Banking and Financial Systems

not-for-profit

instead of paying profits to shareholders, money made by not-for-profit credit unions is returned to members in the form of higher interest rates on savings accounts and lower interest rates on loans

deposit insurance

insurance that covers the deposits of customers in the case of a bank failure

bank note

intended to be used as currency, promised immediate payment by the bank that issued the note and backed by a government bond

Under the Equal Credit Opportunity Act, lenders may not discriminate against potential borrowers based on what factors?

- gender - marital status - race - religion - age - national origin - whether an individual's income is from public assistance benefits

What are four customer-service offerings that enhance a bank's image and generate customer loyalty?

- locations - handicapped accessibility - international services - secure website

List five recruiting methods

- promotions - media advertising - job fairs - college visits - employment agencies

What three factors in modern banking have changed the industry?

-Mergers -Technology -Competition

How does a business qualify to provide a SIMPLE IRA?

-must have no more than 100 employees -cannot have any other retirement plan

List four functions that define a bank

-safeguarding funds -transferring funds -exchanging money -lending money

treasury and cash management services

services offered by banks related to cash management, such as accounting services, capital services, credit card services, and information services.

business finance company

provides loans for businesses, such as retail stores

insurance

provides protection from certain risks that can cause financial loss

commodity money

something of perceived value used as payment for something else of perceived value

store of value

something that can be saved, or stored, to use a future date

monetary policy

regulations of a country's money supply to achieve economic goals and stability

bond

represents money a government or company has borrowed from the bondholder

discount broker

stockbroker who places orders for customers at commissions lower than full-service brokers and may offer only limited services

Consumer Financial Protection Bureau (CFPB)

An independent consumer-protection organization that was created to protect the interests of consumers by making sure federal consumer-protection laws are enforced; it has the authority to ensure consumers get clear information about loans mortgages, credit cards, and other financial products and is also charged with ending deceptive practices in lending.

Export-Import Bank of the United States (Ex-Im Bank)

An independent federal agency established in 1934 to assist US businesses by financing the export of US products, supporting US companies engaged in the overseas export of goods and services, offering loans to US companies, providing guarantees that creditworthy foreign buyers will pay, and offering insurance on exported goods

Cosigner

An individual who signs a loan along with the borrower, taking on equal liability for repayment

Principal

An initial amount that is loaned or deposited

Individual retirement account (IRA)

An interest-earning savings account in which income taxes are deferred on some deposits and all interest until all or part of the balance is withdrawn at retirement age.

World Bank Group (WBG)

A group of international organizations whose mission is to ease poverty around the world by giving loans and grants to developing countries.

Loan policy

A guideline for balancing risk

How does a FICO score affect a loan application?

A higher score means lower risk for the bank and it should be approved. A lower score means more risk for the bank and if the loan is approved, higher interest rates.

Bankruptcy

A legal procedure that enables individuals or companies to eliminate or repay some or all debt under the guidance of federal bankruptcy courts.

Capacity

A loan applicant's ability to pay debts as shown by cash flow

Character

A loan applicant's honesty and integrity as shown by how she or he handled debt.

Capital

A loan applicant's money, property, and other valuables.

Secured loan

A loan backed by the borrower's property

Commercial loan

A loan made when a company borrows money

Consumer loan

A loan made when an individual borrows money for his or her use

Open-ended loan

A loan that does not have to be paid in full by a specific date

Unsecured loan

A loan that is not backed by collateral, only the borrower's signature; AKA signature loan

Closed-ended loan

A loan that must be paid in full on a specific date

Equity loan

A loan that temporarily transfers cash to the borrower and is secured by the owner's equity; sometimes referred to as a second mortgage.

Subprime loan

A loan with fees and interest rates that are higher than the rates given to a person who meets all the underwriting criteria.

Nominal annual rate

A loan's annual interest rate without the cost of fees or compound interest.

executive

A manager who has the responsibility and authority to make decisions about the bank and how it conducts its business.

event-based selling

A marketing strategy that encourages bank representatives to contact a customer when an event occurs

cross-selling

A marketing strategy that encourages existing customers to buy new products or services based on their previous purchases

How long is the time period usually covered by a bank statement?

A month, usually.

Adjustable-rate mortgage (ARM)

A mortgage loan in which the interest rate may change over the life of the loan.

Fixed-rate mortgage

A mortgage loan in which the interest rate stays the same for the entirety of the loan's term.

Bill of exchange

A negotiable instrument that contains an unconditional order to pay a specific amount of money to the payee on a future date; often used in international trade.

Draft

A negotiable instrument that orders a payment to be made.

Note

A negotiable instrument that promises payment, but does not order that the payment be made.

ABA routing number

A nine-digit number by the American Banker Association (ABA) to identify the financial institution responsible for paying the value of a check to the payee.

substitute check

A paper copy of the front and back of the original check

probation

A period of time in which the employee's performance is closely watched, usually as the result of poor job performance

cash card

A plastic card with a magnetic strip that can be read by an ATM

How does a positive public image help a bank?

A positive public image makes it easier to hire and retain employees, acquire new customers, and keep current customers

Simplified Employee Pension (SEP)

A retirement savings plan established by a business for its employees or owners to which the business directly contributes.

401(k) plan

A retirement savings plan that enables employees to make tax-deferred or taxed contributions through payroll deductions.

Defined benefit plan

A retirement savings plan with a fixed amount of money that is provided to retired employees and is determined by qualifications, not company profit.

Defined contribution plan

A retirement savings plan with a fixed maximum amount that can be contributed each year.

Custodial account

A savings account managed by an adult for a minor

Money market account

A savings account that pays a higher interest rate and requires a higher minimum balance than a traditional savings account.

Certificate of deposit (CD)

A savings account that requires a specific amount of money be held on deposit for a specific amount of time; AKA time deposit or fixed deposit.

Real estate

A section of land, the air above it, the ground itself, and any buildings on that land.

Why are organizational charts used?

An organizational chart allows you to see the relationships among individuals and groups that might be difficult to explain in words.

