banking domain details
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details for the tester wants to switch to BIFS domainTRANSCRIPT
Banking Basics
Table of contents Introduction 4
Whatisabank? 6
Howdopeoplestartbanks? 7
Howdidbankingbegin? 8
Whyaretheresomanydifferenttypesofbanks? 11
HowdoIchooseabank? 13
Whattypesofaccountsdobanksoffer? 14
Isitdifficulttoopenabankaccount? 16
Whathappenstomoneyafteryoudepositit? 18
Whathappenswhenyouapplyforaloan? 20
Whatarechecks,andhowdotheywork? 23
Whatiselectronicbanking? 25
Creditcards,debitcards,storedvaluedcards:What’sthedifference? 27
Dobankskeeplargeamountsofgoldandsilverintheirvaults? 30
Whydobanksfail? 31
Doyoulosemoneyifyourbankfails? 34
Doyoulosemoneyifyourbankisrobbed? 35
HowdoestheFederalReservefitintotheU.S.bankingsystem? 36
ResourcesforEveryone 40
IntroductionSomeyoungsaversstashtheircashinshoeboxesorjellyjars.Othersuse“piggybanks,”whichtodaylookmorelikespaceshipsorcartooncharacters.
Inanycase,thesameproblemarises.Soonerorlater,thepiggybankorjellyjarfillsup,andyouhavetomakeadecision:ShouldIspendthemoneyorcontinuetosave?AndifIcontinuetosave,shouldIopenabankaccountorjustfindabiggerjar?
Maybeyou’vehadtofacesuchadecisionyourself.Ifyoudecidetokeepyourmoneyathome,itwilljustsitthereandwon’tearnanyextramoneyforyou.Youalsoruntheriskthataburglar,afire,orsomeotherdisasterwillwipeoutyoursavingsinthewinkofaneye.
Thenagain,ifyouopenabankaccount,youcan’t“visit”yourmoneyaseasilyasyoucanwhenitsitsinyourdresserdrawer.Youcan’tjustwalkintoabankinthemiddleofthenighttocountyourcash.Youcan’trunthecoinsthroughyourfingersortossthebillsintheairandletthemraindownonyourhead.
Openingabankaccountisabigstepbecauseyouareputtingyourmoneyinsomeoneelse’shands.You’recountingonsomeoneelsetohandleyourmoneyresponsibly.Beforeyoudothat,itmightbeagoodideatounderstandhowbanksoperate.
That’sthepurposeofthispamphlet.Itwon’ttellyoueverythingthereistoknowaboutbanksandbanking,butwehopeitwillbeagoodbasicintroduction.
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What is a bank?Abankisabusiness.Butunlikesomebusinesses,banksdon’tmanufactureproductsorextractnaturalresourcesfromtheearth.Bankssellfinancialservicessuchascarloans,homemort-gageloans,businessloans,checkingaccounts,creditcardservices,certificatesofdeposit,andindividualretirementaccounts.
Somepeoplegotobanksinsearchofasafeplacetokeeptheirmoney.Othersareseekingtoborrowmoneytobuyahouseoracar,startabusiness,expandafarm,payforcollege,ordootherthingsthatrequireborrowingmoney.
Wheredobanksgetthemoneytolend?Theygetitfrompeoplewhoopenaccounts.Banksactasgo-betweensforpeoplewhosaveandpeoplewhowanttoborrow.Ifsaversdidn’tputtheirmoneyinbanks,thebankswouldhavelittleornomoneytolend.
Yoursavingsarecombinedwiththesavingsofotherstoformabigpoolofmoney,andthebankusesthatmoneytomakeloans.Themoneydoesn’tbelongtothebank’spresident,boardofdirectors,orstockholders.Itbelongstoyouandtheotherdepositors.That’swhybankershaveaspecialobligationnottotakebigriskswhentheymakeloans.
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How do people start banks?Theprocessofstartingabankvariesfromstatetostate,but,ingeneral,here’showitgoes:
1.Agroupofindividualsdecidestostartabank.Theirfirststepistoapplyforacharterfromtheirstatebankingcommission.*Thechartersetsouttherulesforhowtheymustoperatetheirbank.
2.The banking commission reviews the application to make sure it is complete and thenschedulesahearing.
3.Thecommissionlooksatthefinancialconditionandthecharacteroftheapplicants.
4.Afterthat,thebankingcommissionwilleitherapprovetheapplicationordenyit.
5.Ifapproved, thegroupthatappliedtostart thebankwill thenhaveacertainamountoftimetoraisethenecessarycapital,puttogetherafullmanagementteam,andobtainfederaldepositinsurance.
6.Whenthat’sdone, thegroupwillnotify thebankingcommission,whichwill thenreviewthelistofproposedinvestors.Ifthecommissionhasnoobjectiontothelist,ifthebankisinsured,andifanacceptablemanagementteamisinplace,thecommissionwillissueitsfinalapprovalandthebankmayopenforbusiness. * The United States has
a dual banking system. People who want to start a bank can choose to apply for either a state charter or a charter from the federal government.
How did banking begin?ImagineforamomentthatyouareamerchantinancientGreeceorPhoenicia.Youmakeyourlivingbysailingtodistantportswithboatloadsofoliveoilandspices.Ifallgoeswell,youwillbepaidforyourcargowhenyoureachyourdestination,butbeforeyousetsailyouneedmoneytooutfityourship.Andyoufinditbyseekingoutpeoplewhohaveextramoneysittingidle.Theyagreetoputupthemoneyforyourvoyageinexchangeforashareofyourprofitswhenyoureturn...ifyoureturn.
Thepeoplewiththeextramoneyareamongtheworld’sfirstlenders,andyouareamongtheworld’sfirstborrowers.Youcomplainthatthey’redemandingtoolargeashareoftheprofits.Theyreplythatyourvoyageisperilous,andtheyrunariskoflosingtheirentireinvestment.Lendersandborrowershavecarriedonthisdebateeversince.
