money)
Four of the most common options banks offer for saving money are:
1. Savings Accounts
2. Checking Accounts
3. Money Market Accounts
4. Certificates of Deposit (CDs)
Loans (Service #3: Borrow Money)
By making loans, banks help new businesses get started, and they help
established businesses grow.
Mortgages
A mortgage is a specific type of loan that is used to purchase real estate.
How Banks Make a Profit
• The largest SOURCE OF INCOME for banks is the
INTEREST they receive from customers who have taken
loans.
• Interest
is the price paid for the use of borrowed money.
How Banks Make a Profit
Money leaves bank
Money enters bank
Interest and
withdrawals to
customers
Deposits from
customers
Interest from
borrowers
BANK
Fees for
services
Bank retains
required reserves
Money loaned
to borrowers:
• business loans
•home
mortgages
• personal loans
Bank’s cost of
doing business:
• salaries
• taxes
• other costs
How Do Banks Make Loans?
 FRACTIONAL RESERVE BANKING
 A bank keeps only a fraction of funds on hand and
lends out the remainder.
$10,000 Deposit
Reserve Requirement
20% ($2,000 Retained)
$8,000
Loanable
Funds
Banking Deregulation
 Bank Mergers
 Deregulation led to mergers; no more restrictions
on interstate banking
 Advantages: more competition meant low
interest rates, more services
 also more branches; economies of scale, especially
for technology
 Disadvantages: fewer banks to choose from
 fear larger banks uninterested in small customers,
local communities
Banking Deregulation
 Banking Services
 Financial Services Act of 1999 lifted last restriction on
banks
 Banks, insurance companies, investment companies
compete
 sell stocks, bonds, insurance, traditional banking services
 Customers continue to use different companies for
different services
Housing Boom and Bust
 From 2000 to 2006, house prices in the U.S.
skyrocketed. Many factors contributed to
this boom, but bank lending practices
played a major role.
 Deregulation changed banks from local
institutions into national megabanks. Instead
of collecting payments on a mortgage for 30
years, banks began to sell these loans to
other financial institutions for a quick profit.
Housing Boom and Bust
 Banks became less interested in verifying that
clients could repay a mortgage and more
interested in making as many mortgage loans
as possible. The easy money fueled the
housing price bubble.