Chapter 12

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Chapter 12
Banking Procedures and
Services
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All rights reserved
Learning Objectives
• Explain the difference between different
types of financial institutions
• Learn the basics of having a checking
account, including how to balance an
account
• Describe other available banking services
• Describe the two major federal insurers
• Explain the function and goals of the Federal
Reserve
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Banks and Financial Institutions
• Banks and other financial institutions offer
services such as providing personal loans
and accepting deposits
• Most offer accounts that allow you to draft
payments
• There are two major types of financial
institutions:
– Depository institutions
– Nondepository institutions
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Depository Institutions
• Depository
institutions are
financial institutions
that provide
traditional checking
and savings account
for individuals and
business. They also
provide loans
• Depository institutions take in
and secure people’s money
• This money is loaned to people
and businesses in the community
• Types of depository institutions
include:
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– commercial banks
– savings banks
– credit unions
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Depository Institutions
• Depository institutions generally pay interest
on the deposits people leave with them
• The deposits are used to make loans, on
which they charge an even higher rate of
interest
• They also make money by charging various
fees for services, such as overdraft protection
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Nondepository Institutions
• Nondepository
institutions consist
of institutions that
provide certain
financial services
but do not accept
traditional deposits
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• Nondepository institutions
include:
–
–
–
–
insurance companies
finance companies
securities firms
investment companies
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Choosing a Bank
• Automatic teller
machines (ATMs)
are machines where
you take cash out
from your bank
account.
• Depository institutions can differ on
fees charge, interest rates paid on
deposits, and access to ATMs and
branches
• There can be significant fees
charged from ATMs that are not
within your bank’s network
• Some internet banks pay a higher
deposit rate, but they also provide
limited access
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Check Your Financial IQ
• What are two types of financial institutions?
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Check Your Financial IQ
• Depository and nondepository institutions
are financial institutions
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Banking Basics: Checking
Accounts
• One of the more widely used banking
services is the checking account
• It is also a service that can lead to trouble if
not managed carefully
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How Checking Accounts Work
• Checking account is an
account at a bank into
which you deposit
money and withdraw
money by writing checks
or using a debit card
• Check is a written order
from you to your bank
instructing it to pay
money from your
account to another party
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• When you write a check for
someone, that person “cashes”
the check at your bank
• The bank takes the money out
of your account and gives it to
the person
• This process often happens
electronically
• See figure 12.1 to see a sample
check and an explanation of its
parts
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Figure 12.1
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How Checking Accounts Work
• We open checking accounts because it
allows us to have an accurate payment record
• It also allows us to carry less cash
• Checks also make it safer to send payment
via the mail
• Checks can only be cashed by the person it is
written out to
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Math for Personal Finance
• Jim’s checking account balance was $541.39
at the beginning of the month. He deposited
a $50 check he earned form mowing lawn
and wrote a check for $28.32. His monthly
service fee was $8.
• What is Jim’s new account balance?
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Math for Personal Finance
• Solution: $541.39 + $50 - $28.32 - $8 =
$555.07
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NOW Accounts
• Negotiable order of
withdrawal (NOW)
accounts function much
like checking accounts
except they pay a small
amount of interest on
money in the account
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• Money kept in ordinary
checking accounts do not
usually earn interest
• You can earn interest on
NOW accounts
• NOW accounts require you to
maintain a minimum balance
in order to earn interest
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Debit Cards
• Debit card enables you
to withdraw cash from
your account at ATMs,
or to pay directly for
goods or services at
businesses
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• Many banks provide debit cards
to their account holders
• A debit card looks like a credit
card, but works differently
• There is no credit involved
• The amount of money is
withdrawn immediately from
your account
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Debit Cards
• Personal
identification
number (PIN) are
usually four-digit
numbers that you
need to memorize in
order to be able to use
your debit card
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• Debit cards are convenient but
can make it easy to spend
money
• Record debit card withdrawals
and purchases in your check
register
• Debit cards require you to use
a personal identification
number (PIN)
• Be careful with your PIN. No
one should know it but you.
