How Banks Work

1. How Banks Work Ed Valenski CPA (516) 587-2285 valenski.ed@gmail.com Certified Business Teacher Part Time Massapequa High School, Berner Middle School and Birch Lane Elementary School

2. Overview Course Application: Economics, Personal Money Management, Investing, Finance Accounting, Entrepreneurship Objective: Actively consider the role of banks in the economy and the students personal economic well being. Recognize that individuals, banks and businesses are both investors and borrowers. Do the math. Process Overview: Put “How Banks Work” slide on overhead Describe the process verbally Hand out Insight / Discussion Document Students work as individuals or in groups of two to consider and answer the questions Discuss the answers in a whole class forum Link to current events of the time. Examples right now: Stress tests of the banks Banks need for capital Contraction in the economy and mortgage lending Why banks are not lending more Optional: View news related videos, CNBC, or have student locate an article and relate the reported issue to the banking process.

3. How Banks Work … and so on… until 0 (zero) remains Borrow $64 Buys Stuff – Pays Employees etc., who re-deposit $64 Deposits $100 Retains $10.56 Loans $41.64 Retains $16 Loans $64 Chase B of A Wells Retains $20 Loans $80 Citi Retains $12.80 Loans $52.20 Borrow $52.80 Buys Stuff – Pays Employees etc., who re-deposit $52.80 Borrow $80 Buys Stuff – Pays Employees etc., who re-deposit $80 Ed Valenski CPA Certified Business Teacher

4. Insight / Discussion • What are the roles of each participant? • How many dollars are in circulation? • How long will this go on for? • How much money started this process? • I s Money created? • How much money will be created? • How much money is there on deposit in the banks? • At each bank how much cash is there to cover depositors of that bank? • How much is outstanding as loans? • What if everyone wants their money at the same time? • Banks are retaining or not lending what % of deposits? • What would happen if the banks kept more or less than that %? • What are the implications in the economy? • What if a borrower does not re-pay their loan? • Relate this to the current economic environment. Ed Valenski CPA Certified Business Teacher

5. Insight / Discussion Answers • All participants are both depositors and borrowers. • How many dollars are in circulation? $338.44 (1) adding just what is shown on the chart) or $500 (2) if you calculate out to 0 dollars remaining to be lent = $100/20%) • How long will this go on for? To money supply of $500 • How much money will be created? $400 additional dollars. • How much money is there on deposit in the banks? $59.36 (1) 0r $100 (2) • At each bank how much cash is there to cover depositors of that bank? Specific to the bank Chase $20, Citi $16 etc. or 20% of deposits. • How much is outstanding as loans? $238.44 (1) or $400 (2) • What if everyone wants their money at the same time? Not available / banks borrow from other banks, Federal Reserve - discuss in context of current credit crunch. • Banks are keeping on deposit what % of deposits? 20% • What would happen if the banks kept more or less than that %? Less ie 10% would cause money supply to increase to $1000 and expand the economy, more 50% will cause money supply to decrease to $200 and cause contraction in the economy • What are the implications in the economy? Expansion and contraction. • Loss for the bank, seize collateral if there is any, contraction of the money supply. • Variable answer depending on economy - Relate to current events at the time – there will always be a relationship and some thing going on. Ed Valenski CPA Certified Business Teacher