Understand the Banking System. Objective 4.02 Understand the Banking System.

Classification of Financial Institutions

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.

Classification of Financial Institutions 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

Classification of Financial Institutions 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

Comparative Questions Convenience – Does the institution offer the access desired? Physical locations available Online services Easy to access & use ATM machines

Comparative Questions 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)

Comparative Questions 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 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 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.

Last item completed on check! Parties to a Check Check Number Drawer’s Name & Address Joint Account ABA # Payee Check Date Melanie Paige Charles Paige 319 619 Main Street Raleigh, 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 Paige 062000085:12345678 Drawer’s Signature - Last item completed on check! Bank Name - Drawee 16 Memo MICR Banking #s

Rules Regulating Checking Accounts Stale Check Check that is more than 6 months old Bank may refuse without liability Avoiding Negligence Drawer is responsible if negligent in writing check Write figures close to $ sign and draw line through spaces not used Write close to “Pay to Order of” and draw line through spaces not used Figures and written amount should agree Sign name last Write “Void” on check if mistake is made and in check register

Bad Checks Check issued against checking account with insufficient funds to cover it States have statutes making it a larceny Failure of drawer to make check good within certain period of time will serve as a presumption of guilt

Forged Check Check signed by someone other than drawer and without authority If bank pays and drawer not negligent, bank bears loss Drawer has 1 year to discover and report to bank unauthorized signature or alteration on face of check Drawer has 3 years to discover and report to bank any unauthorized endorsement on check

Stop Payment Outstanding Check Bank has no right to cash check Bank liable if check is cashed Oral stop payment good for 14 days Written stop payment effective for 6 months Upon death, bank can cash checks for 10 days for those written prior to death Outstanding Check Has not cleared the bank Must be known in order to reconcile statement Find by comparing the bank statement with the checkbook register

Reconciling a Checkbook Makes sure the bank’s records agree with your records (bank statement and check register) Check for outstanding checks and deposits Verify the checks, deposits, ATM activity on the bank statement to make sure that your records are correct Make adjustments to the bank statement and your records to ensure that you and the bank have the same amount of money Reconcile every statement when received

DO NOT WRITE BELOW THIS LINE 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 22

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 DO NOT WRITE BELOW THIS LINE 23

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 DO NOT WRITE BELOW THIS LINE 24

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

Structure of the Federal Reserve System 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.

Structure of the Federal Reserve 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

Structure of the Federal Reserve System 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.

Federal Reserve Activities 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.

Federal Reserve Activities The Fed sets standards for consumer legislation dealing with lending and credit. Sets limits for loans and investments by member banks. Approves bank mergers.

Federal Reserve Activities 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.

Federal Reserve Activities Most frequent method of controlling the economy. Buys and sells federal government securities Monitors the reserve requirement Monitors the discount rate Supplies paper currency