Download Ch. 24 Section 3 How Banks Operate

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
loans
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
account
• 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
businesses.
• 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
charter.
• 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
1907.
• 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)
• FDIC helped restore the public’s confidence in
banks.
• 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
institutions.
• Congress began deregulating in the late 1970’s
– relaxing the restrictions of Savings and Loan
Associations
• 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.)