Unit 8: Budgeting and Finance

1. Unit 8: Budgeting and Finance Part III – Banking and Financial Systems Business Essentials April 27, 2012 Mr. Archambeau

2. Banking Systems • After discussing this PowerPoint, you will be able to do the following: • Explain the purpose of the Federal Reserve System • List the types of financial institutions • Identify the financial services used by consumers

3. The Banking System • Banks operate in much the same way as consumer stores. • Banks sell services such as checking accounts, savings accounts, loans, and investments. • The difference is that banks are regulated more strictly than most other businesses. • Reason being, if a business fails, some people lose money. If a bank fails, thousands of people are affected.

4. The Federal Reserve System • What is the Federal Reserve System (Fed)? • Supervises and regulates member banks and helps banks serve the public efficiently. • All national banks are required to join the Federal Reserve System, and state banks may join. • Banks that join the system are known as member banks. • The Federal Reserve System has 12 districts that are spread throughout the entire United States with a central Federal Reserve Bank in each district.

6. The Federal Reserve System • What is the purpose of the Federal Reserve System? • First, the Fed holds reserves for member banks. • Banks cannot lend all the money they receive from customers. They are required to keep a part of the money with the Fed. • The Fed holds these deposits in case the banks need additional funds to meet the daily customer demand. • As a result, a bank will lend only a certain percentage of deposited funds, the rest are kept in the reserve. • For example, if a customer deposits $1,000 and the bank is required to hold 15% of all deposits in reserve. This means the bank can lend $850, which is 85% of the new deposit.

7. The Federal Reserve System • What is the purpose of the Federal Reserve System? • Second, the Fed clears checks for member banks. • Clearing refers to the process of paying checks and other payments among different banks. • The Fed electronically processes millions of payments each day, making sure that the correct amounts are added to and subtracted from the appropriate accounts.

8. Types of Financial Institutions • Deposit Institutions(Deposit Intermediaries) accept deposits from people and businesses and use them to finance their business • Examples of Deposit Institutions are: • Commercial Banks – offer checking accounts, savings accounts, loans (individual and business), investments and other services. Also known as full-service banks. • Savings and Loan Associations – specializes in savings accounts and making loans for home mortgages. Since the 1980s, have started to expand their services. • Mutual Savings Banks – owned by, and operated for the benefit of, its depositors. Profits are distributed in proportion to the amount of business each participant does. Mainly in Northeast US. • Credit Unions – User owned, not for profit, cooperative financial institution. Have to be a member to use their services. The National Credit Union Administration (NCUA), a federal agency, regulates credit unions.

9. Types of Financial Institutions • Non-Deposit Institutions (non-depository intermediaries) do not take or hold deposits. They earn money selling specific services or policies. • Examples of Non-Deposit Institutions are: • Life Insurance Companies – offer life insurance policies and can also offer other financial services, such as investments • Investment Companies – help people choose the best investment opportunities for long-term growth • Consumer Finance Companies – a business that specializes in making loans for long-lasting or durable goods (cars or refrigerators) and for financial emergencies

10. Types of Financial Institutions • More examples of Non-Deposit Institutions: • Mortgage Companies – specialize in providing loans for buying a home or other real estate • Check-Cashing Outlets – offer a wide range of services such as electronic tax filing, money orders, private postal boxes, utility bill payment, and the sale of bus and subway tokens. Usually more expensive than using other businesses • Pawnshops – make loans based on the value of some tangible object, such as jewelry or other valuable items. Commonly charge higher fees than other financial institutions

11. Financial Services • There are four basic services offered by financial institutions. They are: • Savings Accounts • Checking Accounts • Loans and other credit plans • Other (safe-deposit boxes, investments, etc.) • Financial institutions also offer peace of mind to consumers through the Federal Deposit Insurance Corporation (FDIC). • What is the FDIC? • A federal agency that insures all accounts in the same name at each bank up to an amount of $250,000. • Almost 99% of all banks are FDIC members

12. Unit 8: Budgeting and Finance THE END