BANKINGBANKING

Unit 2Unit 2

The Federal Reserve

The Federal Reserve (“Fed”) serves as the nation’s central bank, which is designed to oversee the banking system and regulate the quantity of money in the economy.

Functions & Tools of the Fed

1. Supervise & Regulate the private banking industry to promote safe and sound banking practices.

2. Provide financial services to banks.

3. Conduct monetary policy

The Fed has three tools of monetary control:

1. Reserve Ratio: % of deposits kept on-hand

2. Discount Rate: Interest rate Fed charges banks on loans

3. Open-Market Operations: Buy/sell gov. bonds

Financial Institutions: Businesses which accept deposits and offer multiple services in banking and finance.

Bank: A for-profit financial institution owned by investors in its stock that provides financial services to any customers.

Credit Union: A not-for-profit financial institution owned by its members that provides services to its members at low fees.

5-A-25-A-2

Financial InstitutionsFinancial Institutions

Others

Savings and Loan Association

Financial Institutions

Why consumers may not use them:

Fees Required minimum

balances Privacy

Why consumers may use them:

Safety Interest Cheap Loans

Automated Teller Machine: Electronic machine that customers/members can use to withdraw cash and make other financial transactions.

Commercial Bank Largest financial institutions Services: Checking/savings accounts, credit cards, safe-deposit boxes, CDs,

loans, investments, debit cards

FDIC insured $100K/$250K Ex. Bank of America, US Bank, Commerce Bank

• Not-for-profit, member owned• Services: Share account, share draft account, safe-deposit box

share draft certificate, credit card, investing, loans, insurance

• NCUA insured• Usually lower fees/loan rates and higher interest rates• Examples: First Community, American Eagle

Credit Union

Credit Unions and Banks

For-profit companies owned by shareholders

Not-for-profit institutions

Offer their services to everyone; anyone can become a customer

Offer their services to special groups of people employer-,

church-, community

Banks Credit Unions

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Profits returned to members in the form of lower fees and loan rates and higher interest on deposits

Profits benefit a small group of stockholders

Accounts are federally insured up to $250,000 by the Federal

Deposit Insurance Corporation (FDIC)

Accounts are federally insured up to $250,000 by the National Credit

Union Administration (NCUA)

Types of Insurance

Federal Deposit Insurance Corporation (FDIC) Protects depository institution accounts Insures commercial banks and savings and loan

National Credit Union Administration (NCUA) Provides insurance for credit unions

Federal Savings and Loan Insurance Corporation (FSLIC) Provides insurance for savings and loan

Cash Management Tool(Income Investments)

1. Checking Account (sometimes): An account that allows withdrawals by means of check, debit card, etc. (Share draft account @ Credit Union)

2. Savings Account: Account that helps you save & earn a small amount of interest (Share Account @ Credit Union)

3. Money market account: A deposit account, which has a relatively high rate of interest, typically requires a higher minimum balance to earn interest or avoid monthly fees, and has a restricted # of transactions• Higher interest rates than savings, may have limited check writing

4. Certificate of Deposit: Insured interest-earning savings account w/ restricted access to the funds. (Share draft certificate@ Credit Union)

5. US Government Savings Bond

Opening an Account Photo Id: driver’s license, passport, etc… Social Security Number Signature Card Deposit May be charged

for checks

SAVINGS ACCOUNT

An account that helps you save money and earn a small amount of interest at the same time(low interest-bearing)

Money can be accessed or transferred between accounts through: ATM’s Telephones Internet Bank

CHECKING ACCOUNT

An account that allows withdrawals by means of check, debit card, etc.(may or may not earn interest)

Very liquid Features include:

Minimum balance Transaction Fees Limits on checks written per month Reduces need to carry cash

Deposit Slip

Today’s date goes herePrint Your Name HerePrint Your Address Here

Sign Your Name Here33 3 3 3 3 3

x

4 75 2 5

5 0 0 0

4 2 5 2 5

5-E-15-E-1

4 75 2 5

Click the numbers

Completing a Deposit Slip

Checks If more checks are

being deposited than number of spaces on the front, use the back

List each check Add the total, enter it on

the front

Check Details11 22 33 44 55 99887766 1010

This is the Routing Number for your bank (used for electronic This is the Routing Number for your bank (used for electronic transfers of funds from your account to the payee’s account)transfers of funds from your account to the payee’s account)This is your Account Number. (Note that sometimes these two This is your Account Number. (Note that sometimes these two numbers are the reverse of what is shown here.)numbers are the reverse of what is shown here.)This is just your check number again (see above right).This is just your check number again (see above right).Here is where you write the name of the party you are writing your Here is where you write the name of the party you are writing your check to (the payee). Be sure to write or print legibly!check to (the payee). Be sure to write or print legibly!On the lower line, write out the amount like this.On the lower line, write out the amount like this.Legibly print the amount of money this check is for. Legibly print the amount of money this check is for. Enter the date you write each check.Enter the date you write each check.Place to add any information you want to related to this check.Place to add any information you want to related to this check.Put your personal signature here.Put your personal signature here.Make sure your personal information on the check is correct.Make sure your personal information on the check is correct.Here is the number of this Check.Here is the number of this Check.

