objective 4.02 understand the banking system.. classification of financial institutions

Objective 4.02

Understand the Banking System.

Classification of Financial Institutions


• Depository– Earns money to finance their business by

accepting deposits from customers • Commercial banks - offer many different services,

including savings, loans, and checking accounts.• Savings and loan associations (S&Ls) -

traditionally specialize in savings and home loans, but now are very similar to commercial banks.

• Mutual savings banks - owned by the depositors and specialize in savings and home loans.

• Credit unions - non profit, serve their members only, and are owned by their depositors.


• Non-depository– Earns money to finance their business by

selling specific services such as policies, investments, and loans

• Life insurance companies -term, whole, universal• Investment companies - stocks, bonds, mutual funds• Consumer finance companies – higher rates if bad credit• Mortgage companies – loan $ for land, buildings, homes• Check-cashing outlets –fee based if do not have bank acct• Pawnshops –loan $ based on value of item pawned


• Characteristics of financial institutions– Services – Savings, checking, loans, credit cards,

safe deposit boxes, trusts– Safety – Federal Deposit Insurance Corporation

(FDIC) or National Credit Union Administration (NCUA)

– Convenience – Number of branches and ATMs, online banking

– Fees and Charges – Maintenance fees, check fees, overdraft charges, ATM fees, etc.

– Restrictions – Minimum balances, number of checks written, ATM usage, withdrawal limits

Comparative Questions • Services – Does the institution offer needed services?

– Savings– Depository for payroll taxes– Checking

• Various options to meet customer needs– Loans

• Short term - working capital• Long term - mortgage

– Credit cards– Debit cards– Safe deposit boxes– Trust management

Comparative Questions

• Safety – Is the institution insured against losses?– Federal Deposit Insurance Corporation (FDIC)

Created by Congress to maintain stability and public confidence in the nation’s financial system: insures deposits, supervises financial institutions

– National Credit Union Administration

(NCUA) Charters and supervises credit unions


• Convenience – Does the institution offer the access desired? – Physical locations available– Online services

• Easy to access & use

– ATM machines


• Restrictions – Are there minimum balances that must be kept, or other restrictions?

• Minimum balance- $ amount required to stay in account at all times– If account keeps minimum balance, fees are

often waived (eliminated)


• Fees and Charges – What are the short and long-term costs of the services?– Flat monthly fees– Fees per transaction

• NSF (Non-sufficient funds) fees• Checks written• Debit transactions

– # of transactions allowed before fees begin– Minimum balance required to eliminate fees

Common Payment Services

• Electronic Funds Transfers

• Online Bill Pay

• Checking Accounts– Personal, business

• Specialty checks– Certified, Cashier’s, Traveler’s

• Money Orders– Postal, Express, Telegraphic

Online Bill Pay

• Use the web to make payments

• Often fee based

• Privacy can be issue– Change PIN frequently– Use only “safe” sites

Checking Accounts

Check Writing Procedures

1. Ensure all information is written in the check register first, and ensure checks are written in numerical order.

2. Write the date the check is written.

3. Write the payee’s name.

Check Writing Procedures

5. Write in the numerical amount of the check.

6. Write in the amount of the check in words.

7. Write in the purpose of the check.

8. Sign the check.

16

Parties to a Check

Melanie PaigeCharles Paige 319619 Main StreetRaleigh, NC 27601 2-131/1034

July 16, 2010

Pay To the Order of _____John Thompson______________________$100.50

_One hundred and 50/100 ------------------------------------------------------DOLLARS

State Credit Union

For _______________ Charles Paige062000085:12345678

Drawer’s Name & AddressJoint Account Payee Check

Date

Drawer’s Signature - Last item completed on check!Bank Name - Drawee

CheckNumberABA #

MICR Banking #sMemo

Rules Regulating Checking Accounts

1. Stale Checka. Check that is more than 6 months oldb. Bank may refuse without liability

2. Avoiding Negligencea. Drawer is responsible if negligent in writing checkb. Write figures close to $ sign and draw line through spaces

not usedc. Write close to “Pay to Order of” and draw line through

spaces not usedd. Figures and written amount should agreee. Sign name lastf. Write “Void” on check if mistake is made and in check

register

3. Bad Checksa. Check issued against checking account with

insufficient funds to cover it

b. States have statutes making it a larceny

c. Failure of drawer to make check good within certain period of time will serve as a presumption of guilt