Today,peopleusuallyborrowfrombanksratherthanwealthyindividuals.Butonethinghasn’tchanged:Lendersdon’tletyouhavetheirmoneyfornothing.
Lendershavenoguaranteethattheywillgettheirmoneyback.Sowhydotheytaketherisk?Becauselendingpresentsanopportunitytomakeevenmoremoney.
Forexample,ifabanklends$50,000toaborrower,itisnotsatisfiedjusttogetits$50,000back.Inordertomakeaprofit,thebankchargesinterestontheloan.Interestisthepricebor-rowerspayforusingsomeoneelse’smoney.Ifaloanseemsrisky,thelenderwillchargemoreinteresttooffsettherisk.(Ifyoutakeabiggerchance,youwantabiggerpay-off.)
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Buttheopportunitytoearnlotsofinterestwon’tcountformuchifaborrowerfailstorepayaloan.That’swhybanksoftenrefusetomakeloansthatseemtoorisky.Beforelendingyoumoney,theylookat: •howmuchandwhattypesofcredityouuse,suchascreditcards,autoloans,orother
consumerloans; •whetherornotyouhaveahistoryofrepayingyourloans,and •howpromptlyyoupayyourbills.
Banksalsouseinteresttoattractsavers.Afterall,ifyouhaveextramoneyyoudon’thavetoputitinthebank.Youhavelotsofotherchoices:
•Youcanburyitinthebackyardorstuffitinamattress.Butifyoudothat,themoneywilljustsitthere.Itwon’tincreaseinvalue,anditwon’tearninterest.
•Youcanbuylandorinvestinrealestate.Butiftherealestatemarketweakens,buildingsandlandcantakealongtimetosell.Andthere’salwaystheriskthatrealestatewilldropinvalue.
•Youcaninvestinthestockmarket.Butlikerealestate,stockscanalsodropinvalue,andthesharepricemightbelowwhenyouneedtosell.
•Youcanbuygoldorinvestincollectiblessuchasbaseballcards,butgoldandcollectiblesfluctuateinvalue.Whoknowswhatthevaluewillbewhenit’stimetosell?(In1980,goldsoldfor$800anounce.By1983,thepricehadsunkbelow$400.)
Oryoucanputthemoneyinabank,whereitwillbesafeandearninterest.Manytypesofbankaccountsalsoofferquickaccesstoyourmoney.
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Interest is the price borrowers pay for using someone else’s money.
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Why are there so many different types of banks?Notallbanksareexactlythesame.Therearecommercialbanks,savingsbanks,savingsandloanassociations(S&Ls),cooperativebanks,andcreditunions.Todaytheyoffermanyofthesameservices,butatonetime,theywereverydifferentfromoneanother.
Commercial banksoriginallyconcentratedonmeetingtheneedsofbusinesses.Theyservedasplaceswhereabusinesscouldsafelydeposititsfundsorborrowmoneywhennecessary.Manycommercialbanksalsomadeloansandofferedaccountstoindividuals,buttheyputmostoftheireffortintoservingbusiness(commercial)customers.
Savings banks, S&Ls, cooperative banks,andcredit unionsareclassifiedasthriftinstitu-tionsor“thrifts,”ratherthanbanks.Originally,theyconcentratedonservingpeoplewhosebankingneedswereignoredorunmetbycommercialbanks.
Thefirstsavings bankswerefoundedintheearly1800stogiveblue-collarworkers,clerks,anddomesticworkersasecureplacetosavefora“rainyday.”Theywerestartedbypublic-spiritedcitizenswhowantedtoencourageeffortsatsavingamongpeoplewhodidnotearnmuchmoney.
Savings and loan associationsandcooperative bankswereestablishedduringthe1800stohelpfactoryworkersandotherwageearnersbecomehomeowners.S&Lsacceptedsavingsdepositsandusedthemoneytomakeloanstohomebuyers.Mostoftheloanswenttopeoplewhodidnotmakeenoughmoneytobewelcomeattraditionalbanks.
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Credit unions began as a 19th-century solution to the emergency needs of people whowereunabletoborrowmoneyfromtraditionallenders.Beforetheopeningofcreditunions,ordinary citizens had no place to turnwhen they faced unexpected home repairs,medicalexpenses,orotheremergencies.Creditunionswerestartedbypeoplewhosharedacommonbondsuchasworkinginthesamefactory,belongingtothesamehouseofworship,orfarminginthesamecommunity.Memberspooledtheirsavingsandusedthemoneytomakesmallloanstooneanother.
Althoughtherearestilldifferencesbetweenbanksandthrifts,theynowoffermanyofthesamebankingservicestotheircustomers.Mostcommercialbanksnowcompetetomakecarloans.Manythriftinstitutionshavebeguntomakecommercialloans,andsomecreditunionsmakeloanstohomebuyers.
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Credit unions were started by people who shared a common bond. Members pooled their savings and used the money to make small loans to one another.
How do I choose a bank?Backinthe1950s,banksoftengaveawaytoasterstonewdepositors,andthatmadechoosingabanksimpler.Youwenttotheonethatgaveawaythebesttoaster.
Todaybanksrarelygiveawaytoasters,andchoosingabankisalittlemorecomplicated.Forstarters,youshouldshoparoundtofindoutwhichbanksofferthebestservicesandthelow-estfees.Somebankschargeamonthlyfeeifyouraccountfallsbelowacertainlevel,andthatfeecanbehigherthantheinterestyouraccountearns.Otherbanksmaychargefeesformanytypesoftransactions.Youdon’twantthat.
Incertainstates,suchasMassachusetts,thelawprohibitsbanksfromchargingfeesonsavingsaccountsheldbypeopleundertheageof18orovertheageof65.Findoutifyourstatehassuchalaw.
