Money, Banking and
the Markets
Lesson 2
Banking and Money Growth
About Banking
 Aim:
 How do banks enhance the
benefits provided by money?
 Do Now:
 Describe at least two ways
having your money in the bank is
better than putting it under your
mattress.
About Banking
 Do Now answers:
1. It is protected from being stolen or
destroyed.
2. You can earn interest on money
that you place in the bank.
About Banking
 How would a person be able to accumulate
more and more money over the years?
 She spends less than she earns.
 For reasons we identified earlier, where is
all this money going to be built up?
 In the bank!
 What is an appropriate name to give a
person who accumulates money?
 A saver.
About Banking
 We might think of a saver as a “profitable”
person. With whom else do we associate
the term profit?
 Businesses, which can also be savers.
 Banks provide savers choices such as:
 Savings accounts
 Certificate of Deposits (CD’s)
 For basic money management, they offer:
 Checking accounts from which we write checks
and use debit cards to pay our money to others
About Banking
Checking Accounts
• Deposit/Withdraw
money
• Earn interest
• Pay bills on line
• Pay with debit card
Savings Accounts
• Deposit/Withdraw
money, but less
often
• Earn interest at a
higher rate than
checking
Certificate of Deposit
• Fixed interest rate
• Term commitment
• Penalty if
withdrawn before
maturity
About Banking
 Opposite savers are those who want to
borrow money. Identify good reasons why
a person would want to borrow:
 Buy a home
 Pay for college
 Not-so-good reasons to borrow?
 Live beyond one’s means by buying
expensive cars and vacations
About Banking
 What are good reasons for a business to
borrow money?
 To acquire more office space, a new factory,
or a warehouse
 To upgrade its equipment
 Where do individuals and businesses go
to borrow money?
 A bank!
About Banking
 We see that banks are in the middle
between savers and borrowers.
Savers
Borrowers
 The formal term for being in the middle
is intermediary. In this instance, the bank
is a financial intermediary.
How Banks Make Money
 Pay savers a lower rate of interest
 Charge borrowers a higher rate of interest
 Exercise: ABC Bank pays savers 2% interest
per year but charges borrowers 5%. What
does it earn on each dollar saved and lent?
• 3%, which is known as the spread
Lesson Summary 1 of 2
1. Where do savers place their
money?
2. What benefits do savers receive?
3. Where do borrowers go to borrow
money?
4. What do we call a party, like a bank,
that is a middleman (in this case
between savers and borrowers)?
5. What bank offering do people use
for basic money management,
including paying others?
Lesson Summary 2 of 2
6. What term refers to the
difference in the rate the bank
pays savers and the rate it
charges borrowers?
7. How do banks enhance the
benefits provided by money?
Web Challenge #1
Q: What is the spread banks achieve
today?
• A: While deposit rates are very
uniform, the same is not true for
loans. Different loans have
different risks and different
interest rates.
• Challenge: Visit bank sites and
find out the spread on home
equity loans and auto loans.
Web Challenge #2
Q: If the spread for a bank is just a few
percent, what does this say about the
percentage of loans that go bad?
• A: It has to be very small. If it was
about equal to the spread, then
the bank would make no money!
• Challenge: Using the search term
“delinquent loans”, find out the
percentage of loans that are
overdue, the first sign of trouble.
Web Challenge #3
Q: When a bank loans out the majority
of the money savers place with it,
what’s the enormous assumption it
makes about the behavior and
expectations of savers?
•
•
A: They’ll never all want to withdraw
their money at the same time
because the money isn’t at the bank!
Challenge: Research what a “run on
the bank” is, as well as what
governments do to prevent it.
What will be the profit/loss to the
bank?
• Saver deposits $1000 in a bank at the interest
rate of 5% and the bank lends $1000 to a
borrower at the interest rate of 8%.
– a. Spread?
– b. Dollar amount profit/loss?
• Saver deposits $1000 in a bank at the interest
rate of 8% and the bank lends $1000 to a
borrower at the interest rate of 5%.
– a. Spread?
– b. Dollar amount profit/loss?