Chapter 1 Assessment Finance

How do banks make money?

Banks make money on the spread between interest paid and received. (Banks charge higher interest rates for loans than they pay to depositors in order to make money. This is called the Spread. Bank assets include earnings and investments, but deposits are liabilities.

Savings deposits today are smaller by percentage than they once were. Why do you think some economists feel that this is a risk to the economy?

Banks then have less money to move into the economy with loans and credit. Consumers may be spending their money too freely or investing in riskier, uninsured investments.

Credit unions

Credit unions also are owned by depositors, 1. users of credit unions must be members. Membership is usually based on some type of association, such as a common employer, a certain line of work (teachers have a credit union) 2. Second, credit unions are not-for-profit financial institutions that exist to benefit the members. Any money beyond costs is returned to the mem- bers in the form of dividends on savings, reduced fees for services, or lower rates for loans.

bank

A bank is a financial intermediary for the safeguarding, transferring, exchang- ing, or lending of money. Banks distribute the medium of exchange. Central, commercial, and savings banks are three main types of banks.

Why is a deposit considered a liability for a bank?

A deposit is considered a liability for a bank because A depositor has the right to request his or her funds, and the bank is obligated to pay them including interest.

non-depository intermediary

A private company that does not receive deposits but sells financial services

niche market

A targeted smaller group of customers

What is a non-depository financial institution?

Financial institutions that do not take or hold deposits but make money by selling services or policies. like an insurance company, investment trust, or mutual fund.

lending

Lending is a big part of a bank's business. -Home (mortgages) and auto loans -Credit cards issued by banks are another form of lending, -Loans to governments over decades

What are advantages and disadvantages of the trend towards mergers in banking?

Pro's Mergers can make a bank bigger and they allow banks to have more services and customers and it gives them more resources. Cons: Mergers decrease the number of banks and ownership is concentrated. The 6 largest banks in the Us have 67% of total assets in the us and financial system.

List four ways that banks safeguard money.

Record keeping, identification, enforcement, transfer security, sound business practices and examinations by federal or state bank authorities.

Retail banks

Retail and other thrift institutions such as mutual savings banks, savings and loans, and credit unions developed to help individuals not served by commercial banks save money, acquire loans, and invest .Over time, their services expanded, and they too now offer a wide range of financial services to a broad customer base

profit

Revenue minus costs

List four functions that banks perform.

Safeguard, Transfers, Exchanges and Lends Money

Savings and Loan Associations

Savings and loan associations are owned by depositors themselves, who receive shares of the company.

Name three types of technological innovations in banking.

ATM's, Smart Cards and Payroll Cards, Mobile and Online Banking.

medium of exchange

An agreed-upon system for measuring value of goods and services

Smartcards

Smartcards are credit,debit,orother types of cards that have embedded microchips. Smart cards are useful for a wide variety of "electronic purse" applications, which allow the card to store a value. When the card is used, the stored value decreases. You may have used these already in grocery or video-rental stores. Gift cards, security cards, and customer loyalty reward

A bank's liabilities are more liquid than its assets.

The bank is obligated to give depositors their money if they request it. The bank's assets (customer loans, credit card interest,ect) may be less liquid because they are tied up in longer-term loans, so the bank can'term-48t get them as quickly.

spread

The difference between interest paid and interest received

Consumer debt is higher than ever in the United States. What would happen if people suddenly stopped borrowing from banks?

The economy would slow down.

Equal Credit Opportunity Act (ECOA)

The federal law that prohibits discrimination in the extension of credit because of race, color, religion, national origin, sex, age, or marital status. This doesn't mean all consumers who apply for credit get it. Factors such as income, expenses, debt, and credit history are considerations for creditworthiness.

Deregulation

The loosening of government control

A bank's liabilities exceed its reserves.

The money is loaned out, and the reserves don't match the total of deposits (liabilities). On the positive side, the money is out working, financing businesses and expanding the economy.

How might smart card technology reduce the number of cards in a consumer's wallet or purse?

The smart card has the ability to store a large amount of data, so it can integrate the different functions that used to require many separate cards. For example, a smart card has five distinct functions supported by one single card: credit, cash advance, debit, e-purse and building access.

What reason would people have to not take advantage of today's banking services and technology

They might not trust banks, even though they are regulated and insure deposits. There have been bank fraud situations that have eroded trust of some potential customers.

If private, nondepository loan companies charge higher interest than depository institutions backed by government, how do they stay in business?