What is a lending institution balancing when it makes a loan? Name two things.

Any lending institution must balance the need to make money with the risk involved.

Mortgage loan

A secured loan made to purchase real estate; typically known as a mortgage.

career path

A series of jobs with increased responsibility within a specific career

Passbook

A small book kept by an account holder that is a record of savings account transactions

Which type of endorsement is the least safe? Explain.

Blank endorsement. If lost, anyone who finds it can cash the check.

How are members of the Board of Governors selected?

All members of the Board of Governors are appointed by the US President and confirmed by the US Senate.

Who are the members of the FOMC?

All seven members of the BOG are also members of the FOMC. Five additional members are chosen from the presidents of Federal Reserve Banks.

Dual banking system

Both state and federal governments pass and enforce bank laws

Truth in Lending Act (TILA)

Also Title I of the Consumer Credit Protection Act. Required that all terms of and costs related to a loan must be provided to the consumer in writing; passed in 1968

Gramm-Leach-Bliley Act

Also known as the Financial Services Modernization Act; repealed several key provisions of the Glass-Steagall Act and allowed banks to engage in almost any financial activity; passed in 1999

Interstate Banking Act

Also known as the Riegle-Neal Interstate Banking and Branching Efficiency Act; eliminated most restrictions on interstate bank branching, effectively overriding the McFadden Act; passed in 1997

SIMPLE IRA plan

An IRA-based retirement savings plan that gives small employers a simplified method to make contributions toward their employees' retirement

What criteria do underwriters use to determine if a loan is approved?

An applicant's creditworthiness.

Creditworthiness

An assessment of a borrower's ability to repay a loan.

performance evaluation

An assessment of how well and individual employee is doing his or her job

restricted endorsement

An endorsement with added limitations on what can be done with the check when it is presented to a bank.

Small Business Administration (SBA)

An independent agency of the federal government that was created in 1953 to help Americans start and grow businesses, often in the form of loans.

What executive banking role is charged with setting the strategic vision of the bank and placing individuals into positions of authority to carry out that vision?

Chief executive officer (CEO)

What are the two types of negotiable instruments?

Drafts and notes

What is the most common type of money used today?

Fiat money is the most common type of money used today

What were two goals of the Glass-Steagall Act?

Goals of the Glass-Steagall Act: - Keep banks safe - Give the public confidence in our banking system

What are three things that would show an applicant has good character?

Have experience as a borrower, pay bills on time, and demonstrate stability in home and work arrangements.

Why is security information collected on an account application?

Helps financial institutions ID the customer.

Name the fee a bank pays to use a customer's money.

Interest

What is interest?

Interest is the fee charged for borrowing money.

Compound interest

Interest paid on interest

In addition to general knowledge of business, what else must a trust officer know to be a success?

Investing, estate planning, and tax codes and laws, especially probate laws.

How do investment banks help companies raise capital?

Investment banks help companies raise capital by issuing securities.

How does the Federal Reserve Wire Network participate in wire transfers?

It connects the Federal Reserve Board of Governors, the Federal Reserve Banks and their branches, the US Department of the Treasury, and member depository institutions.

How is a jumbo CD different from a regular CD?

It's a larger amount of money, usually $100,000 or more

Why does a financial institution record a customer's Social Security number?

It's used to report financial info for taxation

Why did a movement to deregulate banks start in the 1980s?

Late in the 1970s, banks started failing. Many consumers blamed excessive regulation because they thought it made banks less competitive by restricting their business.

How long does it take to achieve a short-term goal?

Less than a year

What factors are most important to savers with short-term goals?

Liquidity, convenience, safety of funds, and lack of fees

repossession

Occurs when a bank takes property from a borrower who is not able to repay a loan; generally refers to a car or other vehicle that was purchased with the loan or used as security for a loan.

Redlining

Occurs when a lender draws an imaginary red line on a map and does not make loans in that area.

What precautions do banks take to safe guard our money?

Precautions banks take to safeguard our money: - Surveillance - Nearly indestructible vaults - Alarm systems - Bulletproof glass on teller windows - Background checks of employees

Community Reinvestment Act

Prevented redlining by requiring that banks and other depository institutions show that they are serving the credit needs of all people in their market area; passed in 1977

Credit CARD Act

Protected consumers from unfair and deceptive credit card practices and gave cardholders additional rights; enacted in 2009

Fair Credit Billing Act (FCBA)

Protected consumers from unfair billing practices and provided a way to correct billing errors; enacted in 1974

What is the purpose of the Fair Credit Reporting Act?

Protects consumer credit information

Federal Depository Insurance Corporation Improvement Act (FDICIA)

Provided additional funding to the FDIC; passed in 1991

Who do mortgage bankers most frequently deal with?

Real estate professionals and the person or business seeking the mortgage.

What personnel records are employees not allowed to access?

Records about criminal investigations, reference letters, or documents obtained before they were hired.

Garn-St. Germain Act

Reduced bank regulations further and made it easier to save failing banks and savings associations; enacted in 1982

human resources (HR) department

The bank department that finds and supports employees who contribute to the success of the bank

Federal Reserve System

The central bank for the US that is responsible for the country's monetary system. AKA Fed

Risk

The chance that an unfavorable event will happen to a person or property.

Why would an applicant ask someone to cosign a loan application?

The cosigner's better credit score will get the loan approved.

What is the basic process for opening an account?

The customer fills out an application, deposits at least the minimum amount, financial institution checks info, account and funds become available for use.

Reorganization

The process of creating a repayment plan to repay debts without liquidating property.

compliance

The process of following laws and regulations.

marketing

The process of introducing a product or service to the consumers who can purchase it.

Annual percentage yield (APY)

The rate of return on an investment for a one-year period.

What role does a compliance officer play in the banking industry?

This person establishes how the bank will implement strategies for complying with laws and regulations and for completing the necessary reporting.

What are the three major functions of a bank?

Three major functions of a bank: 1) safekeeping services that protect our money 2) deposit services that let our money grow 3) loan services that allow us to borrow money

The Federal Reserve uses which three measures to calculate the money supply?