1111

5-F5-F

Click the numbers

John M. Smith

Endorsements

Blank Endorsement: Signature of payee

Restrictive Endorsement: Signature of payee w/ words “For Deposit Only” & account number

Student NameX

Endorse Here

XFor Deposit Only—Acct. #

987654321

Students Name

Endorse Here

Endorse: To sign the back of a check to make it payable to the specified payee.

Special Endorsement: Forwarding a check to someone by writing “pay to the order of” + their name and then putting your blank endorsement

Pay to the Order of Jonathon Smith

Student Name

X

Endorse Here

John DoeJane DoeX

Endorse Here

Endorsements

Joint Endorsement: Multiple payees endorsing the same check

Overdraft

Overdraft: A deficit in a bank account caused by drawing more money than the account holds(debit card, ATM withdrawal, or check) Overdraft charge typically between $20-$35 Over 50 million Americans overdraw annually costing 24 billion in overdraft fees

Overdraft protection: which draws from a savings account, credit card, or another checking account This usually costs $5-$10 New regulation will decline transaction unless specified otherwise

Stop payment order: request to not fulfill payment on a check you have written. Typically costs between $20-$30

Reading a Bank Statement

2 Line MethodNumber

DateDescription of Transaction

Debit (-)

Credit (+)

Balance

Dep. 2/1/11 Deposit to Checking $500 +$500 Open Checking Account $500

100 2/2/11 George Forman $75 -$75 New Grill $425

DC 2/3/11 Quicktrip $50 -$50 Gas $375

ATM 2/4/11 Withdrawal $30 -$30 ATM Withdrawal for concert $345

T 2/5/11 Transfer $100 -$100 To Savings $245

1. On February 1st you open a checking account and deposit $500

2. On February 2nd you write check #100 for $75 to George Forman for a new grill

3. On February 3rd you use your debit card at Quicktrip gas station to buy $50 gas

4. On February 4th you withdraw $30 from an ATM to go to a concert

5. On February 5th you transfer $100 from your checking account to your savings

1 Line MethodNumber

DateDescription of Transaction

Debit (-)

Credit (+)

Balance

Dep. 2/1/11 Deposit to Open Checking $500 $500100 2/2/11 George Weber-New Grill $75 $425DC 2/3/11 Quicktrip-Gas $50 $375

ATM 2/4/11Withdrawal- ATM for Concert $30 $345

T 2/5/11 Transfer- To Savings $100 $245

1. On February 1st you open a checking account and deposit $500

2. On February 2nd you write check #100 for $75 to George Forman for a new grill

3. On February 3rd you use your debit card at Quicktrip gas station to buy $50 gas

4. On February 4th you withdraw $30 from an ATM to go to a concert

5. On February 5th you transfer $100 from your checking account to your savings

Reconciling a Checking Account

Reconcile: Comparing the bank statement to your checkbook register and accounting for any differences.

Step 1: Obtain the current balance from your bank statement.

Step 2: Add any deposits that you have recorded in your check register but that are not on this statement.

Step 3: Subtract any outstanding checks (checks you have written but that have not yet cleared the banking system).

step 4: Compare result with the current balance in your check register

* Helps you avoid bouncing checks

* Lets you know how much is in your account

* Keeps you in control of your finances

Steps for Reconciling View the monthly bank statement and check register

$275.00

$275.00

$74.94

√ √ √ √ √ √ √ 

Place a check mark in the √ T column for all transactions that have been cleared and are shown on the bank statement

$275.00

Determine the current account balance from the bank statement

$275.00

Add any outstanding deposits

Deposits Outstanding

Number Amount

 Dep.   30 00 

   

     

     

Total   30 00 

Withdrawals Outstanding

Number Amount 304   43 72  DC   2 75                

Total   46 47 

Subtract any outstanding withdrawals

Compare the total with the checkbook register.

If totals are different, double check the math

and make sure all service fees and bank charges are recorded in the check register.

MONEY MARKET ACCOUNT

Deposit account with a relatively high interest rate. Usually requires higher minimum balance to earn interest & avoid monthly fees. Restrictions on # of transactions

Features: Minimum balance ($1,000) Government insured account Limited accessibility Tiered interest ratesEXAMPLE: a balance of $10,000 will earn a higher interest rate than a

balance of $2,500, & a balance of $800 may earn no interest

Google images

Time deposit paying a specified rate of interest for a specified period of time, with a penalty imposed for premature withdrawal of the deposited funds

Advantages• Insured• Guaranteed interest

Disadvantages• Lack of liquidity• Low interest rate• Minimum amount required

Features: Time: 7 days- 8 years Deposits : $100- $100,000 If money is withdrawn before the expiration date, PENALITIES LOW RISK & NO FEES

