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Cash Coins Checks(Demand Deposits)
Travelers’Checks
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SavingsAccounts
MoneyMarket (CD’s)
MutualFunds
Types of Financial Institutions• Commercial BanksCommercial Banks
– Commercial banks offer checking services, accept deposits, and make loans.
• Savings and Loan Associations (S & L’s)Savings and Loan Associations (S & L’s)– Savings and Loan Associations were originally chartered to lend money
for home-building in the mid-1800s.
• Savings BanksSavings Banks– Savings banks traditionally served people who made smaller deposits and
transactions than commercial banks wished to handle.
• Credit UnionsCredit Unions– Credit unions are cooperative lending associations for particular groups,
usually employees of a specific firm or government agency.
• Finance CompaniesFinance Companies– Finance companies make installment loans to consumers.
Banking Services• Banks perform many functions and offer a wide
range of services to consumers. Storing Money (Service #1)Banks provide a safe, convenient place for people to store their money.
Credit CardsBanks issue credit cards — cards entitling their holder to buy goods and services based on each holder's promise to pay later.
Saving Money: (Service #2: Earn Money)Four of the most common options banks offer for saving money are:1. Savings Accounts 2. Checking Accounts3. Money Market Accounts 4. Certificates of Deposit (CDs)
Loans (Service #3: Borrow Money)By making loans, banks help new businesses get started, and they help established businesses grow.
MortgagesA mortgage is a specific type of loan that is used to purchase real estate.
BANK
How Banks Make a Profit
Deposits from customers
Interest from borrowers
Fees for services
Money enters bankMoney leaves bank
Interest and withdrawals to
customers
Money loaned to borrowers:• business loans•home mortgages• personal loans
Bank’s cost of doing business:• salaries• taxes• other costs
Bank retains required reserves
How Banks Make a Profit• The largest SOURCE OF INCOME for banks is the
INTEREST they receive from customers who have taken loans.• Interest is the price paid for the use of borrowed money.
How Do Banks Make Loans?
FRACTIONAL RESERVE BANKINGFRACTIONAL RESERVE BANKINGA bank keeps only a fraction of funds on
hand and lends out the remainder.
$10,000 DepositReserve Requirement
20% ($2,000 Retained)
$8,000Loanable
Funds
Banking DeregulationBank Mergers
Deregulation led to mergers; no more restrictions on interstate banking
Advantages: more competition meant low interest rates, more servicesalso more branches; economies of scale, especially for technology
Disadvantages: fewer banks to choose fromfear larger banks uninterested in small customers, local communities
Banking DeregulationBanking Services
Financial Services Act of 1999 lifted last restriction on banks
Banks, insurance companies, investment companies competesell stocks, bonds, insurance, traditional banking services
Customers continue to use different companies for different services
Housing Boom and Bust
From 2000 to 2006, house prices in the U.S. skyrocketed. Many factors contributed to this boom, but bank lending practices played a major role.
Deregulation changed banks from local institutions into national megabanks. Instead of collecting payments on a mortgage for 30 years, banks began to sell these loans to other financial institutions for a quick profit.
Housing Boom and BustBanks became less interested in verifying that clients could repay a mortgage and more interested in making as many mortgage loans as possible. The easy money fueled the housing price bubble.