Three measures the Feds use to calculate money supply: - M1 (transactions accounts) - M2 (time-related accounts less than $100,000) - M3 (time-related accounts greater than $100,000)

List three of the fees a bank may charge for checking accounts.

Three of the fees a bank may charge for Checking accts: -Insufficient funds fees -Overdraft fees -Service fees

Why does a company provide benefits?

To attract and retain good employees

How do you calculate the owner's equity if he or she has a mortgage loan?

To calculate the equity, simply subtract the mortgage loan's balance from the value of the real estate.

What does it mean to make counterfeit money?

To counterfeit money means to make a copy of money and represent it as the real thing.

Why is setting up a target market helpful in marketing the bank?

To create a CUSTOMER from a CONSUMER, a bank needs to be able to give the consumer what he or she needs.

What public interest are Fannie Mae and Freddie Mac chartered to promote?

To increase homeownership in the US.

Why is collateral important to the bank when granting a loan to customers?

Under a secured loan, the bank has the right to take ownership of the collateral of the borrower does not repay. The bank can then sell the property to make up for the loss.

depositor

a customer who makes a deposit

savings account

a deposit account at a depository institution that earns interest and provides a safe place to store money

Federal Home Loan Bank Board

a federal regulator agency that chartered and examined savings associations.

insufficient funds fee

a fee charged by a bank when there is not enough money in an account to cover a transaction

inactivity fee

a fee charged if a customer does not make a transaction within a specified period

account inquiry fee

a fee charged to check an account balance at an ATM

central bank

a financial institution that oversees a nation's monetary system by regulating banks, lending money when commercial bank are not able to, and controlling that money supply.

investment bank

a financial institution that provides services for businesses, such as raising capital through the stock market

Internet bank

a financial institution with no physical location or building that customers access from anywhere with an Internet connection; AKA an online bank

national bank

a financial institution with offices all over the country

insurance company

a for-profit business that primarily sells insurance

trust

a legal document that defines a customer's assets and how those assets should be handled

interview

a meeting between a company representative and an applicant

dividend

a payment

reserve

a percentage of the bank's funds that is kept to ensure that money will be available for customers and is not available for loans; AKA required reserves

reserves

a percentage of the bank's funds that is kept to ensure that money will be available for customers and is not available for loans; AKA required reserves

reference

a person who can provide information about the applicant's work history or character

employment agency

a private or government agency that matches an employer's available jobs to workers who have the needed skills, education, and experience

statement

a record that shows all of the activity that has occurred in an account during a covered time period.

money market account

a savings account that pays a higher interest rate and requires a higher minimum balance than a traditional savings account

stock

a security that gives the purchaser part ownership in the company, known as equity

gold standard

a system that determines how much gold each paper note represents

banker's blanket bond

a type of insurance that covers a bank from losses due to robbery or theft.

money center bank

a very large, often international bank whose primary customers are businesses, other banks, and governments.

unit bank

a bank with one location, usually in a small town or rural area, that serves local customers, tends to invest locally, and knows the challenges of the local community

representative money

a bill or coin that can be exchanged for an item of value

cooperative

a business or organization that is owned by its members who cooperate to run the organization

debit card

a card that enables customers to electronically access the funds in their accounts at an ATM or to pay for goods and services in stores or online.

cancelled check

a check that has been cleared

share draft account

a checking account at a credit union

unit of account

a common measure of what something is worth

automated teller machine (ATM)

a computerized machine that provides a means of self-service banking; allows a customer to perform basic banking activities, such as withdrawing cash, viewing account balances, initiating cash advances, and making deposits

counterfeit

a copy of something represented as the real thing

full-service brokerage firm

advises customers on which securities to buy and helps manage investments

deposit insurance fund (DIF)

arranges for depositors to maintain their insured funds in the case of bank failure. Depository institutions pay premiums to this fund in order to pool their money and share risk

operating expense

costs incurred to keep a bank in business, such as utilities, rent, and wages.

National Currency Act

created the Office of the Comptroller of the Currency; enacted in 1863.

automated clearinghouse (ACH)

electronic network for financial transactions that processes credit and debit transactions, processes checks, and transfers funds between banks.

securities

financial instruments that pay interest or give the investor part ownership of the company; issued by investment banks

captive finance company

formed by a manufacturer to provide loans so the manufacturer can easily sell its goods

Debt ratio

A comparison of debt to income or assets, the most common of which are the debt-to-income ratio, the debt-service-coverage ratio, and the loan-to-value ratio.

FICO score

A credit rating used by lenders to predict an applicant's ability and willingness to repay loans.

Savings account

A deposit account at a depository institution that earns interest and provides a safe place to store money.

money market deposit account (MMDA)

A deposit account similar to a money market mutual fund except that it is FDIC insured.

organizational chart

A diagram representing the structure of a company or organization.

cash drawer

A drawer with separate compartments for different denominations of coins and bills

What is a financial institution?

A financial institution is any organization that provides services related to money.

On demand

A payment made when requested

What is the difference between the nominal annual rate and the APR?

APR includes all interest whereas nominal annual rate does not include fees or compound interest.

Why is a CD considered a negotiable instrument from the bank's perspective?

The bank is the maker, providing an unconditional promise to repay the customer's deposit, plus interest, on a specific date. It's promised, not ordered, so it is a note.

To whom is the CEO responsible?

The bank's board of directors.

What are the biggest costs associated with liability cases?

The biggest costs associated with liability cases is the legal costs.

What are the two ways insurance companies earn income?

