BankingBanking

Leslie LumLeslie Lum

What Banks DoWhat Banks Do

Deposit functions - take in money from you Deposit functions - take in money from you and give you interestand give you interest

Loan functions - use the money that you Loan functions - use the money that you deposited and lend it out to others. Banks deposited and lend it out to others. Banks are required to keep 3 to 20% of deposits as are required to keep 3 to 20% of deposits as a reserve requirement. Other funds can be a reserve requirement. Other funds can be loaned out.loaned out.

Other ServicesOther Services

Credit cardsCredit cards Manage your money (brokerage and funds)Manage your money (brokerage and funds) InsuranceInsurance Bill paymentBill payment Financial planningFinancial planning

Banking Hasn’t Been BoringBanking Hasn’t Been Boring 1970’s inflation pushed banks to lobby for deregulation 1970’s inflation pushed banks to lobby for deregulation

of interest ratesof interest rates 1980’s real estate frenzy resulted in over-building1980’s real estate frenzy resulted in over-building 1980’s deregulation allowed banks into other financial 1980’s deregulation allowed banks into other financial

servicesservices 1980’s finance companies took commercial paper share 1980’s finance companies took commercial paper share

away from banksaway from banks 1990’s banks are consolidating1990’s banks are consolidating 2000’s banks become very large and encounter problems 2000’s banks become very large and encounter problems

with easy lendingwith easy lending

Federal Reserve SystemFederal Reserve System

Network of 12 regional banks owned by the participating Network of 12 regional banks owned by the participating commercial banks within its regioncommercial banks within its region

Overall policy is established by seven member board of Overall policy is established by seven member board of governors in Washington, D.C. (14 year terms)governors in Washington, D.C. (14 year terms)

Federal Reserve

sets DiscountRate lower

Banks lendto each

other

Banks lend businesses

Banks lend individuals

Peoplespend

Businessesgrow

Interest Rate Food ChainInterest Rate Food Chain

How do you assess credit risk?How do you assess credit risk?

CharacterCharacter

– prompt in paying bills? bankruptcy?prompt in paying bills? bankruptcy? CapacityCapacity

– financial ability to payfinancial ability to pay CapitalCapital

– Net worthNet worth CollateralCollateral

– Assetsto back loanAssetsto back loan ConditionsConditions

– economic conditions-expansion or recessioneconomic conditions-expansion or recession

Credit Rating ExerciseCredit Rating Exercise

http://www.bankrate.com/brm/fico/calc.asphttp://www.bankrate.com/brm/fico/calc.asp