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Math for Personal Finance
• Tucker used his debit card to withdraw $40
cash from his account. However, he used an
out-of=network ATM that charged him
$2.50, and his own bank charged another $2
for the out-of-network withdrawal.
• How much will his account be charged in
total?
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Math for Personal Finance
• Solution: That was an expensive withdrawal
for Tucker. His account will be reduced by
$40 + $2.50 + $2 = $44.50
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Using Your Checking Account
• Check register is a
small ledger the bank
will provide you for
keeping track of your
account balance
• The amount you open an
account with is your balance
• Record that amount in your
check register
• Record all checks and debit card
purchases/withdrawals in the
register.
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Using Your Checking Accounts
• Keeping an accurate balance is essential
• Some checking accounts have overdraft
protection
• The bank will cash up to a certain amount
even if you do not have money in your
account
• You will have to pay back the bank and pay
a fee
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Using Your Checking Accounts
• Some checking accounts do not have
overdraft protection
• If you overdraw such an account, the bank
will not cash any checks
• They will charge you a fee for overdrawing
your account
• Most businesses will also charge you a fee
for writing them a bad check
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Balancing Your Account
• It is possible for errors—yours or the
bank’s—to occur.
• You should regularly compare your records
to the bank’s. (see figure 12.2)
• At the end of each month the bank will send
you a bank statement
• This lists the bank’s records of all the
deposits and checks written against your
account
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Figure 12.2
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Math for Personal Finance
• Mary Beth’s checking account balance on
her bank statement shows $184.32.
However, she wrote checks for $41.78 and
$12.10 that have not cleared the bank yet.
• How much do Mary Beth’s outstanding
checks total?
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Math for Personal Finance
• Solution: Outstanding checks are checks that
have not cleared the bank so the total is
$41.78 +$12.10 = $53.88
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Check Your Financial IQ
• Why are checking accounts useful?
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0-28
Check Your Financial IQ
• They enable you to carry less cash, keep
records, and mail payments securely
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0-29
Other Banking Services
• Banks offer a variety of different services
besides checking and savings accounts
• A few of them are discussed on the
following slides
• Become familiar with these services as they
can help with your financial planning
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Safety Deposit Box
• Safety deposit boxes
are small containers
located inside the
bank vault and are
used to store valuable
documents
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• Safety deposit boxes are
usually available for rent at
most banks
• Safety deposit boxes
usually contain wills and
small objects such as
jewelry, rare coins, and
legal documents
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Cashier’s Checks, Money Orders,
and Travelers Checks
• Cashier’s check is a
type of check that is
written to a specific
payee but charged
against the bank
instead of your account
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• Banks are also a source of
cashier’s checks
• When you buys a cashier’s
check, the bank takes the
money out of your account
immediately
• These types of checks are
accepted in situations when a
personal check is not
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Cashier’s Checks, Money Orders,
and Travelers Checks
• Money orders are
purchased for cash so
that the recipient can
trust that they are
worth what they say
they are
• Money orders function similar
to cashier’s checks
• The US Postal Service sells
money orders for a fee
• Money orders are also common
when you buys something
online.
• The seller does not have to
wait for your check to clear
when using a money order.