Two ways insurance companies earn income: - selling insurance policies - selling investment products

fractional reserve system

a system that requires banks and other depository institutions to keep a fraction of their deposits in reserves

depository institution

a type of financial institution at which customers deposit money in order to withdraw it later.

securities firm

a type of financial institution involved in the trading of securities in financial markets; also called a brokerage firm, stockbroker or bondbroker

regional bank

a type of financial institution that usually specializes in retail banking and does not operate internationally; AKA interstate bank

account holder

anyone authorized to perform transactions in an account

medium of exchange

anything that is exchanged for goods and services, such as money

finance company

issues loans to both individuals and businesses in order to make a profit, AKA a loan company

consumer finance company

provide high-interest personal loans to individuals who have poor credit

overdraft program

provides funds to cover a check written on an account with insufficient funds

asset

something owned by an individual or other entity

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)

strengthened banks and savings associations and cleaned up the large number of failed institutions. AKA S&L bailout bill

maturity

the date on which a bond investor can receive the initial investment

underwriting spread

the difference between the price paid by the investment bank and the price sold to the public

barter

the exchange of one good or service for another good or service

job fair

a recruiting event attended by one or more companies that are seeking new employees

share account

a savings account at a credit union

non-depository institution

a type of financial institution that does not accept deposits but accepts money from customers for the purpose of investing in business deals in order to spread risk and provide means of investment

savings and loan association (S & L)

a type of financial institution that helped customers save money by allowing small deposits and home loans; AKA savings association or thrift institution

retail bank

a type of financial institution that provides services for customers, such as deposit accounts, mortgages, auto and personal loans, and credit cards.

reserve requirement

the amount of money a bank must keep and not invest or loan out.

deregulation

Occurs when some or all regulations are abolished or overridden and governmental control is lessened.

foreclosure

The legal process of ending an owner's right to a property and transferring it to the lender

How does a fixed rate loan benefit the lender?

The lender knows how much it will earn and when the money will arrive

target market

The market segment that will be the focus of a marketing strategy

What is the purpose of a third party endorsement?

To transfer the payee's claim to the check's value to a third party.

Total income minus what equals profit?

Total income - total expenses = profit

What is the main difference between a traditional IRA and a Roth IRA?

Traditional - funds are taxed when distributed Roth- funds are taxed when contributed.

How does the Fed conduct monetary policy?

Three tools the Fed uses to conduct monetary policy: - open market operations - the discount rate - reserve requirements

What are the three types of depository institutions?

Three type of depository institutions: - commercial banks - savings associations - credit unions

Government sponsored enterprise (GSE)

An organization that is chartered and supported by the government to promote a public interest.

What are the three options a bank has if a borrower is unable to repay a loan?

- take the property if the loan was secured - negotiate with the borrower - take court action to recover lost funds

Bearer instrument

A negotiable instrument that is payable on demand to whoever has it.

In what banking career would you supervise the accountants and auditors in the bank?

Accounting manager

wire transfer

An electronic transfer of funds from one location to another location

third-party endorsement

An endorsement that transfers the payee's claim to the check's value to a third party.

customer

An individual, organization, or business that purchases a product or service.

Promissory note

An unconditional promise to repay a loan for a specific amount of money in the future or on demand

Why does a money market account earn more interest than a passbook savings account?

It has more restrictions of how many withdrawals can be made and how much money the owner must keep in the account.

How is the drawer identified on the check?

The ABA routing number should correspond with the name of the financial institution identified as the drawee.

What is the major purpose of the Sarbanes-Oxley Act?

The Sarbanes-Oxley Act was passed in 2002 to ensure more accurate disclosure of a company's financial information.

Federal Open Market Committee

The body of the Federal Reserve System responsible for making monetary policy

Liquidity

The ability of a financial asset to be quickly converted into cash without any financial loss; having enough cash available to meet normal withdrawals.

Accrued interest

The amount added to the principal at regular time periods

commission

a fee, such as the kind charged by a stockbroker for placing an order

commercial bank

a financial institution owned by investors that focuses on business customers, providing bank accounts along with specialized services such as foreign exchange, investment services, and capital loans; some also provide limited customer-oriented services such as personal checking and savings accounts.

deposit slip

a form that an account holder fills out when making a deposit that is a record of deposit info

charter

a legal document issued by a federal and a state government that details how a bank is to be operated and how it will be regulated

overdraft

a negative balance

interest rate

a stated cost for the use of borrowed money that is a percentage paid on top of the initial amount.

bank

a type of financial institution

stockholder

an investor who expects to make a return from his or her investment in stock

probate law

pertains to settling the financial affairs of a person after he or she has died

payday lender

provides short-term high-interest loans designed to cover expenses until the borrower's next payday.

clearing

the process of approving a check and transferring funds from one account to another.

Who owns commercial banks?

A commercial bank is owned by investors called stockholders.

Principal

An initial amount of money that is loaned or deposited

What are reserves?

Reserves are deposits kept back and not available to make loans

How much was federal deposit insurance under DIDMCA?

$100,000

Credit bureau

A company that gathers, analyzes, and summarizes credit-related information on consumers.

According to the Fair Billing Act, how long does a consumer have to dispute an error to his or her account statement?

60 days

Retirement

A person's withdrawal from active participation in a job or business

Contribution

An IRA deposit

Distribution

An IRA withdrawal

Mortgage-backed securities

Bonds that are guaranteed by the U.S. government.

advertising

Calling attention to a product or service, commonly through the use of paid advertisements

List the five C's of credit.

Character Capacity Capital Collateral Conditions

negotiable order of withdrawal (NOW) account

Checking accounts that can pay interest

Which executive is responsible for carrying out the policies that the board of directors establishes?

Chief Executive Officer (CEO)

What did the US Supreme Court decide in McCullough v. Maryland?

In McCullough v. Maryland, the US Supreme Court decided that the creation of a central bank was within the power of Congress

When must the phrase "Member FDIC" appear in a bank's communications?

In anything that promotes a deposit account or the bank as a whole. Must also appear on the homepage of the bank's website.

How are money center banks chartered?

Money center banks are chartered as national banks by the Federal Office of the Comptroller of Currency (OCC).

How is money created?

Money is created by banks when they make loans

Deposit

Money placed or transferred into a bank account.

Loan

Money temporarily transferred to a borrower in exchange for repayment and interest

Default

Occurs when a borrower fails to meet the terms of a loan agreement.

Branching

Opening banking facilities away from a bank's home office.

Benefits

Services, privileges, or rights that an employer provides in addition to the employee's wages or salary

In addition to the ability to set schedules and others, what skill must an information technology manager have?

