Understand the role of finance in business ESSENTIAL STANDARD 4.00 Understand the role of finance in business

OBJECTIVE 4.02 THE BANKING SYSTEM 2

What are the different financial institutions and their purpose? Topics What are the different financial institutions and their purpose? What are the common payment services provided by financial institutions? What is a depository financial institution? Earns money to finance their business by accepting deposits from customers What are some types of depository financial institution? Types include: Commercial banks, which offer many different services, including savings, loans, and checking accounts. Savings and loan associations (S&Ls), which traditionally specialize in savings and home loans, but now are very similar to commercial banks. Mutual savings banks, which are owned by the depositors and specialize in savings and home loans. Credit unions, which are not-for profit, serve their members only, and are owned by their depositors. 3

CLASSIFICATION OF FINANCIAL INSTITUTIONS

Classification of Financial Institutions Depository financial institutions Earns money to finance their business by accepting deposits from customers Types of Depository financial institution? Types include: Commercial banks, which offer many different services, including savings, loans, and checking accounts. Savings and loan associations (S&Ls), which traditionally specialize in savings and home loans, but now are very similar to commercial banks. Mutual savings banks, which are owned by the depositors and specialize in savings and home loans. Credit unions, which are not-for profit, serve their members only, and are owned by their depositors.

Non-depository financial institutions Earns money to finance their business by selling services like policies, investments, and loans Types of non-depository financial institution Types include: Life insurance companies Investment companies Consumer finance companies Mortgage companies Check-cashing outlets Pawnshops

Classification of Financial Institutions continued Services –Does the institution offer savings, checking, loans, credit cards, safe deposit boxes, trusts, etc? Safety – Does the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insure the institution against losses?

Convenience – Does the institution offer the access you desire Convenience – Does the institution offer the access you desire? Example: ATM machines near home and job Fees and Charges – What are the short and long-term costs of the services? Restrictions – Are there minimum balances that must be kept, or other restrictions?

COMMON PAYMENT SERVICES

Common payment services What are the first two steps in opening a checking account? Signing a signature card is the first step Endorsing a check for deposit What is an endorsement? An endorsement allows the payee to cash the check, deposit the check or transfer payment of the check to someone else.

Blank Endorsement What is a blank endorsement? Consists of endorser’s name only Who may cash a check that has a blank endorsement? Anyone who has a check with a blank endorsement may cash it.

Special/Full Endorsement What is a special or full endorsement? Transfers payment of a check to someone else. Why would this be used? Can be used to make payment on a debt Who is the payee on this example check?

Restrictive Endorsement What is a restrictive endorsement? Limits use of the check so it can be deposited only to endorser’s account. Why would this be the safest endorsement? it cannot be cashed by a thief or someone who finds the check When should it be used? to use when mailing a check for deposit or when using the ATM for deposit.

Check Writing Procedures Ensure all information is written in the check register first, and ensure checks are written in numerical order. Write the date the check is written. Write the payee’s name.

Check Writing Procedures continued Write in the numerical amount of the check. Write in the amount of the check in words. Write in the purpose of the check. Sign the check.

Bank Reconciliation What is a bank reconciliation? What is an outstanding check?

Steps in a Bank Reconciliation Obtain the monthly bank statement. Determine checks paid. Find differences between the monthly bank statement and monthly check register. Calculate the adjusted balance. If the balances do not agree, check the steps again and recalculate.

THE FEDERAL RESERVE SYSTEM

The Federal Reserve System Some basics about The Federal Reserve:

The Federal Reserve System continued Services provided by the Fed: Supervision of banks Participation of open market activities Acting as a clearinghouse Holding reserves Approving bank mergers Supplying paper currency Managing the discount rate