(A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing)Face Value: How much it’s worthCoupon Rate: Interest rate

Maturity Date: Time at which bond can be collected

Types:- Government- Municipal- Corporate- Junk (high-yield)- Convertible

http://www.investopedia.com/video/play/understanding-bonds#axzz1cCDFWuQy

http://www.investopedia.com/video/play/bond-investing#axzz1cCDFWuQy

OVERALL COMPARISONOVERALL COMPARISONTool

Average Interest Earned

Purchase PlaceSpecial

Features

Checking Account

0-.75 %

Commercial Banks, Savings & Loan

Associations, Credit Union

Can be used in place of cash, funds

can be easily accessed

Savings Account.75-

1.25%

Commercial Banks, Savings & Loan

Associations, Credit Union

Easily accessed, temporary holding

place for funds

Money Market Account 1-2%

Commercial Banks, Savings & Loan

Associations, Credit Union, Insurance

companies

Minimum balance, limited transactions, tiered interest rates

Certificate of Deposit

1-2.5%, depending on the length of

deposit

Commercial Banks, other institutions

which accept deposits for a fixed

period

Penalties for early withdrawals, no

deposits or withdrawals are

made after initial investment

Savings Bonds 3% depending on the length of

bond

Commercial Banks, Credit Unions,

employer payroll deduction plans

Tax advantages, a loan to the federal

government

LIQUIDITYLIQUIDITY

Checking accountChecking account

Savings AccountSavings Account

Money Market Deposit AccountMoney Market Deposit Account

Certificate of DepositCertificate of Deposit

Savings BondSavings Bond

Most Liquidity Least Most Liquidity Least Interest Interest

Least Liquid Most InterestLeast Liquid Most Interest

Other Methods of Payment

Cashier’s Check: A check drawn by a bank (for a fee) on its own funds and signed by the bank's cashier. Guaranteed funds (larger amounts)

Traveler’s Check: An internationally redeemable draft (check) purchased in various denominations from a bank or traveler's aid company and payable only upon the purchaser's endorsement against the original signature on the draft.

Contactless Payment: Swiping in front of sensor, (RF). May require signature if purchase is over $25.

Characteristics Credit Card Debit Card

What is it? Pre-approved credit A card (looks similar to a credit card) that is linked to an individual’s bank account

Payment process Charged to an individual’s account and they may pay later

Money is immediately deducted from the bank

Is interest charged?

Yes – because money is being borrowed from the credit card company

No

Credit vs. Debit cards

Online Banking

Online banking: allows customers to conduct financial transactions on a secure website operated by their financial institution

Advantages Disadvantages• Not as personal • Reliance on technology • Decrease in safety• Increase in risk for fraud

• Decreased cost of paper and postage

• Stores records online• Convenience (access anytime)

• Paying bills online

Electronic Banking

© Family Economics & Financial Education – Revised May 2009 – Financial Institutions Unit – Electronic Banking© Family Economics & Financial Education – Revised May 2009 – Financial Institutions Unit – Electronic BankingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

BEWAREPhishing Fraudulent pop-messages & E-mail messages (may appear to be

legit) directing you to a spoofed web site, or otherwise trying to get you to divulge private information. (login, password, SS#, acct. #)

Spyware Any data collection program that secretly gathers information about

you and relays it to advertisers and other interested parties.

Dear CitiFinancial customer,

Due to malfunction of our database server some of the vital data related to your account has been lost. Click here to prove your identity. Please, update your account information in 3 days or your account will be suspended.

Thank you for your time, CitiFinancial Billing Department.

Hello!!!

My compliments to you.

After very thorough consideration, I have decided to reach you through this means to propose to you a mutually beneficial proposals that would require very minimal input from you but have quite an appreciative benefit to you. And of course as is obvious it is your prerogative to either support this proposals or reject it, But I do believe that it is wise to first have a full picture of the transaction before you make such a decision.

I can state very unequivocally here and now that this business transaction that I am proposing is safe, riskfree, legitimate and very profitable. I can also tell you that the amount involved is GB£12,200,000.00 (Twelve Million Two Hundred Thousand Great Britain Pounds), that is about US$23,065,000.00 (Twenty Three Million Two Hundred and Sixty Four Thousand United States Dollars) I am presently in London working as an investment consultant with the below bank at their offshore department located at the Isle Of Man. You can please contact me by email if you need to know more about the transaction so that I can provide you with a more detailed picture of the transaction.

It is however imperative that you be aware from now that the transaction requires absolute confidentiality and a pledge to this resolve would be expected from you before I commence this transaction with you.

Please do respond to my alternate email address : inseque.alainquentin@btinternet.com asap if you are interested.

Warmest regards,

© Family Economics & Financial Education – Revised May 2009 – Financial Institutions Unit – Electronic Banking© Family Economics & Financial Education – Revised May 2009 – Financial Institutions Unit – Electronic BankingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Consumer LiabilityChecking Account