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BANKING AND MONEY SIMULATION 模拟 (Mónǐ)
Introduction – An activity to show you how the American banking system works.
GOALS – At the end of this simulation you should be able to
do the following: 1. Understand money and banking terms
2. Understand the American banking system
3. Be able to open an account and get a loan
4. Understand the reason a bank must maintain a positive interest rate spread
GOALS – At the end of this simulation you should be able to
do the following: (Continued)5. Understand that some people or activities
are more risky than others and people will pay more to borrow money
6. Know what the FED does and how it sets monetary policy
7. Know that decisions made at the highest levels affect decisions at the bottom levels
Step 1 Checks and How they are written
CHECK REGISTER – RECORDING OF CHECKS
STEP 1 – OPEN A CHECKING AND SAVINGS ACCOUNT
•1. A checking (demand deposit) is a cash payment account for purchases such as food, clothing, bills (pay debts). A liability for the bank, used for loans. Biggest part of M1 which is main definition of money in the US (money supply). Cash plus checking (demand deposit) accounts
•2. A savings account sets aside for future purchases within a year, or to be invested to make money for people. Banks will use savings for loans. Interest is paid for savings accounts.
STEP 2 – TAKE OUT A PERSONAL LOAN
1.For a corporation or small company to grow their business, for resources (steel plates for airplanes) or for capital improvements (buildings)
2.For a household or individual to purchase something (a car or truck) or pay for a service (repair a house)
STEP 3 – QUALIFYING FOR A LOAN
Based on credit analysis – Loan officers look at the following factors:
a. Character of borrower- The purpose of loan and ability to pay it back - Adverse Selection
What is the credit risk? Low, medium or high. The interest rate is determined by these factors.
b. Cash - Income and savings of borrower. Does the borrower make enough money to make the loan payments and pay back the loan.
Unit Type Loan Amt Loan Purpose Seller Income/Expenses/Savings/Bank/Credit Risk/Rate
1.Plane Builder 2,000,000 Purchase steel plates/Inland Steel Bank C/3,000,000/2,950,000/500,000 A Low 7%
2 .Airline Corp 2,000,000 Purchase Airplanes/Plane Builder #1 2,500,000/2,000,000/500,000B Med-High12%
3.Investor 200,000 Purchase stock Broker Bank B 200,000 180,000 50,000 C High15%
4.Fuel Wholesaler 100,000 Purchase Fuel Oil Co Bank C 150,000 125,000 25,000 ALow 7%
5.Used Equip Deal 100,000 Purchase Bulldozer Rd Construct Bk A 200,000 180,00020,000 B Med 10%
6.Auto Dealer 100,000 Purchase Cars Ford Motor Bank B 150,000 140,000 10,000 CMed 10%
7.Builder 50,000 Purchase Bulldozer Dealer in #5 75,000 65,000 10,000 A Low/Med 9%
8. Doctor 50,000 Remodel Office Builder in #7 100,000 75,000 25,000 B Low 7%
9.Teacher 20,000 Purchase Car Dealer in #6 40,000 35,000 6,000 C Low/Med 8%
10.Carpenter 20,000 Purchase Truck Dealer in #6 50,000 40,000 10,000 A Low 7%
11.Assembly Line 20,000 Build to fix home Builder in #7 30,000 28,000 2,000 BMed/High13%
12 Trash Collector 10,000 Purchased Truck Dealer in #6 20,000 19,000 1,000 C High15%
13.Welfare Family 5,000 Repair roof Builder in #7 13,000 12,900 100 A Very High17%
STEP 3 – QUALIFYING FOR A LOAN
Based on credit analysis – Loan officers look at the following factors:
c. Collateral – An asset to “pay” for loan. For example, a house, car, stock or other investments, or assets (jewelry)
d. Conditions – The economic conditions of the borrower. What is the economy like.
