Section 4.1 Banking Systems

Objectives

● Identify different types of financial institutions

● Describe the services of financial institutions

● Explain special services offered by financial institutions

Types of Financial Institutions

Financial Institution = an organization that provides services related to money

● Examples:

○ Commercial Banks

○ Savings and Loan Associations

○ Credit Unions

● Purpose is to keep money flowing throughout the economy among

consumers, businesses, and government○ No banks = no circulation of money

Money Flow Through Financial Institutions

Financial Institution

INFLOW(Depositors)

OUTFLOW(Borrowers)

RESULTS(Uses of Capital)

1. Consumer SAVINGS

2. Business DEPOSITS

3. Government DEPOSITS

1. Consumer LOANS

2. Business LOANS

3. Government LOANS

1. Homes, Autos, Education, Travel, Taxes

2. Plant & Equipment, Expansion, Acquisition, Business Needs

3. Roads & Highways, Schools, Hospitals, Public Buildings, Government Projects & Programs

Federal Deposit Insurance Corporation

FDIC = an independent agency created by the federal government to protect bank customers by insuring their deposits

● Also does the following:

○ Examines and supervises financial institution policies & operations

○ Guarantees that depositors are protected if the bank fails or

cannot repay deposits on demand

○ As of 2010, the FDIC will cover up to $250,000 of an insured

deposit

Commercial BanksCommercial Bank = a business owned by investors called stockholders OR shareholders

● Also called full-service banks● Receive, transfer, and lend money to individuals, businesses, and

governments

● Financial Services offered:○ Checking○ Savings○ Lending

CharterCharter = the license authorizing a bank to operate

● Commercial Banks may be chartered by the Federal Government OR

State Government1.Federal Chartered Banks are called national banks

● Usually have the word “national” in their name● Must comply with federal banking regulations

2. State Chartered Banks are regulated by

state banking commissions

Community BankCommunity Bank = a type of commercial bank that is locally owned and operated.

● All lending decisions are made locally by bank loan officers who live in the

local community

● It is easier to obtain a loan from a community bank vs a larger bank

● Offers:○ Standard banking services

■ Checking ■ Savings■ Loans■ Safe-deposit boxes

○ FDIC insured

Savings & Loan Associations

S&L = a financial institution that offers most of the services commercial bank do

● 2 types of S&L’s that are insured by the FDIC:

○ 1. Mutual Savings & Loan Associations = owned and operated for the

benefit of their depositors; depositors receive dividends on their

savings

○ 2. Stock Savings and Loan Associations = owned by stockholders and

operate for profit.

Credit UnionsCredit Unions = a non profit financial cooperative owned by and operated for the benefit of its members

● Services are only offered to its members

● They pay no federal income taxes

● Can be federal or state chartered

● Offer:

○ Lower rates

○ Pay higher interest rates on savings

Services of Financial Institutions

Online BankingOnline Banking = allows bank customers to conduct financial transactions on a secure website owned by the bank

● An account holder can:

○ Pay bills

○ Transfer money between accounts

○ View account balance and statements

○ View checks and deposits

○ Review the history on an account

Mobile BankingMobile Banking = allows bank customers to conduct financial transactions using a smartphone application (App)

● Services include:

○ Alerts and text banking

○ Mobile banking websites

○ Mobile banking apps

Direct Deposits & Withdrawals

Electronic Funds Transfer (EFT) = the movement of money electronically from one financial institution to another

● Safe

● Secure

● Efficient

● Faster than paper check payments and collections

● Cheaper than paper check transfers

○ Costs the US Government $1.03 per paper check

○ Costs $0.11 to issue an EFT payment

Automated Teller Machines (ATM)

● Must have a Personal Identification Number (PIN)● Uses:

○ Check account balances

○ Make cash withdrawals and deposits

○ Move money from one account to another

● ATM owned by your bank = no charge● ATM owned by a different bank other than your

own = charge

Bank CardDebit Card = allows you to make purchases that comes directly from your checking account

● Transactions are automatic and are deducted almost immediately

from your account

● Make withdrawals, deposits, and transfer money

ATM Card = allows you to check account balances, withdraw and deposit cash, transfer money using an ATM

● You CANNOT make purchases with ATM Cards

OverdraftOverdraft = a check written for an amount greater than the balance of the account

● The bank will charge an insufficient funds fee to cover the transaction

○ Approximately $30 or more per overdraft

● Some banks offer overdraft protection

ChecksCertified Check = a personal check that your bank issues and certifies is a genuine check. The money is taken out of the individual’s account.

Cashier’s Check = a check the bank issues and guarantees to pay. The money is taken out of the bank’s account after payment from the individual’s account.

Checkpoint 4.1

In your class folder & a new Google Doc, complete the

following with the Doc labeled as “Today’s Date Checkpoint 4.1”

1. What are 3 examples of financial

institutions?

2. What are the primary functions of a

commercial bank?

3. What are 2 advantages of using

online banking?

4. How does an ATM Card differ from a

Debit Card?

5. What are 2 special services that

many financial institutions offer to

customers?