Otherthingsyoumightwanttoconsider:
1.Doesyourbankpaydepositorsacompetitiveinterestrate?
2.Isthebankinaconvenientlocationandareitsbusinesshoursconvenientforyou?
3.IsyourdepositinsuredbytheFDIC(FederalDepositInsuranceCorporation)?
4.Isthebankagoodcorporatecitizen?Doesitinvestinyourneighborhood?
5.Andlast,butcertainlynotleast,doesyourbankprovidecourteousandefficientservice?
Beforeyouopenanaccount,askafewpeopleiftheyarehappywiththeirbank.Anddosomecomparisonshoppingbecauseallbanksarenotthesame.
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What types of accounts do banks offer?People use banks for different purposes. Some have extra money to save; others need toborrow.Someneedtomanagetheirhouseholdfinances;othersneedtomanageabusiness.Bankshelptheircustomersmeetthoseneedsbyofferingavarietyofaccounts.
Savings accounts are forpeoplewhowant tokeeptheirmoney inasafeplaceandearninterestatthesametime.Youdon’tneedalotofmoneytoopenasavingsaccount,andyoucanwithdrawyourmoneyeasily.
Certificates of deposit(CDs)aresavingsdepositsthatrequireyoutokeepacertainamountofmoneyinthebankforafixedperiodoftime(example:$1,000fortwoyears).Asarule,youearnahigherrateofinterestifyouagreetokeepyourmoneyondepositlonger,andthereisusuallyapenaltyifyouwithdrawyourmoneyearly.
Individual retirement accounts(IRAs)aresavingsdepositsthatofferanexcellentwaytosaveforyourlateryears.Youdon’thavetopaytaxonthemoneyyoudepositinyourIRAuntilyouwithdrawit.Butthereisoftenasignificantpenaltyifyouwithdrawyourfundsbeforeyoureachaspecifiedage(usually59orolder).
Checking accountsoffersafetyandconvenience.Youkeepyourmoneyintheaccountandwriteacheckwhenyouwanttopayabillortransfersomeofyourmoneytosomeoneelse.Ifyourcheckbookislostorstolen,allyouneedtodoiscloseyouraccountandopenanewonesothatnobodycanuseyouroldchecks.(Whencashislostorstolen,yourarelyseeitagain.)Anotherattractivefeatureofacheckingaccountisthatyourbanksendsyouamonthlyrecordofthechecksyouhavewritten,andyoucanusethatrecordifeverneedtoprovethatyou’vemadeapayment.Bankssometimeschargeafeeforcheckingaccounts,becausecheckprocessingiscostly.
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Manybanksalsoofferno-feecheckingandcheckingaccountsthatearninterestifyouagreetokeepacertainamountofmoney—aminimumbalance—intheaccount.Buttheseaccountsarelimitedtonon-businesscustomers.Bankinglawsalmostalwaysrequirebusinessestouseregularcheckingaccountsthatdonotpayinterest.
Money market deposit accountsaresimilartocheckingaccountsthatearninterest,exceptthat theyusuallypayahigherrateof interestandrequireahigherminimumbalance (often$2,500ormore).Theyalsolimitthenumberofchecksyoucanwritepermonth.
Finally,banksdonotalwayscalltheiraccountsbythesamenames.Often,theychoosedistinc-tivenamesinhopesofattractingcustomers.Buttherecanbearealdifferencebetweenonebank’saccountsandanother’s,soshoparound.
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Banks sometimes charge a fee for checking accounts, because check processing is costly.
Is it difficult to open a bank account?You’vefinallydecidedtotaketheplunge.Withyourcashtuckeddeepinyourpocket,youwalkintothebankandasktoopenasavingsaccount.
The bank’s receptionist directs you to a desk where a customer service representativewillhelpyouwiththepaperwork.Toyoursurprise,theonly formyouneedtofillout isasignature card, which requires you to sign your name and then print your name, address,telephonenumber,dateofbirth,socialsecuritynumber,andyourmother’smaidenname(asameansoffurtheridentification).Afteryoucompletethesignaturecard,youreceiveabankbook(sometimescalledapassbook)thatlistsyouraccountbalance(thetotalamountofmoneyinyouraccount).
Whenever you make a deposit (put money in) or a withdrawal (take money out), thetransactionisrecordedinyourbankbook.Itisveryimportantforyoutokeeptrackoftheactivityinyouraccount.
Youdon’tneedlotsofmoneytostartasavingsaccount.Somebanksletyouopenonewithaslittleas$20.Nordoyouneedtowaituntilyouare18yearsold.Inmostcases,youcanopenasavingsaccountassoonasyouareoldenoughtosignyourname,orevenearlierthanthatifyouopentheaccountwithaparentorguardian.
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What happens to money after you deposit it?Whathappenstoa$10billafteryoudeposititinyoursavingsaccount?Doesthebanktellertakeittoavaultandputitintoaseparatecompartmentorcubbyholemarkedwithyournameandaccountnumber?No.
Thebankbeginsbyadding$10totheamountthatisalreadyinyouraccount(yourexistingbalance).Your$10depositandyournewbalancearethenrecordedinyourbankbookandinthebank’scomputersystem.The$10billyoudepositedismixedinwithalltheothercashyourbankreceivesthatday.
Whenyouandothercustomersdepositmoneyinabank,thebank“putsmostofittowork.”Partofthemoneyissetasideandheldinreserve,butmuchoftherestisloanedtopeoplewhoneedtoborrowmoneyinordertobuyahouseoracar,expandabusiness,buyfarmequipment,ordoanyoftheotherthingsthatrequirepeopletoborrowmoney.
Ofcourse,banksdonot lendmoney just toprovideaservice.Theydo it tomakemoney.Here’showitworks.
