DO NOW:
Why do we have
banks?
Banking Services
7.1 How Banks Work
7.1 How Banks Work
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Goals:
◦ Explain how banks operate and benefit
consumers.
◦ Describe different types of money that are
used in the US economy.
7.1 How Banks Work
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Key Terms:
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Inflation
Federal Deposit Insurance Corporation (FDIC)
Currency
Check
Payee
Statement
How Banks Work?
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Banks are private businesses. They are in
business to do what?
◦ Yes, earn a profit! (make money)
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How do banks earn a profit?
◦ Most of the income banks earn comes from the
interest they charge when they lend money.
How Banks Work?
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Where do they get the money to lend?
◦ Mostly from the deposits made from consumers
and businesses.
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Here is how is works.
1. Banks pay depositors interest on most types
of accounts.
2. The interest rates depositors receive are
lower than the interest rates banks charge
borrowers.
3. The difference between these rates is the
banks income.
For example.
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Suppose you deposit $10,000 in your bank at
2% interest. ($200)
The bank lends your $10,000 to a business
and charges 6% interest.($600)
What does the bank earn?
◦ The 4% difference. ($600-$200=$400 profit)
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Banks other sources of income:
◦ Fees for credit cards and checking accounts.
◦ Financial planning services.
◦ Mortgage Loans & Lines of Credit
How do banks benefit you?
Banks provide security
1. Banks keep money safer
2. Banks protect your purchasing power
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The interest you earn on your money in a bank
increases your purchasing power if over time
there is inflation.
Inflation is a sustained increase in the average
level of prices.
3. Banks are heavily regulated to protect both
depositors & businesses. (Must have
reserves)
4. Most banks are FDIC insured deposits up to
$250,000.
How else do banks benefit
consumers?
Banks make borrowing easier
• They bring together savers and borrowers to help
give loans to reliable borrowers.
Money, money, money…MONEY
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Money comes in two forms
1. Currency- paper money and coins used for
financial transactions. Usually used for
smaller transactions.
1. Checks- an order to a bank to pay a
specified sum to the person or business
named on the check (payee). Usually used
for larger transactions or payments.
**Payee- person or business to whom
a check is written.