1. Competency 4.02 Understand the Banking System
4.0 Understand the Role of Finance in Business
Competency 4.02 Understand the Banking System
Objective 4.02-A
Analyze the roles/responsibilities of the Federal Reserve.

2. The Federal Reserve System
What is the Federal Reserve System?
Why does it exist?
Who participates?
How is it organized?

3. The Federal Reserve (The Fed) A Centralized Banking System
Federal Reserve Act signed into law by President Woodrow Wilson
Organized by the Federal Government in 1913
Why have “ The Fed” ? Purpose:
To establish and maintain confidence in the US monetary system
To ensure a safe, healthy and stable economy
To supervise and regulate member banks and help serve the public efficiently.
* Prior to the Federal Reserve Act anyone could issue currency or coin money

4. Who Participates in Federal Reserve?
All National Banks are required to be part of the Fed
Optional for state banks
Divisions are called DISTRICTS
There are 12 DISTRICTS in the United States
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.

5. The Federal Reserve What are the two arms of “The Fed”?
Board of Governors
Represents the government (public) sector
District Federal Reserve Banks
Represents the business (private) sector

6. Board of Governors
Usually meet about twice a week, ordinarily on Mondays and Wednesdays
Public is invited to look into the meetings of the Board of Governors
Usually discuss monetary policy such as lowering and raising interest rates
The Board Room at the Federal Reserve in Washington, DC

7. Members of the Board of Governors
Ben S. Bernanke, Current Chairman
Alan Greenspan, Retired Chairman  
Chairman is appointed by President and confirmed by Senate
Similar to procedure for Supreme Court Justices

8. Purpose of Federal Reserve
Established to supervise and regulate banks
Known as the “Bank’s bank”
The central bank of the United States
Assists banks with serving the public more efficiently
All national banks are required to join the Federal Reserve System
State banks have the option of joining the system

9. The Federal Reserve System Services
Supervision of banks
Agent for the federal government
Regulates monetary policy
Lends money to member banks
Acting as a clearinghouse
Participation in open market activities
Sets loan limits & standards
Supplies currency

10. 1. Fed Supervision: Set Reserve Requirements
Member banks are required to keep a certain percentage (10% for many years) of all deposits in the bank’s vault or on deposit with the district federal reserve bank
Reserves: funds set aside for emergencies
Example: a rush of withdrawals by customers
Purpose: to reduce risk of bank panics and protect depositor’s money

11. 1. Fed Supervision: Audits Member Banks
Inspects banks by auditing financial records
Audit -an inspection of records to verify the:
1. accuracy of books (records) of the bank
2. bank is complying with banking laws
Similar to Individuals/corporations who are audited by the IRS to review the accuracy of a tax return.

12. 1. FED Supervision: Approves Bank Mergers
Q: Why do banks merge?
To be more competitive
-to offer customers more locations (local, regional, national, international)
-to offer a variety of services more efficiently
-to compete with a growing array of other financial service companies such as:
*money market and other mutual funds
*mortgage companies
*credit unions and
*credit arms of industrial firms (General Electric and Ford Motor)
Here are some recent bank mergers approved by “The Fed” in
Bank of New York bought Mellon Financial Corporation for $18.3 Billion
JPMorgan Chase bought Bear Stearns for $1.1 Billion
Bank of America bought Merrill Lynch Bank of America for $50 Billion
Wells Fargo bought Wachovia for $15.1 Billion

13. 2. Fed Acts as Agent for Federal Government
The Fed holds a checking account for the US Treasury
Disburses social security benefits and other transfer payments using the direct deposit system
Accepts some types of federal tax money
Example: Federal tax depositories
Payroll taxes - federal income tax, FUTA, and social security taxes are deposited using federal deposit coupon into a national bank

14. 3. FED Regulates Monetary Policy
What is Monetary Policy? When the Federal Reserve influences money and credit conditions in the economy to achieve economic goals
How? The Fed determines amount of money in circulation and available for loans, then either increases or decreases to stabilize/stimulate the economy
Tight money- policy when less money is available at higher interest rates, slows (stabilizes) economy
Loose money- policy when more money is available at lower interest rates, increases (stimulates) economy

15. 4. FED Lends Money to Member Banks
Monitors the discount rate of interest - rate used by the Fed to loan money to member banks
Compare banks to intermediaries (go-betweens) trading in money at “wholesale” prices
The Fed changing interest rates affect borrowers (member banks) who pass rates to consumers
Raising rate - discourages borrowing
Reducing rate - encourages borrowing
Note: the Federal Reserve does not loan money to individuals or businesses (only member banks) HOWEVER, rates the Fed charges member banks “trickle down” and affect the interest rates for consumers