Whenyoukeepyoursavingsinabank,thebankpaysyouextramoney,whichiscalledinterest.Theinterestisaddedtoyouraccountonaregularbasis,usuallyonceamonth.
Let’ssayabankpaysitsdepositorsinterestof3percentayearontheirsavings.Insimpleterms,thatmeans ifyoukeep$100inyoursavingsaccount,thebankwilladd$3toyouraccountbalanceduringthecourseofayear.
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But,thereisanothersidetointerest.Whensomeoneborrowsmoneyfromabank,thebankchargesinterest,anditchargesborrowersahigherratethanitpayssavers.Forexample, itmightpaysavers3percentandchargeborrowers8percent.Thedifference,8percentminus3percent,goestothebank.Charginginterestonloansisoneofthemainwaysforabanktomakemoney.
Therateofinterestabankchargesdependslargelyontwothings:•howmanypeoplewanttoborrowmoney,and•howmuchmoneybankshaveavailabletolend.
Ifabankhasplentyofmoneytolend,andthedemandtoborrowmoneyisnotparticularlystrong,interestrateswilltendtobelowinordertoattractborrowers.Butwhenbankshaveasmalleramountofmoneytolend,andthedemandtoborrowisfairlystrong,interestrateswillrise.Asadepositor,youwantinterestratestobehigh,butasaborrower,youwantthemtobelow.
When it comes to paying interest on savings deposits, there usually isn’t a big differencebetween banks. They pay just enough to stay competitive with one another and attractdepositors. So, if one bank is offering a much better (higher) rate than most other banks,trytofindoutwhy.Andremembertheoldsaying: If something sounds too good to be true, it probably is.
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As a depositor, you want interest rates to be high, but as a borrower, you want them to be low.
What happens when you apply for a loan?Lastweekyourmechanicadvisedyounottospendanymoremoneyonthefaithfuloldcarthathascarriedyouovermanymilesofhighway.Thetimehascometoshoparoundforanewone.Butcarswerealotcheaperwhenyoulastboughtone.Thistimeyou’llhavetotakeoutabigloan.
Youdon’tnecessarilyhavetoborrowfromthebankwhereyouhaveanaccount.Youshouldshoparoundforalenderthatoffersthebestdeal,includingthelowestinterestrate.Sometimescarcompaniesofferlow-interest,orevenno-interestloans.Anddon’tforgettheinternet.Youcanresearchawealthofonlineresourcesfromthecomfortofyourhomeoroffice.
Yourfirststepistofigureouthowmuchyoucanaffordtoborrow.Youwillnotknowifyoucanaffordthenewcar—orifalenderwillletyouborrowtheamountwant—untilafteryoucompletea loanapplication. Inadditiontoroutinepersonal informationsuchasyourname,address,telephonenumber,andSocialSecuritynumber,aloanapplicationalsoasksforinfor-mationonhowmuchmoneyyouearn,howlongyouhaveworkedatyourcurrentjob,andhowmuchmoneyyoualreadyoweoncreditcardbillsandotherdebts.
Thenextstepisforthelendertoevaluateyourapplicationanddecideifyouarea“goodrisk.”Beforetheylendyoumoney,lenderswanttobeascertainaspossiblethatyouwillbeabletopaythemback.Doyouearnenoughmoneytokeepupwithyourloanpayments?Doyouhaveahistoryofpayingyourdebtsontime?Toanswerthesequestions,lendersrelyheavilyoncreditbureausandcreditreports.Thereareapproximately1200localandregionalcreditbureausintheUnitedStates.Allareprivatecompanies(notgovernmentagencies),andmostarelinkedbycomputertothreenationwidecreditbureaus.Theyprovidemuchoftheinforma-tionthatlendersneedtoevaluateloanapplications.
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Whenyouapplyforaloan,yourbankcontactsacreditbureauandasksforacopyofyourcreditreport,whichisbasicallyasummaryofyourpaymenthabits—informationaboutloans,chargeaccounts,creditcardaccounts,bankruptcies,andcourtjudgmentsthatmightrequireapotentialborrowertopayalargesumofmoneyasasettlement.Howtheinformationgetsintoyourcreditreportisnomystery.Whenyouapplyforanewchargeaccountorcreditcard,clerkstransferinformationfromyourapplicationtoelectronicrecordsthatareforwardedtooneormoreofthenationwidecreditbureaus.Ifyouarelateinpayingyourbills,orifyoumissapayment,theinformationgoesintoyourcreditreport.Lendersthenevaluateyourreportandtrytodecideifyouarea“goodrisk.”
Afterweighingalltheinformation,yourbankwilleitherapproveordenyyourloanrequest.Ifyourrequest isdenied,thebankmustnotifyyouinwritingwithin30days,andthelettermuststatethereasonfordenyingyourloan.Ifyourloanisapproved,thebankwillgiveyouacheckmadeouttoyourautodealerortransferthefundstoyouraccount.Toprotectitselfincaseyoufailtorepaytheloan,yourbankwillholdthelegaltitle(ownershippapers)toyourpurchaseuntilyoupayofftheloan.
Beforeapplyingforaloan,youshouldrequestacopyofyourcreditreport.Ifthereareanyissuesorquestions,youmaybeabletoaddressthembeforeprocessingaloanapplication.Youareentitledtoafreecopyofyourcreditreport,atyourrequest,onceevery12months.Formoreinformationonhowtorequestacopy,visittheFederalTradeCommissionwebsiteathttp://www.ftc.gov
Before applying for a loan, you should request a copy of your credit report.
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What are checks, and how do they work?Youreachforyourwalletandit’snotthere.Panicgiveswaytodespairwhenyourealizethatyourwalletisgoneandsoisyourcash.Chancesareyou’llneverseethecashagain.