They offer services to people who aren't in banks. People need their service and can't get it anywhere else.

liability

To banks, deposits represent this type of obligation

asset

Anything of value that can be readily exchanged

Usury is the practice of charging extreme interest rates. From your library or the Internet, find out more about usury limits, what they are, how they work, and what the usury limits are in various states. Write a one-page report summarizing what you learn.

Usury is the act of lending money at an interest rate that is considered unreasonably high or that is higher than the rate permitted by law. Usury limits are limits that a financial institution can charge you on interest

commercial bank

a bank that offers services to the general public and to companies. (Commercial banks are so called because, at one time, they offered their services only to businesses. Today, commercial banks seek the business of any worthy customer.) One of the big distinctions between commercial banks and other depository institutions is that commercial banks are owned by stockholders who expect a profit on their investments.

Creditworthiness/credit rating

consumers who apply for credit get it. Factors such as income, expenses, debt, and credit history are considerations for creditworthiness.

Disadvantages of Mergers

decreased number of banks, fewer banks in control of our money, sometimes higher fees

Advantages of mergers

increase size of banks and resources

How do banks help expand and maintain the economy?

Banks Move Money Banks expand the economy by transferring and lending money to creditworthy borrowers, thus creating markets and jobs. When a business has money to invest, businesses can expand, jobs are created, products get manufactured, services are performed, and the economy grows. Banks lend money to businesses and people to make purchases they might not be able to make and they determine the creditworthiness of customers to avoid losing money.

Why are banks called "financial intermediaries"?

Banks are financial intermediaries that safeguard, transfer, exchange, and lend money. They act as intermediaries between borrowers and lenders. They connect borrowers and lenders.

How is a bank like other businesses? how is it different?

Banks are like other businesses because they have customers, provide a service, and try to earn a profit. Banks are different from other businesses because they are regulated by the government.

Why are banks regulated and protected by government?

Banks are regulated and protected by the government to guarantee the safety and stability of the money supply of the country.

What is the primary difference between credit unions and other depository owned intuitions?

Customers must be members of a credit union. Credit unions are non profit. Others are profitable.

central banks

Government banks that regulate and manage money supply

depository intermediaries

Holds funds for the public and uses the funds to finance their business commercial banks, thrifts (which include savings and loan associations and savings banks) and credit unions.

What happens if many depositors need their money at once?

If many depositors need their money at once, the bank must either break its promise to depositors or pay until its reserves are gone. If the bank fails, unpaid depositors can lose some of their money. Some is protected by FDIC (federal deposit insurance) This rarely happens.

FDIC Insurance

In the United States, deposit insurance, backed by the government since 1934, has kept people from fearing the loss of their deposits. Thus, a "run on the banks," when people call for their money all at once, is rare.

How does the fact that consumers have many choices for places to put their money affect the banking industry?

It increases competition among the banks.

Name three trends in recent banking history.

Mergers, Technology use, and competition. (Changes in regulation, changes in technology, and changes in competition (credit unions) have pushed banking, like most other businesses, to become organizations that must respond rapidly to changing business conditions in order to survive.)

The Banking Acts of 1933 and 1935 established what and what does it mean to depositors

More regulation 1933- Glass, Stegall and banks couldn't offer stock advice 1935- expanded the monetary control of the FED

commercial banks

Most common form of government-backed corporate bank

Name two types of thrift institutions.

Mutual Savings Banks and Savings and Loan Associations.

mutual savings bank

Mutual savings banks are similar to savings and loan associations. They receive deposits primarily from individuals and concentrate also on private real estate mortgages. Mutual savings banks are owned by depositors. These state-chartered banks are sometimes granted greater powers with regard to assets and liabilities than S&Ls, but usually not as much as those of commercial banks.

Return on Equity (ROE)

Net Income/Total Equity, measures profitability

Would consumers be better off if all public utilities, including electric and gas companies, were deregulated so that the marketplace could set prices?

No because those companies can charge very high prices to the point where customers can't afford those utilities.

How did deregulation ultimately result in more banking services for consumers?

One of the biggest effects of deregulation was that banks moved into new areas of business. Banks began offering more financial services such as 1. credit cards, 2. innovative lending options (ex. home equity loans) 3.technology-related services like ATM's and Online Banking allow convenience.

ways banks safeguard money

keep accurate records, customer identification/preventing id fraud, enforce legal action for fraud, transfer money securely, use sound business practices.

depositors

people who put money into banks