SPA Economics HOW A BANK WORKS.  Why?  It’s insured by the FDIC, which means it’s safe.  Even if the bank burns down or gets robbed, you can still.

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Presentation transcript:

SPA Economics HOW A BANK WORKS

 Why?  It’s insured by the FDIC, which means it’s safe.  Even if the bank burns down or gets robbed, you can still get your money.  Why?  Banks pay interest on your money, which means your money makes money.  Liquidity – you can get your money out any time the bank is open. PEOPLE PUT THEIR MONEY IN BANKS

 Banks lend your money to people and small businesses.  People use loans to purchase expensive items like cars and houses, among other things.  The bank expects its customers to pay back the money PLUS interest. THE BANKS LEND THE MONEY

 Banks pay you interest to keep your money in their bank.  Banks then loan that money. Borrowers have to pay back the loan plus interest.  The banks pay very little interest to the depositors & charge a much higher rate for loans.  The current interest rate for a car loan is over 4%. The current interest rate for savings accounts is 0.10%.  This means the borrowers are paying the bank 40 times the interest that the bank pays depositors. HOW BANKS MAKE MONEY

 Michael deposits $1000 in a savings account at the banks.  The bank loans that $1000 to another customer, Carmella.  After one year, the bank pays back $0.10 to Michael.  After one year, the bank receives $ from Carmella.  $40 - $0.10 = $39.90  The bank pays Michael 10 cents.  Carmella pays the bank $40. HOW BANKS MAKE MONEY

Borrow $1000 Pay back $1040 Deposit $1000 Bank pays 10 cents A CUSTOMER DEPOSITS $1000 INTO A SAVINGS ACCOUNT AT THE BANK The bank earns $39.90

Grab a 3 x 5 card. Give it to your teacher YOUR TASK: IN ONE SENTENCE, EXPLAIN HOW A BANK MAKES MONEY