THE ROLE OF BANKS --A Macro and Micro Economics look at the role of banks

COMMERCIAL VS INVESTMENT BANKS  Between 1933 and 1999, it was fairly easy to tell banks apart thanks to the Glass-Steagall Act.Glass-Steagall Act  If you helped companies issue shares, you were an investment bank. If you were primarily concerned with deposits and lending, then you were a commercial bank.  After its repeal in in 1999, banks could both provide commercial services to individuals and business, as well as participating in investment banking helping companies become public entities.  For example, as of 2013, JPMorgan Chase Bank is among the largest commercial banks in the U.S. by assets and, in 2012, the same bank was one of the lead underwriters in the Facebook IPO.

COMMERCIAL BANKING SERVICE  Accept deposits  Lends money- Big Loans, Small Loans, Credit Cards  Process payments  Issue bank drafts and checks  Offer safety deposit boxes for items and documents There are more actions, of course, and finer categories within this broad view. Commercial banks may offer other services such as brokering insurance contracts, giving investment advice and so on. They also provide a wide variety of loans and offer other credit vehicles like cards and overdrafts. However, the common theme among these activities is that they are aimed at providing a financial service to an individual or business

HOW ARE THEY FOUNDED  There are big banks that are known world wide like JP Morgan Chase, Wells Fargo, and Citibank, but there are thousands of commercial banks in the US alone.  It is a difficult process to start a bank that requires lots of steps, rules, and several millions in seed capital.  It takes a board of directors and an experienced management team.  A location is then selects and a charter is applied for  A charter costs thousands and can be a lengthy process

HOW THEY ARE FOUNDED CONT…..  Once a charter is granted, the bank must be operational within the year.  Over those 12 months, the bank must get their FDIC (Federail Deposit Insurance Corporation) insurance paid, secure a staff, buy equipment, and go through two or more regulatory inspections.  To get to the stage where a bank can make money by leveraging deposited dollars as consumer loans, there needs to be millions in capital, some of which can be raised in private circles and paid back through an eventual public share offering.

WHY DO WE USE BANKS  Banks and Credit Unions are safe and convenient places to store and keep track of our money.  Most account balances are insured up to $100,00 by the FDIC.  We can earn interest by keeping our money in savings accounts or by investing in bonds or CDs.  Intermediaries for money and transactions

BANKS VS CREDIT UNIONS BANKS  Regional, state, or nation wide and open to General Public  Depositors are called customers and have no ownership in the bank  Have stockholders that have a vote and make decisions like electing board members  Board members are paid and are more concerned with stockholders bottom line  For Profit with declared earnings to stockholders Credit Unions  Local and only open to members  Depositors are called members and actually collectively own the bank  All members have a vote in making decisions  Board of directors is comprised of volunteers and value customer diversity  Not-for-profit whose earnings are paid back to members in the form of higher savings interests and lower loan rates

SAVINGS ACCOUNTS  Your money earns you interest, which is a return on your money.  Simple interest: determined by intial deposit only  Compound Interest: Interest earned on intial deposit as well as on interest you have earned. (BETTER!!!)  Annual Percentage Rate (APR) is the amount your money would earn if left on deposit for one year.  Savings accounts usually crry an APR of 1% or 2%  an APR of 1%  $1,000 would earn $10 in a year

CERTIFICATES OF DEPOSIT (CDS)  Offer a guaranteed interest rate for a specified amount of time.  You choose the length of time that you money is deposited (Months to years)  The longer the term, the higher the interest rate  If you withdraw money early, you pay a penalty.

CHECKING ACCOUNTS  Let you deposit and withdraw money and write checks to pay for purchases and bills. (Debit Cards)  These earn interest as well, but at a much lower rate. WHY???  PIN number: Personal Identification Number

TYPES OF CHECKING ACCOUNTSCHECKING ACCOUNTS  Free Checking Accounts  No Monthly Fees  No Minimum Balance Requirements  Student Accounts  No or Low Minimum balance requirements  Joint Accounts  Allow Co-Owners to Have Equal Access to the Account