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Cashier’s Checks, Money Orders,
and Travelers Checks
• Travelers checks are
checks written by a
large financial
institution with no
payee specified
• People pay for travelers checks
in advance
• The recipient can be confident
that the check will be cashed
• Travelers checks are accepted
around the world
• Travelers who lost travelers
checks can usually replace
them
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Arrangements for Credit Payments
• Bank drafts occur
when you authorize
someone to take money
out of your bank
account automatically to
satisfy some financial
obligation
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• Bank drafts are used to make
car and house payments, and
to pay utility bills
• People use bank drafts to
contribute to retirement
accounts and other
investments
• Bank drafts help you pay off
borrowed money in a timely
manner
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Arrangements for Credit Payment
• Electronic funds
transfer is whenever
you authorize someone
to access your bank
account for payment
or for deposit
• Bank drafts are an example of
electronic funds transfer
• A bank draft authorization will set
a specific date on which the
money is taken from your account
• With bank drafts, you do not have
to write a check every month
• Make sure to record all bank
drafts and transfers in your check
register
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Other Online Services
• Most banks now offer a variety of online
services, such as:
– having payments drafted directly out of your
account
– utilize online bill payment services
– transfer funds between checking and savings
accounts
– make loan applications
– check your bank statements
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0-37
Check Your Financial IQ
• Besides checking account, what services are
typically offered by banks?
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0-38
Check Your Financial IQ
• Services include safety deposit boxes,
cashier’s checks, money orders, and travelers
checks
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0-39
Deposit Insurance
• One of the reasons to put
money in the bank is to
keep it safe
• If the institution went
bankrupt, you would want
your money to be
protected
• Most financial institutions
have deposit insurance on
the first $250,000 you
have on deposit.
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• The major federal
insurers are:
• Federal Deposit
Insurance Corporation
(FDIC)
• National Credit Union
Savings Insurance
Fund (NCUSIF)
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FDIC
• The federal government created the FDIC in
1933 during the Great Depression
• The bank failures caused people to take their
money out of even healthy institutions
• This reaction hurt the banks and reduced the
amount of money available for borrowing
• The government needed a way to restore
faith in the banking system
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0-41
FDIC
• Saving money is critical to economic growth
• If there is no money deposited in the banks,
businesses cannot borrow
• Currently, the FDIC provides deposit
insurance on the first $250,000 of deposits at
insured institutions
• FDIC insurance covers checking accounts,
savings accounts, NOW accounts, and
certificates of deposit
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NCUSIF
• Credit unions
functions similarly to
a bank, but unlike a
bank, a credit union
has nonprofit status
and is owned by its
members
• The National Credit Union
Association (NCUA)
supervises credit unions
• It provides deposit insurance
with the same limits as FDIC
insured deposits
• This program is also backed by
the federal government
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0-43
Check Your Financial IQ
• Why is it important to give people
confidence in the safety of their deposits?
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0-44
Check Your Financial IQ
• If people lose confidence in the safety of
their deposits, they may withdraw money in
panic and that can damage even healthy
banks
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0-45
The Federal Reserve and Banking
System
• The bank is part of a larger system that plays
a central role in the nation’s economy
• At the heart of that banking system is the
Federal Reserve System
• The Fed, as it is known, helps regulate our
banking system and our whole economy
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Multiple Roles
• Federal Reserve
System serves as
the central bank
of the United
States
• The Federal Reserve Act of 1913
created the Federal Reserve System
• The Fed regulates banks and carries
out the nation’s economic policies
• The Fed’s major economic goals are
to create ongoing economic growth,
encourage full employment, and
promote price stability
• The Fed uses monetary policy in
order to achieve these goals
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0-47
Price Stability
• Price level stability
means making sure that
we don’t have inflation
(or deflation)
• Inflation is defined as a
sustained increase in the
general level of prices
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• The main goal of Fed policy
is price level stability
• Inflation means the prices of
goods and services are going
up
• Inflation is considered
problematic to the
government and the Fed
because it harms businesses
and individuals in our
economy
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Monetary Policy
• Monetary policy