Theconsequencesarenotnearlyasseriousifyouloseyourcheckbook.Allyoudointhatcaseiscloseyourcheckingaccountandopenanewone.Afterthat,yourlostorstolenchecksareworthlesstoanyonewhomighttrytousethem.
Becausetheyaresafeandconvenient,checkshavebecomeapopularmethodofpaying forthingsortransferringmoney.Butwhatexactlyisacheck?
Insimpleterms,acheckisawrittensetofinstructionstoyourbank.Whenyouwriteacheck,you are instructing your bank to transfer a specific amount of money from your checkingaccounttoanotherpersonoranorganization.Youcanevenwriteachecktoconvertsomeofthemoneyondepositinyourcheckingaccountintocash.
Whenyoufillintheblankspacesononeofyourchecks,youaretellingyourbankthreethings:1)howmuchofyourmoneyyouwanttotransfer,2)whenyouwanttotransferit,and3)towhomyouwantittogo.Youauthorizethetransferbysigningthecheck.
So,ifyourfavoriteauntsendsyoua$50checkforyourbirthday,she’sactuallytellingherbanktotransfer$50fromheraccounttoyou.Butwhenyougotocashhercheckordeposititinyouraccount,howdoesyourbankknowifyourauntactuallyhasenoughmoneyinheraccounttocoverthecheck?
Theanswertothisquestionisn’twhatitusedtobe.
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Upuntil2004,thecheckhadtotravelallthewaybacktoyouraunt’sbankbytruckorbyplane.Iftherewasenoughmoneyinheraccounttocoverit,herbankwould“clear”thecheck.Iftherewasn’tenough,herbankwouldstampit“NSF”—NotSufficientFunds—and“bounce”itbacktoyourbank.Andontopofallthat,youraunt’sbankhadtosendhercancelledchecksbacktohereverymonth,alongwithheraccountstatement.
AllthatpaperworkmighthavebeenOKbackin1940,oreven1970,whenAmericanswrotefewer checks. But as checks becamemore popular, banks spentmore andmore time andmoneymovingbillionsofpiecesofpaperaroundthecountryeachyear—notthebestuseofresources,especiallywhennewtechnologyofferedamoreefficientwaytodothings.
In2004,Check21wentintoeffect.Thenewfederallawmadeitpossibleforbankstohandlemore checks electronically. Insteadof physicallymoving checks fromonebank to another,bankscannowelectronicallytransmitimagesofthecheckstheyprocess.It’salotfasterandlesscostly.
For more information on Check 21, see Frequently Asked Questions about Check 21, http://www.federalreserve.gov/paymentsystems/truncation/faqs2.htm
Instead of physically moving checks from one bank to another, banks can now elec-tronically transmit images of the checks they process.
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What is electronic banking?Thebankclosesintenminutes.Evenifyoumakeitthereintimetocashyourcheck,yournerveswillbefrazzled.Isn’tthereaneasierway?
Yes,thereis.Electronicsandcomputershaveturnedbankingintoaround-the-clockbusiness.Automatedtellermachines(ATMs)nowmakeitpossibleforyoutodomuchofyourbankingwheneveryouchoose.
ATMsarecomputersthataremuchlikelimited-servicebankbranches.Youcanusethemtomakeawithdrawal,makeadeposit,makealoanpayment,transfermoneyfromoneaccounttoanother,orcheckyouraccountbalance.Inmanycases,automatedtellermachinesofdifferentbanksarelinkedtogetherinnetworkssoyoucanusethemwhenyoutraveltoadifferentpartoftown,anotherstate,orevenanothercountry.Allyouneedisaplasticcardfromyourbankandyourownpassword.
Tiredofrushingtothebanktocashyourpaycheck?Askyouremployeraboutdirectdeposit,abankingservicethatmakesitpossibleforyoutohaveyourmoneyelectronicallyaddedtoyourcheckingaccounteverypayday.Insteadofreceivingapaycheck,youreceiveastatementthattellsyouyourmoneyhasbeendepositedinyouraccount.DirectdepositispopularamongpeoplewhoreceiveSocialSecuritychecksorpensionchecksbecauseitsavesthemthebotherofstandinginlineatthebank,battlingbadweather,orworryingaboutbeingrobbedonthewayhomefromthebank.
Anotherelectronicbankingserviceiscalledelectronicfundstransfer,orEFT.ByusingEFT,abankcantransferlargeamountsofmoneytoanotherbankbysendinganelectronicmessage.Electronictransferstakeonlyaninstant.Anelectronicmessageinstructsacomputertodeductacertainamountofmoneyfromonebankaccountandthenaddthesameamounttoanotherbankaccount.Themessage is sent, and theappropriateamount is transferred.Nocashorpaperchangeshands,butmoneyistransferredjustthesame.
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Technologyhasmade itpossibletobankfromthecomfortofyourownhome.Banksoffersoftwarepackagesthatallowcustomerstodebitorcredittheiraccounts,checktheiraccountbalances,orevenapplyforaloan.Consumerscanmakethesetransactionsonline.
There areeven “virtual banks” thathavenophysical bankoffice in a traditionalway.Theyprovidealloftheirservicestotheircustomersoverthe internet.Formore informationoninternetbanking,checkoutWhat You Should Know About Internet BankingontheFederalReserve Bank of Chicago web site: http://chicagofed.org/consumer_information/what_you_should_know_about_internet_banking.cfm
Technology has made it possible to bank from the comfort of your own home.
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Credit cards, debit cards, stored value cards: What’s the difference?Credit cardsarenotaformofmoney,eventhoughpeopleoftenrefertothemas“plasticmoney.”Whenyouuseacreditcardyouareactuallytakingoutaloan—buyingsomethingnowandagreeingtopayforitlater—andsoonerorlateryouwillhavetopaythebillforallthosethingsyou’vebought.
