U.S. Banking System
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Financial Institutions
 Commercial
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Focus: corporate services: lending, cash management
 Savings
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and Loans
Focus: real estate mortgages
 Credit
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Banks
Unions
Focus: Consumer loans and accounts
Payment System and Banking
Relationships
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U.S. Banking System

Regulation of Banking System
 Most
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foreign countries
Few, large banks
 Canada: Bank of Nova Scotia, TDB, CIBC, Bank of
Canada, etc., found all across country
Payment System and Banking
Relationships
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U.S. Banking System
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Regulation of Banking System
 United
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States
Numerous, small banks
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Depression era legislation limited bank branches
 Why?
In the 1980s, many Texas banks were in trouble
Legislation permitted out of state banks to acquire “troubled banks”
1995: legislation passed permitting interstate banking
 Many predicted only a few, large banks would remain at this point
With some banks increasing in size, such as Bank of America
 Banks can provide cash collection and concentration for
operations across country
 But, personal touch was often lost: loan officers moved; phone
trees
Payment System and Banking
Relationships
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U.S. Banking System
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Regulation Q
 Corporations
can not receive interest income on
checking account balances
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Sole proprietorships can have interest earning accounts
Alternative strategies:
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Sweep accounts: excess balances into overnight loans
 Firms with large cash balances
Money market mutual funds:
 Minimum check amount generally $500
 Uninsured
 Minimal risk as generally invested in government securities
Payment System and Banking
Relationships
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U.S. Banking System
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FDIC Insurance
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$250,000 per account through 2009
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Married couple
Multiple banks
Capital requirements
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Tier 1: $3 of common stock for $100 of assets
Tier 2: $8 of common, preferred stock for $100 of risk weighted
assets
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100% risk factor: business loans
50% risk factor: real estate loans
0% risk factor: T bills
150% risk factor: past due loans
Payment System and Banking
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U.S. Banking System

Fed
 Structure
 12 district banks
 25 regional branches
 6 regional check processing centers
 Impact on payment system
 Assists in processing checks
 Provides wire transfer system for large payments
 Provides ACH for small dollar electronic payments
 Regulates availability schedules
Payment System and Banking
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U.S. Banking System
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Check clearing
 Fed
credits collecting bank’s account and debits
drawee bank’s account
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Collecting bank records deposit; drawee bank records check
 MICR
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line:
Fed Reserve Bank Code
Bank ID Number
Account Number
Check Number
Payment System and Banking
Relationships
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U.S. Banking System
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Check clearing
 On
Us: written on bank where check is deposited
(30% checks)
 Local: process by:
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Courier presenting, clear through correspondent, local
clearing house
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 Out
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Availability: max two business days
of Town: process by:
Courier presenting, presenting image, correspondent, Fed
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Availability: max five business days
Payment System and Banking
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U.S. Banking System
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Check clearing
 Float
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Collection: Day check written – Day funds available
Disbursement: Day check written – Day funds taken from
account
 Component
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Mail
Processing
Clearing
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Based on bank’s availability schedule
Payment System and Banking
Relationships
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U.S. Banking System
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Availability schedule: Fifth Third Bank, pages 291-295
 Eastwood Bank, Rochester, MN
 First $100 next day
 Local checks: two days
 Out of town checks: five days
 Longer availability:
 Deposit more than $5,000
 Redepositing NSF check
 Account has been overdrawn
 New accounts: first 30 days
 Electronic deposit: immediately
 Cash, wire transfer, cashier checks up to $5,000: next day
 Other checking deposits: 10 days
Payment System and Banking
Relationships
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Electronic Payments
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Wire Transfers: entry increasing one bank’s account and decreasing the
other
 Immediate access for large dollar amounts ($30,000 average)
 Overnight loans of repo agreements
 More expensive than other forms of moving funds
ACH: automatic deposit of payroll checks; government checks
 One or two day availability
 Cheaper to process than checks
 $5 per ACH; 10 cents per item in ACH at First-Mid Illinois
 Payor knows when funds will be withdrawn
 May reduce float
 Incentives to adopt ACH
Payment System and Banking
Relationships
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Debit Cards
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Processed locally or through ACH
 Vendor:
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Immediate availability for local accounts
Two business day availability if out of town
 Customer:
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Local checks: immediate withdrawal of funds
ACH: two days withdrawal
Payment System and Banking
Relationships
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International Payments
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Giro system
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Payment made by customers; often at post office
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Funds are transferred between accounts based on account
number
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Not sent to creditor
Bank then notifies company funds are available
Used for regular periodic payments
Can be made automatically
Value dating
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Delays availability of deposits
Moves debit date for checks
To compensate for payment of interest
Payment System and Banking
Relationships
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Managing Bank Relationships

Reliable services with reasonable costs
 Services
 Collection services: availability; concentration; lockbox
 Payment services: wires; ach; letters of credit
 Information services: advisory services on collection and
disbursement
 Credit services: line of credit; factoring; medium-term loans
 Investment services: money market funds; repos
Payment System and Banking
Relationships
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Managing Bank Relationships
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Reliable services with reasonable costs
 Reasonable costs
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Account analysis statement
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Benefit from company’s deposits exceed cost of bank providing services to
company
I.E., is this company a profitable customer for bank?
Earnings Credit Allowance = Average collected balance x Earnings credit rate

Average collected balance = Ledger balance (amount in account) – Float (deposits not
collected) – Required Reserves (Funds which can not be loaned)
Earnings credit rate = Based on T-bill rates; less than money market rates
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Processing on us, local, out of town checks
Processing returned; redeposited checks
Fund transfers
Deposits
FDIC Insurance
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Cost of providing services
If benefit > cost; excess benefit carried to next period
If cost > benefit; service charge or required balances increased next period
Payment System and Banking
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