Technical expertise in computer systems.

If a date is not specified in a negotiable instrument, when is it paid?

The negotiable instrument is paid on demand

Term

The number of years a loan will exist.

Conditions

The overall environment in which a loan will be given.

credit union

a financial institution that provides many of the same services as banks and S&L's, but owned by its members and run on a non-profit basis

app

computerized software program loaded onto a smartphone, tablet, or other mobile device that allows the user to perform specific tasks

deposit

money placed or transferred into a bank account

interest expense

money that a bank pays to customers for the use of their money

Name five ways banks safeguard money

record keeping, identification, enforcement, transfer security, sound business practices.

remote deposit capture

records deposit info that the account holder would otherwise have to enter manually when making an electronic deposit.

Credit score

A measure of risk based on a borrower's credit history.

surcharge

a fee charged by an ATM when cash is withdrawn, AKA a convenience fee

interest

a fee charged for borrowing money

premium

periodic payments made to purchase an insurance policy

What is another title for a branch manager?

Operations manager

Which law did the Interstate Banking Act override?

The McFadden Act

Jumbo CD

A CD for a large amount of money, usually $100,000 or more, with a high interest rate.

branch office

A banking facility that is not the bank's main location

rapport

A bond of mutual trust

What is the most common reason for loans to go into default?

A borrower failed to make payment when it was due.

Collateral

A borrower's property that is pledged to secure a loan

market segment

A group of consumers that share common wants and needs

need

Something a person must have to survive

Drawee

The party who pays the value of the negotiable instrument to the payee; often, this is the bank.

What type of expense are utilities?

Utilities are an operating expense.

Office of the Comptroller of the Currency (OCC)

established by the National Currency Act to create a uniform national currency and a system of national banks; was the first federal agency charged with bank supervision

National Credit Union Share Insurance Fund (NCUSIF)

established in 1970 to insure credit union deposits up to $250,000

decentralization

occurs when a central authority shares power with regional and local authorities

Name three characteristics of a savings account

- earns low interest rate - can add/withdraw money, or close acct any time - FDIC insured up to $250,000

What are four factors that can be used to determine groups in a bank's organization?

- function - number of people performing the same function - amount of money the group earns - geographic location

What are two possible consequences of poor work performance?

- Probation - Termination

What are the steps in recruiting and hiring a new employee?

- Recruit applicants - Interview selected applicants - Verify references - Hire the best applicant

List the types of commercial loans

- acquisition - acquisition and development - asset based - bridge - construction - development - construction improvement and rehab - Small Business Association (SBA)

What are the functional areas of bank compliance?

- advertising - anti-money laundering - the Bank Secrecy Act - depository operations - lending - loan servicing - loss prevention

What elements must be in a negotiable instrument?

- authorized signature - specific amount - unconditional promise to pay - payment date - payee

If a bank's deposits increase by $2500 and the reserve requirement is 10%, what is the potential increase in the money supply?

2500 (deposit) - 250 (10% requirement) = 2250 (excess reserves/increase in money supply)

trust officer

A bank employee responsible for providing customers with financial products and trust services

mortgage banker

A bank employee similar to a lending officer who deals only with mortgage loans

compliance officer

A bank employee who ensures the bank follows all state and federal laws and regulation, and implements strategies for compliance and reporting.

lending officer

A bank employee who evaluates applications for loans or lines of credit; AKA loan officer

information technology (IT) manager

A bank employee who implements the policies and procedures set by the chief technology officer or chief information officer and directs the work of the IT technicians

manager

A bank employee who is in charge of a segment of a business

public relations manager

A bank employee who is responsible for creating a positive image of the bank, including the design and implementation of promotions, coordination of sponsorship, and providing information to journalists

accounting manager

A bank employee who is responsible for the functions of the accountants and auditors in the bank.

branch manager

A bank employee who oversees the day-to-day activities of one branch of the bank; AKA operations manager

human resources (HR) manager

A bank employee who recruits new employees, ensures employees receive proper training, and enforces the bank's employment policies.

underwriter

A bank employee who reviews loan applications and approves or denies a loan.

chief information officer (CIO)

A bank executive involved in the technology the bank currently uses and responsible for solving issues with implementing new technology.

chief technology officer (CTO)

A bank executive responsible for developing new technology for use by the bank.

chief financial officer (CFO)

A bank executive responsible for financial planning, control, and record keeping for the bank

chief operating office (COO)

A bank executive responsible for the bank's daily operations and performance

chief executive officer (CEO)

A bank executive who is appointed by a corporate board of directors and is accountable to the corporation's stockholders, the public it serves, and legal authorities for the actions of the bank.

president

A bank executive who often serves in the role of CEO or COO

How does a bank panic usually start?

A bank panic is usually started by a run on a single bank

Why would a bank open a branch office?

A bank will open a branch office if doing so will increase profits.

What type of bank would a business owner likely use to deposit daily receipts as well as pay invoices and payroll?

A business owner would likely use a commercial bank to deposit daily receipts as well as pay invoices and payroll.

Social security

A federal program that includes financial benefits intended to supplement retirement savings for Americans

Interest

A fee charged for borrowing money.

Penalty

A fee for breaking the terms of an account

Pension

A fixed sum of money a company provides for its retired employees

department

A group created when several employees in a business are working on a specialized task.

board of directors

A group of individuals elected by a bank's shareholders to represent the shareholders and guide the bank's policies and business decisions.

Negotiable instrument

A transferable, signed document that represents the promise to pay a specific amount of money in the future or on demand.

Installment loan

A type of closed-ended loan for a large amount of money that is repaid smaller amounts over a specified period of time.

word-of-mouth advertising

A type of promotion in which customers tell others about their experience with a specific business.

Previous balance method

A way to calculate finance charges by using the amount the customer owed at the end of the previous billing period to calculate the interest owed for the current month.

Adjusted balance method

A way to calculate finance charges by using the balance from the previous month and subtracting payments made during the current period.

