competency 4.02 understand the banking system
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Competency 4.02Understand the Banking System
Objective 4.02-A
Analyze the roles/responsibilities of the Federal Reserve.
4.0 Understand the Role of Finance in Business
The Federal Reserve System
What is the Federal Reserve System?
Why does it exist?
Who participates?
How is it organized?
The Federal Reserve (The Fed)
A Centralized Banking System
Federal Reserve Act signed into law by President Woodrow Wilson
Organized by the Federal Government in 1913 Why have “ The Fed” ? Purpose:
To establish and maintain confidence in the US monetary system To ensure a safe, healthy and stable economy To supervise and regulate member banks and help serve the public
efficiently.* Prior to the Federal Reserve Act anyone could issue currency or coin
money
Who Participates in Federal Reserve? 1) All National Banks are required to be part of the Fed
1) Optional for state banks
2) Divisions are called DISTRICTS3) There are 12 DISTRICTS in the United States4) Every state comes under a district5) Each Federal Reserve Bank is a corporation, owned by its member
banks
NC is in District 5, the Richmond District.
The Federal Reserve
What are the two arms of “The Fed”? Board of Governors
Represents the government (public) sector District Federal Reserve Banks
Represents the business (private) sector
Board of Governors Usually meet about
twice a week, ordinarily on Mondays and Wednesdays
Public is invited to look into the meetings of the Board of Governors
Usually discuss monetary policy such as lowering and raising interest rates
The Board Room at the Federal Reserve in Washington, DC
Members of the Board of Governors Ben S. Bernanke, Current Chairman
Alan Greenspan, Retired Chairman
Chairman is appointed by President and confirmed by Senate Similar to procedure for Supreme Court Justices
Purpose of Federal Reserve
Established to supervise and regulate banks1. Known as the “Bank’s bank”
2. The central bank of the United States
3. Assists banks with serving the public more efficiently
4. All national banks are required to join the Federal Reserve System
5. State banks have the option of joining the system
The Federal Reserve System Services1. Supervision of banks
2. Agent for the federal government
3. Regulates monetary policy
4. Lends money to member banks
5. Acting as a clearinghouse
6. Participation in open market activities
7. Sets loan limits & standards
8. Supplies currency
1. Fed Supervision: Set Reserve Requirements Member banks are required to keep a
certain percentage (10% for many years) of all deposits in the bank’s vault or on deposit with the district federal reserve bank
Reserves: funds set aside for emergencies Example: a rush of withdrawals by customers
Purpose: to reduce risk of bank panics and protect depositor’s money
1. Fed Supervision: Audits Member BanksInspects banks by auditing financial records Audit -an inspection of records to verify the:
1. accuracy of books (records) of the bank2. bank is complying with banking laws
Similar to Individuals/corporations who are audited by the IRS to review the accuracy of a tax return.
1. FED Supervision: Approves Bank MergersQ: Why do banks merge? To be more competitive
-to offer customers more locations (local, regional, national, international)-to offer a variety of services more efficiently-to compete with a growing array of other financial service companies such as:
*money market and other mutual funds*mortgage companies*credit unions and *credit arms of industrial firms (General Electric and Ford Motor)
Here are some recent bank mergers approved by “The Fed” in 2007-2008 Bank of New York bought Mellon Financial Corporation for $18.3 Billion JPMorgan Chase bought Bear Stearns for $1.1 Billion Bank of America bought Merrill Lynch Bank of America for $50 Billion Wells Fargo bought Wachovia for $15.1 Billion
2. Fed Acts as Agent for Federal Government
The Fed holds a checking account for the US Treasury
Disburses social security benefits and other transfer payments using the direct deposit system
Accepts some types of federal tax money
Example: Federal tax depositories
Payroll taxes - federal income tax, FUTA, and social security taxes are deposited using federal deposit coupon into a national bank
3. FED Regulates Monetary Policy What is Monetary Policy?
When the Federal Reserve influences money and credit conditions in the economy to achieve economic goals
How? The Fed determines amount of money in circulation and available for loans, then either increases or decreases to stabilize/stimulate the economy Tight money- policy when less money is available at
higher interest rates, slows (stabilizes) economy Loose money- policy when more money is available at
lower interest rates, increases (stimulates) economy
4. FED Lends Money to Member Banks
Monitors the discount rate of interest - rate used by the Fed to loan money to member banks Compare banks to intermediaries (go-betweens) trading in
money at “wholesale” prices
The Fed changing interest rates affect borrowers (member banks) who pass rates to consumers
Raising rate - discourages borrowing Reducing rate - encourages borrowing
Note: the Federal Reserve does not loan money to individuals or businesses (only member banks) HOWEVER, rates the Fed charges member banks “trickle down” and affect the interest rates for consumers
5. FED Acts as Clearing House Clears/Processes/Settles checks for
member banks Federal Reserve uses the Automated
Clearing House (ACH) to electronically complete fund transfers (check settlements) between banks
Interdistrict Settlement Fund in Washington, DC used for between district transfers
Checks/deposit slips have MICR coding Magnetic Ink Character Recognition
Scanners read MICR on checks to electronically process data accurately and rapidly through the ACH and Interdistrict Settlement Fund
6. FED Participates in Open Market Participates in open market operations by buying and
selling government securities Q: What are government securities?