involves the raising or
lowering of the money
supply to achieve some
goal
• Fiat money has value
not because the coins
and bills have some
value in their own right,
but because the
government orders that
it be accepted as
payment
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• The Fed uses monetary policy
as its primary tool to fight
inflation and promote a
healthy economy
• The money we currently use in
the United States is known as
fiat money
• With fiat money, a five-dollar
bill is worth five dollars
because the government says it
is
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Monetary Policy
• The government must control how much of
that paper and coin is circulating in the
economy
• The United States Treasury is in charge of
printing money and minting coins
• The Fed is the agency in charge of
determining how much money is in
circulation
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0-50
Monetary Policy
• Physical money in circulation is the most
visible part of the money supply
• There is a lot of electronic money that we
never see
• As the economy grows and more people
need money to make purchases, the Fed
expands the money supply
• This includes more electronic money, paper
money, and coins (see figure 12.3)
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Figure 12.3
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Monetary Policy
• The Fed uses monetary policy to change
interest rates and impact buying behavior
• If the Fed wants to encourage people to
spend more money, it increases the money
supply
• When more money is available, it drives
interest rates down and encourages spending
• When the Fed reduces the money supply,
interest rates go up
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0-53
Monetary Policy
• If the Fed shrinks the money supply, people
will compete for an item (money) that’s in
limited supply
• The price of that money (interest rates) will go
up
• If the Fed is concerned about inflation, it will
shrink the money supply
• This will drive up the price of money and
discourage spending, which should slow
inflation
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0-54
Monetary Policy
• A Discount rate
occurs when the
Fed changes the
interest rate it
charges to the
banks when it
loans them money
• The Fed uses the money supply to
impact interest rates
• Banks use the option of
borrowing money from the Fed
only on occasion
• Either of these actions are
designed to slow the economy or
stimulate the economy
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0-55
Monetary Policy
• The Fed has to maintain a balance
• It wants enough money in the economy to
encourage economic growth, but not too
much because to cause inflation
• Keep the Fed’s overall goals in mind: stable
prices, economic growth, and full
employment
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0-56
Check Your Financial IQ
• What is the main tool the Fed uses to
influence the economy?
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0-57
Check Your Financial IQ
• The Fed changes the money supply
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0-58
Summary
• Banks and other financial institutions offer
individual services such as:
– making personal loans
– accepting deposits
– providing accounts that allow you to draft
payments
• There are two types of institutions:
– Depository institutions
– Nondepository institutions
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0-59
Summary
• One of the most widely used banking
services is the checking account
• Checking accounts allow us to have an
accurate record of our payments and to carry
less check
• Many banks provide debit cards to their
checking account holders
• A debit card enables you to withdraw cash
from your checking account
© 2010 Pearson Education, Inc. All rights reserved
0-60
Summary
• Other services provided by banking
institutions are the following:
–
–
–
–
Safety deposit boxes
Cashier’s checks
Money orders
Travelers checks
• Banks also offer services for credit payment
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0-61
Summary
• The FDIC and NCUSIF are two major
insurers for most financial institutions
• Most financial institutions have deposit
insurance to protect your money up to some
maximum amount
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0-62
Summary
• The Fed is the heart of the banking system
and regulates banking and the whole
economy
• The Fed’s major economic goals are to:
– create ongoing economic growth
– encourage full employment
– promote price stability
• The Fed uses monetary policy to help
accomplish these goals
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0-63
Key Terms and Vocabulary
•
•
•
•
•
•
•
•
•
•
•
•
•
Automatic Teller Machine (ATM)
Bank draft
Cashier’s check
Check
Check register
Checking account
Credit union
Debit card
Depository institutions
Discount rate
Electronic funds transfer
Federal Deposit Insurance
Corporation( FDIC)
Federal Reserve System
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•
•
•
•
•
•
•
•
•
•
•
Fiat money
Inflation
Monetary policy
Money orders
National Credit Union Savings
Insurance Fund (NCUSIF)
Negotiable order of withdrawal
(NOW) accounts
Nondepository institutions
Personal identification number
(PIN)
Price level stability
Safety deposit boxes
Travelers checks
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Websites
•
•
•
•
•
www.bls.gov
Dir.yahoo.com/
www.fdic.gov
www.federalreserveeducation.org
www.federalreserve.gov
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