Download Ch. 24 Section 3 How Banks Operate

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Ch. 24
Section 3
How Banks Operate
Banking Services
• Banks are started by investors, who pool their
financial assets to provide banking services for
people in the community
• Banks cannot rely on initial investors, depositors
are needed to survive.
• If ten people put $10,000 cash into a new bank
most of this money would be used for customer
Accepting Deposits
To earn money, banks accept deposits to
create different types of accounts and then
use these deposited funds to make loans
Banks hope to attract customers who make
deposits; what services do they offer:
1. Checking accounts
2. Savings accounts
3. Certificates of deposit (CDs)
Accepting Deposits (cont.)
Checking Accounts
• Allow customers to write checks or use check
cards to pay bills or transfer money from one
person to another
• Money is not kept here long; used for daily
necessities: food, clothes, bills, etc.
• Usually pay no rate of interest
Accepting Deposits (cont.)
Savings Accounts
• This is usually for people who have money they
can untouched for longer periods of time
• Earns interest based on the amount in the
• Longer the money is left in, the larger it grows
Accepting Deposits (cont.)
Certificate of Deposit
• Require customers to give a certain amount to the bank
for a specific period of time
• Money earns high interest during that time, but if
customers take it out early, they will have to pay a
substantial penalty (losing control of your money for a
period of time.)
• Higher interest rates compared to a savings account
Making Loans
• Banks lend money not only to people but to
• Loaning money increases the money supply
• Imagine, if you deposit $1000, it is loaned to
someone who in turn deposits the money they
have borrowed and then it is loaned to others
• Constant circulation and money begins to grow
Quick History of Banking
National Banking Act of 1863
• Created a system of dual banking in which
banks could have either a state or federal
• Federally chartered banks issued national
banknotes or national currency
• It was uniform in appearance and backed by
U.S. government bonds.
Quick History of Banking (cont.)
The Federal Reserve
• Banking crises finally hit a head in the Panic of
• Federal Reserve Act of 1913 is passed which
establishes the FED as the central bank of the
U.S. (Bank for Banks)
• By 1914, the issuing of Federal Reserve notes
became the major form of currency in circulation
Quick History of Banking (cont.)
The Great Depression
• After the crash of 1929, the banking industry to a major
hit during the Great Depression of the 1930’s.
• Bankrupt people and businesses could not repay their
loans and banks lost their depositors money. (life
savings were lost)
• This financial panic caused many banks to collapse in on
themselves; many were left weakened.
Quick History of Banking (cont.)
• President Franklin D. Roosevelt declared a “banking
holiday” in 1933 to keep depositors from bankrupting the
banking system by withdrawing all their money.
• Banks were allowed to reopen when they could prove
that the money in their reserves was greater than or
equal to the money that had been deposited in.
• If not financially sound, banks were not allowed to open
Quick History of Banking (cont.)
Glass-Steagall Act of 1933
• Passed by Congress in 1933 establishing the
Federal Deposit Insurance Corporation
• FDIC helped restore the public’s confidence in
• A person’s deposits would be insured for up to
$100,000. (safety net for depositors)
Quick History of Banking (cont.)
• From roughly 1933 to the early 1970’s, the
government tightly regulated financial
• Congress began deregulating in the late 1970’s
– relaxing the restrictions of Savings and Loan
• By 1982, Congress decided to allow S&Ls to
make higher risk investments.
Quick History of Banking (cont.)
• When those investments went bad, hundreds of
S&Ls failed.
• The government insured S&L deposits, but the
bail out cost the taxpayers of this country just
short of $200 billion dollars.
Quick History of Banking (cont.)
Gramm-Leach Bliley Act of 1999
• Permitted bank holding companies greater freedom to
engage in a full range of services including banking,
insurance, and securities.
• opens up competition among banks, securities
companies and insurance companies.
• Some argue it may weaken competition (only the
strongest survive, squeeze out the weak)
• Some think it will violate customers privacy (affiliated co.)