16. 5. FED Acts as Clearing House
Clears/Processes/Settles checks for member banks
Federal Reserve uses the Automated Clearing House (ACH) to electronically complete fund transfers (check settlements) between banks
Interdistrict Settlement Fund in Washington, DC used for between district transfers
Checks/deposit slips have MICR coding
Magnetic Ink Character Recognition
Scanners read MICR on checks to electronically process data accurately and rapidly through the ACH and Interdistrict Settlement Fund

17. 6. FED Participates in Open Market
Participates in open market operations by buying and selling government securities
Q: What are government securities?
A: Treasury bills and bonds – loans to government in various denominations (amounts) and for various time periods
Advantages and Disadvantages
+ offer a fixed rate of interest over a fixed period of time
+ attractive because not subject to income taxes
- cannot be easily transferred and are non-negotiable

18. Open Market Operations
Government securities are sold at a discount (from face value), but are redeemed (cashed in) for face value on the maturity (due) date
Examples:
Purchase treasury note for $7500 (discount price), redeem at maturity date for $10,000 (face value)
Purchase Series EE savings bond for $25, redeem in 7 years at maturity for $50

19. Government Securities
Savings bonds - Example Series EE-
Denomination minimum $25
Payable after 6 months
Earns interest up to 30 years
Short-term obligation of the U.S. Treasury Treasury bill – maturity in one year or less
Issued to mature in 13 weeks, 26 weeks, 52 weeks
Long-term obligation of the U.S. Treasury
Treasury note – maturity at 1 to 10 years, minimum $1000
Treasury bond - maturity at 10 + years

20. Open Market Operations
Bank discount rates encourages borrowing by member banks, and therefore encourages borrowing by consumers
Purpose of open market operations
Regulate money supply
Most frequent method of controlling the economy
Who controls open market operations?
Federal Open Market Committee (FOMC)-
A committee within the Federal Reserve

21. 7. The FED Sets Lending Standards
Sets standards for consumer legislation dealing with lending and credit
Sets limits for loans and investments by member banks
News: Federal Reserve revised bank lending rules since banking crisis
Ex: Lower % of total loans for land/acreage

22. 8. The Fed Supplies Currency
Money defined:
a medium of exchange for value
US money = currency and coins
Federal Reserve supplies paper currency
Legal Tender for all debts, public and private
Paper currency supplied is “Federal Reserve Notes”
Printing currency (paper money, bills)
Bureau of Printing and Engraving
Counterfeiting - federal crime
Coinage
Minting supplied and regulated by the Department of Treasury, US Mint

23. St. Louis Federal Reserve

24. Topics Classification of financial institutions
Depository
Non-depository
Common payment services
Electronic Funds Transfers
Online Bill Pay
Checking Accounts
Specialty checks
Money Orders 24

25. Classification of Financial Institutions
Depository
Earns money to finance their business by accepting deposits from customers
Types include:
Commercial banks- full service - 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- not-for profit, serve their members only, and are owned by their depositors. 25

26. Classification of Financial Institutions
Non-depository
Earns money to finance their business by selling specific services such as policies, investments, and loans
Types include:
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 26

27. How To Compare Financial Institutions
Which characteristics of financial institutions are of interest?
Services offered
Safety
Convenience
Fees and charges
Restrictions
What kinds of questions may be asked about each characteristic? 27

28. 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

29. 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

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

31. 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)

32. 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

33. 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

34. Online Bill Pay Use the web to make payments Often fee based
Privacy can be issue
Change PIN frequently
Use only “safe” sites
Write Online Bill Pay questions 1-3 from next slide on notebook paper. Use the website to answer the questions.

35. Online Bill Pay Questions
What are the two types of online bill pay?
What is automatic bill pay?
Choose link Banking 101
Choose link 3 reasons to avoid online banking.
List 3 reasons given.

36. Common Payment Services - EFT
Electronic Funds Transfer (EFT)
Banking method in which computers and electronic
technology is used as a substitute for checks and other
paper forms of banking
Electronic Funds Transfer Options:
Automated Teller Machines (ATM’S)
Pay-By-Phone Systems
Direct Deposit or Withdrawals
Paychecks, automated bill payment
Point-of-Sale Transfers
Debit Cards
Automatic Deposits and Payments 36

37. Checking Accounts
Used by business and individuals to manage cash transactions
Check-
A preprinted form issued by the financial institution
Account holder directs withdrawals by writing checks
Parties to a Check
Payee, Drawee, Drawer

38. 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
619 Main Street
Raleigh, NC /1034
July 16, 2010
Pay To the Order of _____Donnie Tatum______________________$100.50
_One hundred and 50/ DOLLARS
State Credit Union
For _______________ Charles Paige
2131/1034:
Drawer’s Signature -
Last item completed on check!
Bank Name - Drawee 38
Memo
MICR Banking #s

39. Record Keeping IMPORTANT:
Keep a current balance in check register or on check stub by:
Recording deposits
Recording withdrawals
Checks written
EFTs
Bank Fees

40. Common Payment Services
Special Checks
Travelers check
Requires 1st signature when check issued
Requires 2nd signature when check used
Go to link below and read about traveler’s checks and how they work.