Average daily balance method

A way to calculate finance charges by using the card's beginning daily balance

Which method used to calculate finance charges is most favorable for borrower's?

Adjusted balance method

What does the Fed do with the money it earns?

After the Fed pays its expenses, it gives the extra money to the US Treasury, where it is applied to the national debt.

How often is interest compounded at most banks?

At least twice a year

What is the difference between automatic payments and a bill-payment service?

Automatic payment are set up by the customer once and all subsequent payments are made without additional action by the customer or vendor. When using a bill-payment service, the electronic transfer of funds from a customer's account to a vendor's account must be requested by the customer or the vendor each time a payment is due.

What is the most common method used to calculate finance charges?

Average daily balance method

Why do governments regulate banks?

Banks are essential to our society, our economy, and even the security of our government.

How can banks increase their profits?

Banks can increase their profit by increasing income and decreasing expenses

What are two ways banks earn income on securities?

Banks earn income on securities by charging interest and selling securities for more than its purchase price for a gain.

Which type of financial institution handles the most electronic funds transfers?

Banks handle the most electronic funds transfers.

How do banks make money from selling insurance?

Banks make money for selling insurance by collecting premiums on policies sold.

List four ways that banks engage with the communities they serve.

Banks often sponsor community events, such as marathons. They provide ongoing financial education to consumers. Bank executives often serve on civic boards and local chambers of commerce. Another way banks affect their communities is through the customer service they provide.

Why do banks pay interest to depositors?

Banks pay interest to depositors to entice them to use their bank rather than the competitor. And to have that money to loan and then make income of the interest they charge.

How did IRDs remove bank and customer concerns about the use of electron records?

Banks were no longer worried about the lack of a paper check that they could watch throughout the process -- they could now watch an electronic copy of the check instead. Customers were no longer worried about the lack of a cancelled check at the end of the process -- they could now view and print and electronic copy of the check as proof of payment.

In what ways is a bank like any other business? In what ways is it different from other businesses?

Banks, like any other business, sell their services to make money, and they market and manage those services in a competitive field. Banks are financial intermediaries essential to our economy.

Why is liquidation a possibility when dealing with bankruptcy?

Because the borrower may own property that can be sold for cash.

Why is an unsecured loan also known as a signature loan?

Because the borrower's promise to pay is shown by his or her signature on the loan agreement.

Why is a mortgage a secured loan?

Because the lender can take ownership of the real estate if the mortgage is not repaid.

Why is a CD also known as a time deposit or a fixed deposit?

Because the length of time and amount are specified.

How does commodity money derive its value?

Commodity derives its value from the value of the item being used as currency.

What does a market segment of consumers have in common?

Common wants and needs

When considering the risk posed by a commercial loan, what three things do lenders look at?

Company/organization's cash flow, collateral, and commercial debt ratio.

Which law requires that credit card issuers state the monthly payment amount necessary to pay off a cardholder's existing balance in 36 months?

Credit Card Accountability, Responsibility, and Disclosure Act; Credit CARD Act

Why is cross-selling sometimes referred to as relationship-based selling?

Cross-selling is the result of an existing relationship formed by selling a bank product or service to a customer.

What are some customer services offered by Federal Reserve Banks?

Customer services offered by Federal Reserve Banks: - Depositing a payroll check directly into a bank account - Automatic payment of some bills, (car, house, etc.) directly from the customer's account

How are ATMs a source of income for the bank?

Customers are typically charged a service fee for using ATMs belonging to other banks.

What aspect of a bill and account collector's job can make it stressful?

Customers can be confrontational when pressed to make payments

What is the main advantage of an online savings account?

Customers can now open accounts in other states or at a local bank.

How is a debit card different from a credit card?

Customers who use debit cards are not billed later like customers who use credit cards. Instead, money is immediately withdrawn from the customer's account and deposited in the vendor's account when the purchase is made.

To create a positive image of the bank, what must a public relations manager do?

Design and implement promotions, coordinate the bank's sponsorship of charitable activities, and provide information to journalists.

automated clearinghouse (ACH)

Electronic network for financial transactions that processes credit and debit transactions, processes checks, and transfers funds between banks.

bill-payment service

Electronic transfer of funds from a customer's account to a vendor's account that is requested by the customer or the vendor each time a payment is due

Sarbanes-Oxley Act (SOX)

Ensured accurate disclosure of a company's financial information by mandating greater transparency and accountability; enacted in 2002.

What role does a compliance department play in a bank?

Ensures the bank meets new and updated rules

Glass-Steagall Act

Established the FDIC, introduce banking reforms, separated investment banking from commercial banking, and established an interest rate ceiling. AKA Emergency Banking Act of 1933

What previous career experience may help someone to become a CTO?

Experience as an information technology manager.

What do financial institutions do?

Financial institutions conduct financial transactions such as investments, loans, and deposits.

Why is it important for bank employees to be able to explain the options the bank offers?

Financial products can be confusing for many people. Many of the financial decisions customers will make will have a major impact on their lives.

What are three hazards that safe deposit boxes protect their contents from?

Fire, flood, and theft

What are two advantages of direct deposit from an employee's standpoint?

First, funds are immediately available since a check does not need to clear. Second, direct deposit is safe because it eliminates the need to transport a check.

List four factors that lead to the bank failures during the Great Depression.

Four factors that lead to the bank failure of the Great Depression: - Crop failures in the 1920s - Changes in branch banking regulations - Stock market crash - Already large number of banks

List four types of treasury securities.

Four types of Treasury securities: -Treasury Bills -Treasury Notes -Savings Bonds -Treasury Bonds

What are four types of non-depository institutions?

Four types of non-depository institutions: - investment banks - securities firms - finance companies - insurance companies

direct deposit

Funds that are added directly into a bank account by electronic means instead of with a negotiable instrument

McFadden Act

Gave individual states the right to set their own rules regarding out-of-state banks coming into the state; enacted in 1927

In what banking career would you recruit new employees, ensure employees receive proper training, and enforce the bank's employment policies?

Human Resources (HR) Manager

What information is recorded on a deposit slip?