Manybanksissuecreditcards,eventopeoplewhoaren’tregularcustomers.Beforeissuingyouacreditcard,abankwillrequireyoutocompleteanapplicationformandwillexamineyourcreditrecordtoseeifyouhaveahistoryofpayingbackyourdebtsontime.
Sometimespeoplerunupcreditcardbillsthataretoobigtopayoffeverymonth.Whenthathappens,theymustpayamonthlyfinancechargethatcansometimestop20percentayear.In addition, banks (and other companies that issue credit cards) sometimes charge theircardholdersanannualfee.
Theyalsochargemerchantsafeeformakingthecreditcardserviceavailable.Financecharges,annualfees,andmerchantfeeshavebecomeanimportantsourceofincomeforbanks.
Debit cardslooklikecreditcards,buttheyareverydifferent.Whenyouuseadebitcardatthegaspumporatastore,theamountofthepurchaseiselectronicallydeductedfromyourbankbalance. Itwill showuponyourmonthlybankstatement,but there’snomonthlybillbecause the amount of each purchase is deducted almost immediately from your account.
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Somemerchantsofferyou theopportunity togetadditionalcashbackwhenyoupay forapurchasewithyourdebitcard.YoucanalsouseyourdebitcardatanATMifyouneedtowithdrawcashfromyouraccount,butiftheATMisnotpartofyourbank’snetwork,youmayhavetopayafee.
Oneothermajordifferencebetweendebitcardsandcreditcards is thatyoudon’thaveasmuchlegalprotectionifyourdebitcardislostorstolen.Onalostorstolencreditcard,themostyou’reresponsibleforis$50.Butifsomeonestealsyourdebitcard,youcouldbere-sponsibleforupto$500infraudulentchargesortransfersunlessyoureportthelossortheftofyourcardwithintwobusinessdays.Youriskunlimited loss ifanunauthorizedchargeorwithdrawalappearsonyourstatement,andyoudon’treportitwithin60days.Soalwaysbesuretocheckyourmonthlybankstatements!
Thecardthatmaycomeclosesttobeing“plasticmoney”isthestored value card.Giftcardsandphonecardsarethetwotypesthatmostpeopleknowbest.Thecardsare“loaded”withacertaindollaramount—$10,$50,$100,oranyotheramount—andthatamountdecreaseswitheachuse.Forexample,ifsomeonegivesyoua$50giftcardtoBob’sBigBuy,andyoubuysomethingtherefor$30,youwillstillhave$20“stored”onthecard.Twothingstokeepinmindaboutstoredvaluecards:1)Youcan’tusetheminasmanyplacesascreditcardsordebitcards.IfyoureceiveagiftcardtoBob’sBigBuy,that’stheonlyplaceyoucanuseit,and2)Theyreallyare“justlikecash”inthatyou’reprettymuchoutofluckiftheyarelostorstolen.
When you use a credit card you are actually taking out a loan—buying something now, and agreeing to pay for it later.
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Do banks keep large amounts of gold and silver in their vaults?Today,banksrarelykeepgoldorsilverintheirvaults.That’sbecauseourpapermoneyisnolongerbackedbygoldorsilver,andourcoinsdon’tcontainpreciousmetal.
TheU.S.governmentstillholdsmillionsofouncesofgoldandsilver,butcitizensandforeigngovernmentscanno longerexchangetheirU.S.papermoney for it.Thegovernment’sgoldandsilverareconsideredvaluableassetsratherthanformsofmoney.Today’scoinsandpapermoneyarebackedbythe“fullfaithandcredit”oftheU.S.government.
Ifthatmakesyoualittleuneasy,trythefollowingexercise.Putaten-dollarbillandablankpieceofpaperonatabletop,andaskpeopletochoosebetweenthetwo.Chancesareeveryonewillchoosetheten-dollarbill.Why?Afterall,neithertheten-dollarbillnortheblankpieceofpaperisbackedbygoldorsilver.
ThedifferenceisthatpeopleallovertheUnitedStateswillaccepttheten-dollarbillaspaymentifyouwanttobuysomething.Butyouwouldhaveahardtimefindingsomeonewillingtoac-cepttheblankpieceofpaper.That’sbecausetheten-dollarbillisbackedbythepromiseoftheUnitedStatesgovernment,andtomostpeople,thatpromiseisasgoodasgold.
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Why do banks fail?Abankisabusiness,andlikeotherbusinesses,theycanfail.Sometimestheyfailbecausethepeoplewhorunthemmakepoorbusinessdecisionssuchasexpandingtooquicklyorputtingtoomuchmoneyintoonetypeofloan.
Sometimestheyfailbecauseoffraud.Maybethepresidentmakesquestionableloanstofriendsorhiresunqualifiedrelativesandpaysthemhugesalaries.Butbanksalsogooutofbusinessbecausechangingeconomicconditionsmakeitdifficultorimpossibleforborrowerstorepaytheirloans.Here’sanexample.
Gusher National Bank Slips on Falling Oil PricesFallingenergypricesmeancheapergasolineandlowerhomeheatingbills.So,fallingoilpricesmustbegood,right?
Not for everyone!Take the caseofGusherNational Bank.Gusherwas very aggressive inmakingloanstooilandnaturalgascompaniesthathadnoproblemrepayingtheirloanswhenenergypriceswerehigh.TheloansspelledbigprofitsforGusher,andeveryoneagreedthatGusher’sexecutivesweresmartbusinesspeoplewhoreallyknewhowtomakemoney.
Thentheeconomysloweddown,andthedemandforenergyfell.Factoriesburnedlessoilandnaturalgas.Truckdrivers,commuters,andvacationersdrovefewermilesandburnedlessfuel.Asaresult,energypricesdroppedsharply,andmanyenergycompaniesfellbehindontheirloanpayments.Someevenstoppedmakingpaymentsaltogether.