STEP 4 – PAYING BACK A LOAN. EXAMPLE OF LOAN AMORTIZATION FOR DOCTOR IN SIMULATION
Loan Repayments by Month Loan amount = $50,000 Interest Rate = 7% 120 months (10 years)Starting 10/1/2014 Ending 9/30/2024 Month Start Balance Principal Interest Payment1 $ 50,000.00 $ 288.88 $ 291.67
$ 580.542 $ 49,711.12 $ 290.56 $ 289.98
$ 580.543 $ 49,420.56 $ 292.26 $ 288.29
$ 580.544 $ 49,128.31 $ 293.96 $ 286.58
$ 580.545 $ 48,834.35 $ 295.68 $ 284.87
$ 580.546 $ 48,538.67 $ 297.40 $ 283.14
$ 580.547 $ 48,241.27 $ 299.13 $ 281.41
$ 580.548 $ 47,942.14 $ 300.88 $ 279.66
$ 580.549 $ 47,641.26 $ 302.64 $ 277.91
$ 580.5410 $ 47,338.62 $ 304.40 $ 276.14
$ 580.5411 $ 47,034.22 $ 306.18 $ 274.37
$ 580.5412 $ 46,728.05 $ 307.96 $ 272.58
$ 580.54118 $ 1,721.50 $ 570.50 $ 10.04 $ 580.54119 $ 1,151.00 $ 573.83 $ 6.71 $ 580.54 120 $ 577.18 $ 577.18 $3.37
$ 580.54121 $ 0 $ 0 $ 0
$ 0
UNIT ACTIVITY – Loan based on 10 yr amortization
UNIT # Savings Checking Loan Loan % Loan Interest Pmt/Yr +Principle Bank
1 Plane Builder 200,000 300,000 2,000,000 7% 140,000 280,000 A
2 Airline Corp 150,000 350,000 2,000,000 12% 240,000 345,000 B
3 Investor 10,000 40,000 200,000 15% 30,000 38,700 C
4 Fuel Wholes 11,000 14,000 100,000 7% 7,000 13,900 A
5 Equip Dealer 4,000 16,000 100,000 10% 10,000 15,900 B
6 Auto Dealer 0 10,000 100,000 10% 10,000 15,900 C
7 Builder 2,000 8,000 50,000 9% 4,500 7,600 A
8 Doctor 17,000 8,000 50,000 7% 3,500 7,000 B
9 Teacher 3,000 3,000 20,000 8% 1,600 2,900 C
10 Carpenter 7,000 3,000 20,000 7% 1,400 2,800 A
11 Assembly Line 0 2,000 20,000 13% 2,600 3,600 B
12 Trash Collect 0 1,000 10,000 15% 1,500 1,900 C
13 Welfare Fam 0 100 5,00017% 850 1,050 A
STEP 4 – PAYING BACK A LOAN. EXAMPLE OF LOAN AMORTIZATION
Loan Repayments by Month – 10 year Amortization
Month Start Balance Principal InterestPayment
1 $ 50,000.00 $ 288.88 $ 291.67 $ 580.54
2 $ 49,711.12 $ 290.56 $ 289.98 $ 580.54
3 $ 49,420.56 $ 292.26 $ 288.29 $ 580.54
4 $ 49,128.31 $ 293.96 $ 286.58 $ 580.54
5 $ 48,834.35 $ 295.68 $ 284.87 $ 580.54
6 $ 48,538.67 $ 297.40 $ 283.14 $ 580.54
7 $ 48,241.27 $ 299.13 $ 281.41 $ 580.54
STEP 4 – PAYING BACK A LOAN. EXAMPLE OF LOAN AMORTIZATION
Loan Repayments by Month – 10 year Amortization
Month Start Balance Principal Interest Payment
7 $48,241.27 $299.13 $281.41 $580.54
8 $47,942.14 $300.88 $279.66 $580.54
9 $47,641.26 $302.64 $277.91 $580.54
10 $47,338.62 $304.40 $276.14 $580.54
11 $47,034.22 $306.18 $274.37 $580.54
12 $46,728.05 $307.96 $272.58 $580.54
118 $1,721.50$570.50 $10.84 $580.54
119 $1,151.00$573.83 $6.71 $580.54
120 $577.18 $577.18 $3.77 $580.54
121 $0.00 $0.00 $0.00 $0.00
The Money Supply and how money for loans is created
There are 4 major players in the money supply process:
•The Federal Reserve System – the “FED”
•The banking system (i.e. Financial Intermediaries)
•Depositors
•Borrowers
The Role of the FED in the Banking Process
The Fed has 3 key functions or roles:
•It makes monetary policies using one of its monetary policy tools
•It clears checks for member banks
•It makes sure banks are doing things right!
Regulations, keeping the rules
THE FED’S RESERVE LIABILITIESRESERVES = money in vault + money held in an account with the Federal Reserve. Earns no interest
2 categories of Reserves
Required Reserves – This is the amount of money a bank needs to keep by law, about 10%Excess Reserves – any additional amount held that is above the required reserves (liquidity)
THE FED’S ASSETS1. SELLING GOVERNMENT SECURITIES, like treasury bonds to the banks
The Fed holds Treasury securities for two reasons:
a. buying and selling of Treasury securities is one of the Fed’s major tool in controlling the economy’s money supply. By the fed purchasing securities from the banks, the Fed is providing reserves for the banking system thus increasing the money supply. Selling securities to the banks take money out of the system.
b. holding Treasury securities provides a return for the Fed
2. DISCOUNT LOANS
a. How banks borrow from the Fed
b. The Fed makes loans to banks through its discount loan operation
HOW DEPOSITS ARE CREATED•When the Fed wants to change the money supply
it will change the required reserves of banks
•There are two ways the Fed can alter the reserves of a bank or the banking system:
• (i) buying and selling securities to the banks
• (ii) making and recalling discount loans from banks• The central bank goes to the open market to buy a financial asset, such as
government bonds. To pay for these assets, bank reserves in the form of new base money (for example newly printed cash) are transferred to the seller's bank and the seller's account is credited. Thus, the total amount of base money in the economy is increased. Conversely, if the central bank sells these assets in the open market, the amount of base money held by the buyer's bank is decreased, effectively reducing base money, taking money out of the economy.