IDs the date of deposit, account receiving deposit, tracking numbers for checks deposited, amount of cash customer will receive, customer's signature.

In order for barter to occur, what is necessary?

In order for a barter to occur, a coincidence of wants is necessary

When can an employee make an early withdrawal from his or her 401(k)?

In the case of financial hardship, distribution is limited to the employee's contributions

How have the methods and locations for promoting a product changed?

In the past, promotion relied heavily on advertising. Advertising meant promotions on television and radio or in newspapers and magazines. Today, promotion is more dynamic. Advertising is only one option. Promotions can include almost any activity.

annual percentage rate (APR)

The actual annual interest rate paid over the life of a loan.

How do loans earn income for banks?

Loans earn income for banks by charging interest.

What is the difference between money market deposit accounts (MMDAs) and money market mutual funds (MMMFs)?

MMDAs are FDIC-insured.

List the major services offered by bank trust departments.

Major services offered by bank trust department: - Retirement planning - Open IRA, 401 (k), variable annuity - Estate planning - Prepare a will or trust document that arranges for transfer of assets - Estate settlement - Determines estate value - Prepares and files all necessary documents - Pays taxes - Distributes assets as called for in the will

E-compliance

Managing risks associated with electronic banking

Why is experience as a lending officer particularly helpful for someone who wants to move up in the banking industry?

Many upper-management positions are filled by people with experience as lending officers.

payment system

Method of transferring funds without cash

National Banking Acts of 1863 & 1864

Modified the National Currency Act, allowed the federal government to charter private banks, and created a uniform national currency

Federal Reserve Bank

One of the twelve regional branches of the Federal Reserve System that were created to avoid establishing a central bank in a single location

A credit card is considered what type of loan? Why?

Open-ended loan because the borrower need only make regular payments and the principal does not have to be paid in full.

How do banks used FedCash services?

Ordering additional currency and coins to meet the needs of customers

What two steps did ACHs remove from the check-processing procedure?

Paper checks no longer need to be mailed from bank to bank and cancelled checks are no longer returned to the drawer.

Farm Service Agency (FSA)

Part of the US Department of Agriculture that provides financial and logistical support to commercial farms, often in the form of loans or guaranties.

Home Mortgage Disclosure Act (HMDA)

Passed in 1974 to require most mortgage-lending institutions to report data related to mortgage loans in order to allow for transparency in lending.

PayPal is what type of payment system?

Paypal is a type of P2P payment system.

Why do people purchase insurance?

People purchase insurance to protect from risk that can cause financial loss.

automatic payment

Preauthorized electronic funds sent from a customer's account to a vendor's account a regular intervals

Depository Institutions Deregulation and Monetary Control Act (DIDMCA)

Removed many of the regulations passed during the Great Depression and allowed depository institutions to make more types of loans and investments; enacted in 1980

Equal Credit Opportunity Act (ECOA)

Required all lenders to make credit decisions based solely on credit qualifications; use of gender, marital status, race, religion, age, national origin, or whether an individual received public assistance benefits to determine whether that individual should get a loan is illegal; passed in 1974

Fair Credit Reporting Act (FCRA)

Required that credit bureaus collect and distribute information in a fair and legal manner and provided processes for correcting credit report errors; enacted in 1971

What are two qualities managers must possess to manage effectively?

Responsibility and authority

Why were rural citizens oppose to the First Bank of the United States?

Rural citizens were opposed to the First Bank of the United States because it took power away from the states and put it into the hands of eastern bankers.

What was the original purpose of savings associations?

Savings associations were originally organized to help people save money

benefits

Services, privileges, or rights that an employer provides in addition to the employee's wages or salary

Closing costs

Several fees that are applied when a mortgage is signed.

Annual percentage rate (APR)

The actual annual interested rate paid over the life of a loan.

transaction account

a bank account that allows the owner to use it to pay a third party, such as a checking account

What challenges does the trend mergers pose toward banks? What skills will these challenges require of those making careers in banking?

Smaller banks with limited resources will have to find unique ways to compete with the larger banks. The larger banks will have to find efficient ways to manage increased resources in multiple locations. Employees of large banks may become more specialized in certain areas.

Historically, how did individuals pay for retirement?

Social security benefits and company pension

want

Something a person would like to have, but does not need to survive

How do stockbrokers make their money?

Stockbrokers make their money through commission

Which position in a bank is responsible for front-line operational support

Tellers

How do the duties of the CEO differ from that of a COO?

The CEO sets the strategic vision of the bank, while the COO is responsible for monitoring the bank's daily operations, which helps shape the policies created by the CEO.

Why is it necessary for a CFO to be a CPA?

The CFO supervises all accounting tasks, including preparing and monitoring the bank's budget.

Why was the FDIC established?

The FDIC was established to promote public confidence in the banks after the Great Depression

Name two federal agencies that were eliminated under the FIRREA.

The FSLIC and the Federal Home Loan Bank Board.

How does the Fed use its entire toolset to maintain the stability of the financial system?

The Fed monitors the economy, supervises and regulates member banks, and serves as the nation's bank to maintain the stability of the financial system

Why did the Fed's designers want to avoid making the Fed a single bank in New York?

The Fed's designers did not want the Fed to be located only in New York because New York is the home of Wall Street and many high-powered financial institutions. Many feared it would be affected by the needs of the stock market and financial institutions in New York.

What is the Federal Open Market Committee responsible for?

The Federal Open Market Committee creates monetary policy.

What is the largest automated clearinghouse in the US?

The Federal Reserve Bank is the largest automated clearinghouse in the US.

How did the Glass-Steagall Act affect interest rates?

The Glass-Steagall Act established an interest rate ceiling on savings and time deposits.

What two things did the Office of the Comptroller of the Currency accomplish when it was first created?

The Office of the Comptroller of the Currency created a uniform national currency and a system of national banks, when it was first created.

Equity

The difference between real estate's value and the amount owed for the real estate; equity belongs to the owner.

When is the discount rate set?

