17 1 BANKS AND OTHER FINANCIAL INSTITUTIONS Goals

17 -1 BANKS AND OTHER FINANCIAL INSTITUTIONS Goals • Explain the purpose of the Federal Reserve System • List the types of financial institutions. • Discuss factors for selecting a financial institution.

The Banking System The Federal Reserve System Most banks attempt to attract the deposits of customers. As an individual you cannot open an account in a Federal Reserve Bank because it is a bank for banks. The federal government set up the Federal Reserve System (Fed) to supervise and regulate member banks and to help banks serve the public efficiently. Banks that join the system are known as member bank. Federal Reserve Activities One service provided by the Fed is the holding of reserves. Banks cannot lend all of the money they receive from customers A bank will only lend a certain percentage of deposited funds. Another service of the Federal Reserve System is clearing checks for member banks. Clearing refers to the paying of checks among different banks in different locations.

Cont…The Banking System Banking and the economy Several million people work in banks, savings and loan associations, credit unions, and other financial institutions. These are ways individuals use banking services: �Borrow money to build roads. �Borrow money to buy seeds for crops. �Deposit cash from business operations. �Finance a college education. �Invest for retirement. �Obtain a mortgage. �Process credit card transactions. �Save for a vacation.

Types of Financial Commercial Banks Institutions Deposit institutions, also called depository intermediaries, accept deposits from people and businesses and use them to finance their business. This is the most common way of banking. Commercial banks are often called fullservice banks because they offer a wide range of financial services. Savings and Loan Traditionally, a savings and loan association (S&L) specialized in savings accounts and making loans for home mortgages. Today, many S&Ls use the words savings bank in their names. Mutual Savings Bank A mutual savings bank is a savings bank that is owned by, and operated for the benefit of its depositors. Credit Unions , A credit union is a user-owned not-forprofit, cooperative financial institution.

Cont. . . Types of Financial Institutions Non-Deposit Financial Institutions Consumer Finance Companies A business that specializes in making loans for long-lasting or durable goods, such as cars and refrigerators, and for financial emergencies. Mortgage Companies Mortgage companies , along with other financial institutions, provide loans for buying a home or other real estate. Check-Cashing Outlets People who do not have bank accounts may use check-cashing outlets (CCOs) to cash paychecks and obtain other financial services. Some services provided at a CCO are more expensive than at other business. Pawnshops make loans based on the value of some tangible object, such as jewelry or other valuable items. Also called non-depository intermediaries. They do not take or hold deposits. Life Insurance Companies People commonly buy life insurance to provide financial security for their dependents. Investment Companies Many investors own shares of one of the more than 60, 000 mutual funds worldwide. Investment companies make these mutual funds available.

Selecting a Financial Institution Services Offered 1. 2. 3. 4. There are four basic types of banking services you will use. Savings account Checking and payment accounts Loans and other credit plans Other services, such as safe-deposit boxes and investment advice Safety The Federal agency that helps to regulate banks and other financial institution is the Federal Deposit Convenience Do you want 24 -hour banking service? Do you want branch offices near your work or home? These are some of the factors you will need to think about as you decide about convenience. Fees and Charges Financial services have costs. Restrictions Costs are not measured in dollars. If you must keep $500 on deposit to get “free” checking. You may be losing the chance to earn interest on those funds at another institution.

Questions The financial institution most likely to charge the highest rate for a loan would be a… 1. 2. 3. 4. Bank Pawnshop Credit union Mortgage company If deposit insurance is most important to you when selecting a financial institution, you are most concerned with… 1. 2. 3. 4. Safety Convenience Services fees