THE MONEY MULTIPLIER
1. Member banks set up an account in the Federal Reserve Bank
equaling the total of their savings and checking accounts $100,000
2. Fed requires a certain percent (10%) to be kept on reserve X .10
3. Reserve required $10,000
4. Balance basis for loans $90,000
5. Total amount is “multiplied” 10 time because the bank can
create through loans, demand deposits equaling $10 for
Each $1 it adds to its reserve. X 10
6. Total amount available to loan$900,000
The $90,000 is deposited into another bank ad the process starts over again
THE MONEY MULTIPLIER
1. Money deposited into another bank $90,000
2. Fed requires a certain percent (10%) to be kept on reserveX .10
3. Reserve required $9,000
4. Balance basis for loans $81,000
5. Total amount is “multiplied” 10 time because the bank can
create through loans, demand deposits equaling $10 for
Each $1 it adds to its reserve. X 10
6. Total amount available to loan $810,000
The $81,000 is deposited into another bank ad the process starts over again
THE MONEY MULTIPLIER
1. Money deposited into another bank $81,000
2. Fed requires a certain percent (10%) to be kept on reserveX .10
3. Reserve required $8,100
4. Balance basis for loans $72,900
5. Total amount is “multiplied” 10 time because the bank can
create through loans, demand deposits equaling $10 for
Each $1 it adds to its reserve. X 10
6. Total amount available to loan $72,900
The $72,900 is deposited into another bank ad the process starts over again
CREATION OF DEPOSITS – MONEY MULTIPLIER
MONEY CREATION PROCESS
It is important to note that the above example is possible only if :
• (i) the banks do not keep excess reserves
• (ii) all the loans are deposited in checking accounts and not taken out as cash
SIMULATION SUMMARY* Checking accounts (demand deposit accounts) – using checks as substitute for money
* Check register – keeping a record of a checking account
* Personal and business loans and qualifying for a loan
a. Good character – ability to pay back loan. Adverse Selection
b. Income – Making money
c. Collateral – assets to cover loan if not able to pay back, house, car, jewelry
d. Conditions – what is the economy like
SIMULATION SUMMARY
* Amortization – interest + principle in paying back loan over a certain time period.
* 4 players in money supply process
a. FED b. Banks c. Depositors D. Borrowers
* Role of Fed
a. Set monetary policy
b. Clear checks
c. Regulate bank activity
SIMULATION SUMMARY
* FED’s Liabilities
1. Required Reserves (usually about 10% but can be raised or lowered by the FED.
2. Excess Reserves
* FED’s Assets
1. Selling Government securities
2. Selling DISCOUNT loans to the banks.
These are 2 of the ways the FED effects the money supply –
* The MONEY MULITPLIER increases the money supply.
Unit Type Finance 10 Finance 9Finance 1
1.Plane Builder Corp Vicky/Lisa Lily/Grace Grace/Jessica
2.Airline Corporation Eileen/Sadie Naomi/Dana Victoria/Sandra
3.Investor Andrew/Joanna Haley/ZaraConan/Zena
4.Fuel Wholesaler Cora/Kira Douglas/Eli Delia/Betty
5.Used Equip Dealer Eli/Regan Karen/Abigail Vicky/Nienna
6.Automobile Dealer Phoebe/Julia Dominique/Kaci Lily/Cindy Li
7.Builder Tony/Peter Tracy/RobinJessy/Kristen
8. Doctor Rita/Anna Susan/Retana Anna/Katrina
9.Teacher Angela/RachelWhitney/Stella Emily/Taylor
10.Carpenter Chris/Leo Derek/Melissa Doria/Kate
11.Assembly Line Teri/Shiny Nora/Coco Dave/Laily
12 Trash Collector Jamie/Criesgod Karry/WadeLiya/Catherine
13.Welfare Family Devin/Lucky
BANKERSFinance 10 Finance 9 Finance 1
Bank A Bank A Bank A
Kevin/Nico Kristi/Zoe Cindy/Coco/Albert/Erin
Bank B Bank B Bank B
Victoria/Cici Caroline/Cici Jack/Hero/Rayna/Bell
Bank C Bank C Bank C
Zoe/Kristi Kay/Ned Elice/Yvette/Lisa/Christy
Federal Reserve-FEDFinance 10 Finance 9 Finance 1
Joyce NinaWendy
Valerie Sunny Winters
Janene Heidi Zoe
Haley Libby Melinda
Evan Gabriella Alma
Kara
Mary
Keven