The discount rate is set every two weeks.

responsibility

The duty to complete an assigned task well

Payee

The entity receiving the money

Drawer

The entity who signs the negotiable instrument to validate it; AKA maker

What is the fractional reserve system?

The fractional reserve system is a system that requires that banks and other depository institutions keep a fraction of their deposits in reserve

What are the three functions of money?

The functions of money: - medium of exchange - unit of account - store of value

customer service

The handling of all interactions between a customer and a bank

public image

The ideas and opinions that people have about business

What factor is most important to savers with long-term goals?

The interest rate

Periodic interest rate

The interest rate the lender applies to a loan's outstanding balance to calculate the finance charge each billing period.

What is the largest expense for banks?

The largest expense for banks is the interest paid on deposits

What is major source of income from brokerage services?

The major source of income for brokerage services is commission.

Cap

The maximum increase that can be applied to a monthly loan payment, or the maximum interest rate increase the rate is adjusted

interest rate ceiling

The maximum rate that a bank can pay on certain deposits

How do banks control word-of-mouth advertising?

The only control banks have over word-of-mouth advertising is the customer service they provide. It is up to the bank to foster positive relationships with customers by excelling in every interaction.

Savings

The portion of income that is not spent.

authority

The power to affect or direct a situation or a worker's behavior

What is the primary business of finance companies?

The primary business of finance companies is issuing loans

What is the primary source of income for most banks?

The primary source of income for most banks is interest from loans.

How is the Federal Reserve System set up differently from its predecessors?

The structure of the Fed, including its location and organization, is meant to safeguard against corruption.

Why is the time from 1837 to 1863 known as the era of free banking?

The time from 1837 to 1863 was known as the era of free banking because all bank functions were handled by state banks.

Finance charges

The total dollar amount of interest and any other fees paid on the loan

finance charge

The total dollar amount of interest and any other fees paid on the loan.

collection

The transfer of past-due loans to a bank department or outside agency that attempts to gather full or partial repayment of the loan

What are the two most important disclosures that are required under the Truth in Lending Act?

The two most important disclosures that required under the Truth in Lending Act are the annual percentage rate and the total finance charges on a loan.

How is a money order different from a traveler's check?

They are not used as cash because the cannot be refunded if lost or stolen

Why would a consumer use a home-equity loan to pay off credit card debt?

They will owe the same amount if the transfer the from a credit card to an equity loan. However, the interest rate for an equity loan is lower, so they will pay less interest.

What type of bank typically has only one or two locations?

Unit banks typically have only one or two locations.

Who conducts a performance review?

Usually done by the employee's manager. Some companies also ask coworkers or workers who report to the employee to participate in the review

Compensation

Wages and financial benefits earned by working

Underwriting

When lenders analyze risks and set conditions on the loan.

Mature

When the fixed term of a CD expires and the account can be accessed without paying a penalty

garnishment

Withholding all or part of a borrower's salary to pay an outstanding debt

gold-exchange standard

allowed foreign governments, but not individuals, to redeem US dollars for gold.

online banking

allows customers to conduct financial transactions on a secure website operated by their bank; AKA home banking

peer-to-peer payment (P2P)

allows for an immediate money transfer from one person to another.

promotion

an activity that increases consumer awareness of a product

money order

an amount of money that is purchased in an exact amount payable to a specific party

gain

an increase in income that occurs when a bank sells a security for more than its purchase price.

Federal Deposit Insurance Corporation (FDIC)

an independent Federal agency established in 1933 that provides deposit insurance up to $250,000 for depositors in insured banks and thrifts in the case of bank failure.

safe deposit box

an individually secured container usually kept within a bank vault to store valuables

financial intermediary

an institution that acts as a go-between in financial transactions

image replacement document (IRD)

another term for a substitute check, usually an electronic copy.

electronic funds transfer (EFT)

any exchange of money from one account to another through computer-based systems that is started by electronic means

financial institution

any organization or business that provides services related to monet

money

anything that is exchanged for goods or services

commodity

anything that is useful or has value

fiat money

money that has value because the government says it has value.

legal tender

money that mus be accepted for payment of debts or to make purchases

bank run

occurs when a large number of depositors withdraw all of their money from a bank at the same time due to fear that their money is unsafe.

acquisition

occurs when are company buys another company and sets itself up as the new owner

coincidence of wants

occurs when two people each want what the other has to offer.

pension fund

plan that provides retirement income for the employees of a business

estate planning

preparing for the transfer of assets after a client's death.

liquidity

the ability of a financial asset to be quickly converted into cash without any financial loss; having enough cash available to meet normal withdrawals

divisibility

the ability to be broken into smaller parts

trading

the buying and selling of securities by a broker

risk

the chance that an unfavorable event will happen to a person or property.

aggregates

the different measures that are compiled from a collection of data sources by which the money supply is measured.

excess reserve

the funds available for a bank to loan out after its reserve is met.

Board of Governors

the governing body of the Federal Reserve System

beneficiary

the individual who receives financial protection from an insurance policy.

discount rate

the interest banks pay to borrow money from the Federal Reserve Bank

prime rate

the interest rate that banks charge their best customers

prime rate

the interest rate that banks charge to their best customers

monetary system

the mechanism a nation uses to provide and manage money for itself

blank endorsement

the payee's signature

era of free banking

the period from 1837 to 1863 during which all bank functions in the US were handled by state banks, and federal funds were held in the US Treasury.

trustee

the person or institution that controls financial assets for the customers

insured

the person or thing covered by an insurance policy

money multiplier effect

the phenomenon that occurs when the new deposits increase the money supply by more than the original deposit

estate

the property and possessions of an individual, which may include property, cars, money, or other assets.

endorsement

the signature used to legally transfer the value of a check

money supply

the total amount of money available in an economy at a given time in.

denomination

the unit in which money is available

profit

when a bank's income exceeds its expenses

underwriting

when lenders analyze risks and set conditions on the loan

inflation

when too much money in the economy result in rising prices

merger

when two companies agree to combine

bank panic

widespread worry that banks do not have enough money to cover customer demands for withdrawals