41. Traveler’s Checks Go to website
Traveler’s Checks – Draft drawn by a well-known financial institution on itself or its agent, used when traveling
Go to website
Write questions 1-3 on notebook paper. Use the website to answer the questions.
Click on Learn More about Travelers Checks.
List the 4 steps in how to use travelers checks.
List 5 ways Travelers Checks mean Peace of Mind.
What is the benefit of Cheques for Two?

42. Certified Check
A certified check is written by a bank for you from your bank account to give to someone.
It's guaranteed funds that the bank reserves from your account.
Go to website:
Write Certified Check questions 1-5 from next slide on notebook paper. Use the website to answer the questions.

43. Certified Check Questions
Who issues a certified check?
Give two examples of when you might need a certified check?
Why can’t a certified check bounce?
Why does a creditor require a certified check?
Do banks charge a fee for a certified check?

44. Cashier’s Check Sample Cashier’s Check – A check the bank draws on itself

45. Common Payment Services
Money Order
Draft issued by a post office, bank, express company, or telegraph company for use in paying or transferring funds for the purchaser
Orders issuing agency to pay amount printed on form to another party
Types of Money Orders:
Postal money order
Express money order
Telegraphic money order
Go to website
Write questions 1-5 from next
slide on notebook paper. Use
the website to answer the
questions.

46. Money Order Questions
For what amount of money is a money order issued?
When was the Postal Order system established?
What is a concern about using money orders?
Who usually sells money orders in the United States?
Name 5 security features of a postal money order.

47. Common payment services
Opening a checking account
Signing a signature card is the first step
Writing a check for payment
Endorsing a check for deposit
An endorsement allows the payee to cash the check, deposit the check or transfer payment of the check to someone else.
Different types of endorsements:
Blank
Full
Restrictive 47

48. Check Endorsements Definition: Signature on the back of a check
What does an endorsement do?
Allows payee to cash, deposit or transfer payment of the check to someone else
Provides proof that the payee cashed or transferred payment of the check to someone else
How should a check be endorsed?
Endorser (payee who is signing) should sign the check the way it is on the front of the check and if the name is misspelled, correct the signature directly up under the first endorsement 48 48

49. DO NOT WRITE BELOW THIS LINE
Blank Endorsements
Should match payee’s name
Signed with endorser’s name only (endorser is payee from front of check)
Can be cashed by anyone who holds the check with a blank endorsement!
Don’t use blank endorsement before you are ready to cash or deposit!
X Jane Doe
DO NOT WRITE BELOW THIS LINE 49

50. Special Endorsement Juan Delgado
Transfers payment of a check to someone else.
Payee signs check , then writes “pay to the order of” another person
Can be used to make payment on a debt
Juan is payee on check
Juan owes Maria money
Juan transfers payment to Maria.
Debt = money owed
Might also endorse:
Juan Delgado
pay over to
Maria Fernandez 50

51. Full Endorsement Example
Transfers payment to someone else
Payee signs the check over to another person to receive payment
Who was payee on check? John
X Pay to the order of
Jane Doe
John Doe
DO NOT WRITE BELOW THIS LINE 51

52. Restrictive Endorsement
Limits use of the check so it can be deposited only to endorser’s account.
Safest type of endorsement
Cannot be cashed by a thief or someone who finds the check
Best to use when mailing a check for deposit or when using the ATM for deposit. 52

53. Check Writing Procedures
Write information in the check register first, (ensure checks are written in numerical order)
Write the date the check is written.
Write the payee’s name.
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. 53

54. How Do I Know the Amount in my Checking Account?
Keep a Check Register or Check Stub Balance
Subtract checks written (or debit card transactions) from balance
Add deposits to balance
Keep a running balance after writing checks or making deposits
Check Register is YOUR documentation of how much money is in your account?
What if mistakes are made?
You will make corrections when you reconcile (balance) bank statement

55. Bank Reconciliation What is a bank reconciliation?
Document that shows two equal balances
Your record of your checking account
The bank’s record of your account
Do they have the same $ balance?
Yes, or reconciliation is not complete!
Reconciliation helps to find/correct any mistakes in your register! 55

56. Outstanding Checks What is an outstanding check?
Outstanding checks are checks that have not cleared (been deducted from) the bank statement balance.
Need to know items outstanding in order to reconcile statement
How to know if checks are outstanding:
Find out which checks /deposits are outstanding by comparing the bank statement with the checkbook register

57. Reconciling a Checkbook
Makes sure the bank’s records agree with your records
1. Check for outstanding checks and deposits
2. Check the checks, deposits, ATM activity on the bank statement to make sure that your records are correct
3. Make adjustments to the bank statement and your records to ensure that you and the bank have the same amount of money
4. Reconcile every statement upon receipt 57

58. 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.
Account balances must be equal! 58