Monthspassed,oilpricesremainedlow,andmoreenergycompaniesfellbehindontheirpayments.Finally,Gusherlostsomuchmoneytobadloansthatgovernmentregulatorshadtostepinandclosethebank.Gusherhadfallenvictimtochangingeconomicconditions— fallingenergypricesandahighconcentrationofloanstoenergycompanies.
A bank is a business, and like other businesses, they can fail.
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OrtakethecaseofBedrockBank...
Bedrock Bank Gets Too Big Too FastBedrock Bank’s new president was determined to turn his bank into the region’s biggestlender.Bedrock’sloanofficersgotthemessageandstartedmakingasmanyloansastheycouldforcondominiumdevelopments,shoppingcenters,officebuildings,andhigh-pricedsuburbanhousingdevelopments.Loanapplicationswerenotalwayscheckedascloselyastheyhadbeeninthepast,andsomeoftheloanswereapprovedmorequicklythantheyhadbeenintheolddays.Butnobodyseemedconcernedbecausethelocaleconomywasstrongandrealestatevalueswererisingrapidly.
Everythingseemedfine;everyonewasmakingmoney.Butthentheeconomysloweddown,andthingstookaturnfortheworse.Theweakeconomyforcedmanybusinessestoclose,leavinglotsofvacantofficespace.Realestatevaluesplummeted,andmanydevelopersfellbehindontheirloanpayments.
Intheend,BedrockBankwaslosingsomuchmoneyonbadrealestateloansthatgovernmentregulatorswereforcedtostepinandcloseit.TheregulatorstriedtofindabuyerforBed-rock,butnootherbankwantedtogetstuckwithalltheloansthathadgonebad.Eventually,anotherbankagreedtobuyBedrockifthefederalgovernmentwouldagreetokeepmanyoftheproblemloans.
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Do you lose money if your bank fails?TheFederalDepositInsuranceCorporation(FDIC)hasprotectedbankdepositssince1934.Inallthattime,noonehaslostmoneythatwasFDIC-insured.Federaldepositinsurancecoversmosttypesofdeposits,includingsavingsdeposits,checkingdeposits,andcertificatesofdeposit.Thebasicinsuredamountis$100,000.
In thedays before federal deposit insurance, theU.S. banking systemwasplaguedbybank“runs”or“panics.”Attheslightesthintoftrouble,depositorswouldruntothebankandlineuptowithdrawtheirmoney.Alltoooften,onlythefirstfewpeopleinlinehadanyhopeofeverseeingtheirmoneyagain;otherslosteverything.Evenhealthybankssometimesfailedafterrumorscauseddepositorstopanicandwithdrawtheirmoney.
For many years, the public seemed willing to accept the losses. But then came the GreatDepression of the 1930s, and financial pressures forced thousands of banks to close theirdoorsforever.Lossesranintothehundredsofmillionsofdollars,andmanypeoplelosttheirlifesavings.
Thewaveofbankfailuresshatteredpublicconfidenceinthebankingsystem,andAmericanslooked to the federal government for help. Congress responded by establishing the FDIC,whichprovideddepositinsurancecoverageofupto$2,500perdepositor.Publicconfidencerebounded,andbankfailuresdeclinedfromapproximately4,000in1933to62in1934.
Overtheyears,thefederaldepositinsurancelimithasincreased,andfederaldepositinsurancehashelpedtomaintainpublicconfidenceintheU.S.bankingsystem.Bankfailureshavenotbeeneliminated,butlonglinesofpanic-strickendepositorshavebecomeanuncommonsight.
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Do you lose money if your bank is robbed?No.Nearlyallbankshaveprivateinsurancethatcoversthemiftheyarerobbed.(Itisnotthesameasfederaldepositinsurance.)
Inaddition,mostbankstakeelaboratemeasurestosafeguardthecashandothervaluableitemsleftintheircare.Bankvaultshavelongbeenprotectedbyreinforcedconcretewalls,timelocks,andmetalalloydoorsthatresistdrillingandexplosions.
Atonetime,armedsecurityguardsstoodwatchoverbanks,buttodaymostbanksseemtohavedecided(wisely)thattheywouldrathernotexposetheircustomersandemployeestogunplay.Shotgunsandrevolvershavebeenreplacedbyclosed-circuittelevisioncamerasthatmaintainaconstantwatchovereveryonewhoentersorexitsthebank.
Another innovation is theexplodingdyepack. Incertaincases,bankemployeesareabletoplaceapackageofreddyeinwiththerobber’sstashofstolencash.Later,whenthecrookopens the stash, the concealed dye pack explodes, covering the robber and the ill-gottenmoneywithdyethatwon’twashoff.
Most banks take elaborate measures to safeguard valuables. Shotguns and revolvers have been replaced by closed-circuit television cameras that maintain a constant watch over everyone who enters or exits a bank.
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How does the Federal Reserve fit into the U.S. banking system?AlthoughtheFederalReserveisofteninthenews,noteveryoneunderstandswhatitisandwhatitdoes.PerhapsthebestwaytoclearthingsupistohaveaFederalReserve“Q&A”tocoversomeofthemostcommonquestionsthatpeopleask.
What is the Federal Reserve?ItisthecentralbankingsystemoftheUnitedStates.
What does it do?TheshortansweristhattheFederalReserveis:
•abankforotherbanks,•abankfortheU.S.government,and•responsibleforU.S.monetarypolicy,whichinfluences
howmuchmoneyandcreditwillbeavailabletotheU.S.economy.
Italsohelpsto:•superviseandregulatebankinginstitutionstoensurethesafety
andsoundnessofthenation’sbankingandfinancialsystem•protectthecreditrightsofconsumers,and•maintainthestabilityofthefinancialsystembyhelpingto
containrisksthatmayariseinfinancialmarkets.
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When was the Federal Reserve established?CongresscreatedtheFederalReserveSystemin1913tohelpmaketheU.S.bankingsystemsaferandmoreefficient.
