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

2. Classification of Financial Institutions

3. 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.

4. 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
Investment companies
Consumer finance companies
Mortgage companies
Check-cashing outlets
Pawnshops

5. 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

6. Checking Accounts

7. 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.

8. 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.

9. Parts of a Check Charles Paige 319 619 Main Street
Drawers
Address
Check
Number
ABA #
Payee
Check
Date
Charles Paige
619 Main Street
Raleigh, NC /1034
_________July 16_____2010
Pay
To the
Order of _____John Thompson________________________$100.50
_One hundred and 50/ DOLLARS
State Credit Union
For _______________ _Charles Paige
Bank Name
Drawer’s Signature

10. 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

11. 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

12. 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

13. 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

14. 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

15. Blank Endorsement Consists of endorser’s name only
Anyone who has a check with a blank endorsement may cash it. 15

16. 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. 16

17. 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. 17

18. The Federal Reserve System

19. 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.
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.

20. Structure of the Federal Reserve System
Federal Reserve Board (FRB): governing body of the Federal Reserve System. Its seven members are appointed by the President, subject to Senate confirmation, and serve 14-year terms. 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

21. 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.

22. 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.

23. Federal Reserve Activities
Holds reserves.
Bank must keep a percentage of their funds on deposit with the Federal Reserve.
Protects depositor’s money; just think “Federal Deposit Insurance Corporation (FDIC) insured symbol”.
Helps the banking system operate more efficiently.

24. 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.

25. 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.

26. 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