4. Forged Checka. Check signed by someone other than drawer and

without authority

b. If bank pays and drawer not negligent, bank bears loss

c. Drawer has 1 year to discover and report to bank unauthorized signature or alteration on face of check

d. Drawer has 3 years to discover and report to bank any unauthorized endorsement on check

5. Stop Paymenta. Bank has no right to cash check

b. Bank liable if check is cashed

c. Oral stop payment good for 14 days

d. Written stop payment effective for 6 months

e. Upon death, bank can cash checks for 10 days for those written prior to death

6. Outstanding Checka. Has not cleared the bank

b. Must be known in order to reconcile statement

c. Find by comparing the bank statement with the checkbook register

7. Reconciling a Checkbooka. Makes sure the bank’s records agree with your

records (bank statement and check register)

b. Check for outstanding checks and deposits

c. Verify the checks, deposits, ATM activity on the bank statement to make sure that your records are correct

d. Make adjustments to the bank statement and your records to ensure that you and the bank have the same amount of money

e. Reconcile every statement when received

Blank Endorsement

• Consists of endorser’s name only

• Anyone who has a check with a blank endorsement may cash it.

X William Parker

DO NOT WRITE BELOW THIS LINE

Special Endorsement

• Transfers payment of a check to someone else.

• Can be used to make payment on a debt

• Juan Delgado is the payee on this check.

X Pay to the order of

Tom Smith

Bill Jones


Restrictive Endorsement

• Limits use of the check so it can be deposited only to endorser’s account.

• Safest type of endorsement, as it cannot be cashed by a thief or someone who finds the check.

• Safest endorsement to use when mailing a check for deposit or when using the ATM for deposit.

X For Deposit Only

Sam Thomas


The Federal Reserve System

Structure of the Federal Reserve System

• Organized by the Federal Government in 1913 to supervise and regulate banks.– Assists banks with serving the public more

efficiently.– To establish and maintain confidence in the

US monetary system– To ensure a safe, healthy and stable

economy


• Officially created by the Federal Reserve Act.– Signed by President Woodrow Wilson.– Known as the “bank’s bank”. The Federal

Reserve System is the central bank of the United States.

– All national banks are required to join the Federal Reserve System

– State banks have the option of joining the system.


• Federal Reserve Board (FRB): governing body of the Federal Reserve System.

• Seven members– appointed by the President, – subject to Senate confirmation– serve 14-year terms.

• Federal Reserve Chairman– Ben Bernanke


• Federal Reserve Board (FRB) • The board establishes Federal Reserve

System policies on:– Reserve requirements and bank regulations– Sets the discount rate– Tightens or loosens the availability of credit in

the economy– Regulates the purchase of securities on

margin

Divisions of the Federal Reserve

• Divisions are called districts. There are 12 districts in the United States, located in the following cities: – Boston, New York, Philadelphia, Cleveland,

Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

• Every state comes under a district.• Each Federal Reserve Bank is a corporation,

owned by its member banks. • NC is in District 5, the Richmond District.

Federal Reserve Activities

• Fed supervises banks.– Accepts deposits of member banks.

• Some federal tax money is deposited in the Federal Reserve Bank.

• The Fed holds a checking account for the United States Treasury.

– Lends money to member banks.– Inspects banks yearly through auditing

financial records.


– Holds reserves.• Bank must keep a percentage of their funds

on deposit with the Federal Reserve.• Protects depositor’s money

– Federal Deposit Insurance Corporation (FDIC)

• Helps the banking system operate more efficiently.


– The Fed sets standards for consumer legislation dealing with lending and credit.

– Sets limits for loans and investments by member banks.

– Approves bank mergers.


• Fed participates in open market operations by buying and selling federal government securities (treasury bills and bonds).– Regulates money supply– The Federal Reserve clears checks between

banks in different cities. Electronic Funds Transfer (EFT) and automated clearinghouses are used to accomplish this.


– Most frequent method of controlling the economy.• Buys and sells federal government

securities• Monitors the reserve requirement• Monitors the discount rate• Supplies paper currency

objective 4.02 understand the banking system.. classification of financial institutions

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