How many Federal Reserve Banks are there?Thereare twelveFederalReserveBanks.Eachof the twelveReserveBanksserves itsownFederalReserveDistrict.
Where is the headquarters for the Federal Reserve?TheSystem’sheadquartersisinWashington,D.C.ItiscalledtheBoardofGovernorsoftheFederalReserveSystem.
Does the Federal Reserve lend money to businesses and consumers?No.TheFederalReservedoesnotlendmoneytoprivateborrowers,butitsometimeslendsmoneytobankswhentheneedarises.Does the Federal Reserve print U.S. paper money?No.AlthoughFederalReserveNotesaccountforalmost100percentoftheU.S.papermoneyincirculation, thenotesareactuallyprintedbytheBureauofEngravingandPrinting,whichis partof theU.S.TreasuryDepartment.Thepapermoney is then shipped to the FederalReserveBanksandtheirbranches.Whenbanksneedcash fortheircustomers’needs, theyorderitfromtheFederalReserveBankintheirDistrict.Also,sincemoneygraduallywearsout,theFederalReserveBanksprocesscashinordertodetermineitsfitness.Wornoutbillsareshredded;newbillsareintroducedintothesystemtoreplacetheoldones.
Do all Federal Reserve Banks store gold bars in their vaults?OnlytheFederalReserveBankofNewYorkhasaworkinggoldvault,andalmostallofthegoldinitsvaultisforeign-owned.TheU.S.government’sgoldisheldatFortKnox,Kentucky,theU.S.Mints inDenverandPhiladelphia, theSanFranciscoAssayOfficeof theU.S.Mint,andtheU.S.BullionDepositoryinWestPoint,NewYork.
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Does the Federal Reserve process all the checks Americans write?No.TheFederalReserveBankshandlelessthanone-thirdofallU.S.checks.Privateentitiesprocesstherest.
Is the Federal Reserve responsible for regulating and supervising the entire U.S. banking system?No.Itsharesthisresponsibilitywithotherfederalandstateregulatoryagencies.
Does the Federal Reserve set interest rates?TheFederalReserveisresponsibleforU.S.monetarypolicy.Thismeansitmakespoliciesthatinfluencehowmuchmoneyandcreditwillbeavailable to theU.S.economy. InterestratesoftengoupordowninresponsetotheFederalReserve’smonetarypolicydecisions,butonlythediscountrateissetdirectlybytheFederalReserve.ThediscountrateistheratebankspaywhentheyborrowfromtheFederalReserve.
The Federal Reserve does not print money. U.S. paper money is printed by the Bureau of Engraving and Printing, which is part of the U.S. Treasury Department.
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Resources for everyoneYoucanrequesthardcopiesofmanyofthesepublicationsthroughtheFederalReserve’sonlinepublicationscatalog:http://www.newyorkfed.org—Click“PublicationsCatalog.”
A Guide to Your First Bank Account, FederalReserveBankofAtlantahttp://www.frbatlanta.org—Click“Publications”and“BooksandBrochures.”
A Penny Saved,FederalReserveBankofNewYorkhttp://www.newyorkfed.org—Click“PublicationsCatalog”and“Comics.”
Building Wealth,FederalReserveBankofDallashttp://www.dallasfed.org—Click“Publications&Resources.”
Choosing a Credit Card,BoardofGovernorshttp://www.federalreserve.gov—Click“PublicationsandEducationResources”and“ConsumerInformationBrochures.”
Consumer Guide to Check 21 and Substitute Checks,BoardofGovernorshttp://www.federalreserve.gov—Click“PublicationsandEducationResources”and“ConsumerInformationBrochures.”
How to Establish, Use, and Protect Your Credit,FederalReserveBankofPhiladelphiahttp://www.philadelphiafed.org—Click“Publications”and“ConsumerBooklets.”
In Plain English: Making Sense of the Federal Reserve,FederalReserveBankofSt.Louishttp://www.stlouisfed.org/publications—Click“InPlainEnglish.”
Paying for It: Checks, Cash, and Electronic Payments,FederalReserveBankofAtlantahttp://www.frbatlanta.org—Click“Publications”and“BooksandBrochures.”
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The Story of Banks,FederalReserveBankofNewYorkhttp://www.newyorkfed.org—Click“PublicationsCatalog”and“Comics.”
The Story of Checks and Electronic Payments,FederalReserveBankofNewYorkhttp://www.newyorkfed.org—Click“PublicationsCatalog”and“Comics.”
The Story of Money,FederalReserveBankofNewYorkhttp://www.newyorkfed.org—Click“PublicationsCatalog”and“Comics.”
What You Need to Know About Payment Cards,FederalReserveBankofPhiladelphiahttp://philadelphiafed.org—Clickon“Publications”and“ConsumerBooklets.”
What You Should Know About Internet Banking,FederalReserveBankofChicagohttp://www.chicagofed.org—Clickon“EducationResources”and“PersonalFinanceInformation.”What You Should Know About Your Checks,BoardofGovernorshttp://www.federalreserve.gov/pubs/check21/shouldknow.htm
What Your Credit Report Says About You,FederalReserveBankofPhiladelphiahttp://www.philadelphiafed.org/consumers/creditreport.html
When is Your Check Not a Check?,BoardofGovernorshttp://www.federalreserve.gov/pubs/checkconv/default.htm
Your Credit Rating,FederalReserveBankofPhiladelphiahttp://www.philadelphiafed.org/consumers/creditrating.html
Your Credit Report,FederalReserveBankofSanFranciscohttp://www.frbsf.org/publications/consumer/creditreport.html
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For additional copies, contact:
Public and Community Affairs DepartmentFederal Reserve Bank of BostonP.O. Box ����2Boston, MA 0220�
1-�00-�0�[email protected]
Revised 1/200�
federal reserve bank of boston TM