A: Treasury bills and bonds – loans to government in various denominations (amounts) and for various time periods
Advantages and Disadvantages+ offer a fixed rate of interest over a fixed period of time
+ attractive because not subject to income taxes
- cannot be easily transferred and are non-negotiable
Open Market Operations
Government securities are sold at a discount (from face value), but are redeemed (cashed in) for face value on the maturity (due) date
Examples: Purchase treasury note for $7500 (discount price),
redeem at maturity date for $10,000 (face value) Purchase Series EE savings bond for $25, redeem
in 7 years at maturity for $50
Government Securities Savings bonds - Example Series EE-
Denomination minimum $25 Payable after 6 months Earns interest up to 30 years
Short-term obligation of the U.S. Treasury Treasury bill – maturity in one year or less Issued to mature in 13 weeks, 26 weeks, 52 weeks
Long-term obligation of the U.S. Treasury Treasury note – maturity at 1 to 10 years, minimum $1000 Treasury bond - maturity at 10 + years
Open Market Operations
Bank discount rates encourages borrowing by member banks, and therefore encourages borrowing by consumers
Purpose of open market operations1. Regulate money supply
Most frequent method of controlling the economy Who controls open market operations?
Federal Open Market Committee (FOMC)-
A committee within the Federal Reserve
7. The FED Sets Lending Standards Sets standards for
consumer legislation dealing with lending and credit
Sets limits for loans and investments by member banks
News: Federal Reserve revised bank lending rules since banking crisis
Ex: Lower % of total loans for land/acreage
8. The Fed Supplies Currency Money defined:
a medium of exchange for value US money = currency and coins
Federal Reserve supplies paper currency Legal Tender for all debts, public and private Paper currency supplied is “Federal Reserve Notes”
Printing currency (paper money, bills) Bureau of Printing and Engraving Counterfeiting - federal crime
Coinage Minting supplied and regulated by the Department of
Treasury, US Mint
St. Louis Federal Reserve
http://www.stlouisfed.org/education_resources/
Topics
Classification of financial institutions Depository Non-depository
Common payment services Electronic Funds Transfers Online Bill Pay Checking Accounts Specialty checks Money Orders
Classification of Financial Institutions Depository
Earns money to finance their business by accepting deposits from customers
Types include: Commercial banks- full service - offer many different
services, including savings, loans, and checking accounts. Savings and Loan associations (S&Ls) -traditionally
specialize in savings and home loans, but now are very similar to commercial banks.
Mutual savings banks- owned by the depositors and specialize in savings and home loans.
Credit unions- not-for profit, serve their members only, and are owned by their depositors.
Classification of Financial Institutions Non-depository
Earns money to finance their business by selling specific services such as policies, investments, and loans
Types include: Life insurance companies -term, whole, universal Investment companies - stocks, bonds, mutual funds Consumer finance companies – higher rates if bad credit Mortgage companies – loan $ for land, buildings, homes Check-cashing outlets –fee based if do not have bank acct Pawnshops –loan $ based on value of item pawned
How To Compare Financial Institutions Which characteristics of financial institutions
are of interest? Services offered Safety Convenience Fees and charges Restrictions
What kinds of questions may be asked about each characteristic?
Comparative Questions
Services – Does the institution offer needed services? Savings Depository for payroll taxes Checking
Various options to meet customer needs Loans
Short term - working capital Long term - mortgage
Credit cards Debit cards Safe deposit boxes Trust management
Comparative Questions
Safety – Is the institution insured against losses? Federal Deposit Insurance Corporation (FDIC)
Created by Congress to maintain stability and public confidence in the nation’s financial system: insures deposits, supervises financial institutions
National Credit Union Administration
(NCUA) Charters and supervises credit unions
Comparative Questions
Convenience – Does the institution offer the access desired? Physical locations available Online services
Easy to access & use ATM machines
Comparative Questions
Restrictions – Are there minimum balances that must be kept, or other restrictions?
Minimum balance- $ amount required to stay in account at all times If account keeps minimum balance, fees are often
waived (eliminated)
Comparative Questions
Fees and Charges – What are the short and long-term costs of the services? Flat monthly fees Fees per transaction
NSF (Non-sufficient funds) fees Checks written Debit transactions
# of transactions allowed before fees begin Minimum balance required to eliminate fees
Common Payment Services
Electronic Funds Transfers Online Bill Pay Checking Accounts
Personal, business Specialty checks
Certified, Cashier’s, Traveler’s Money Orders
Postal, Express, Telegraphic
Online Bill Pay
Use the web to make payments Often fee based Privacy can be issue
Change PIN frequently Use only “safe” sites
Write Online Bill Pay questions 1-3 from next slide on notebook paper. Use the website to answer the questions.
http://banking.about.com/od/bankonline/f/setupbillpay.htm
Online Bill Pay Questions
1. What are the two types of online bill pay?
2. What is automatic bill pay?
3. Choose link Banking 101Choose link 3 reasons to avoid online banking.
List 3 reasons given.
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Common Payment Services - EFTElectronic Funds Transfer (EFT) Banking method in which computers and electronictechnology is used as a substitute for checks and otherpaper forms of banking
Electronic Funds Transfer Options: Automated Teller Machines (ATM’S) Pay-By-Phone Systems Direct Deposit or Withdrawals
Paychecks, automated bill payment Point-of-Sale Transfers
Debit Cards Automatic Deposits and Payments
Checking Accounts
Used by business and individuals to manage cash transactions
Check- A preprinted form issued by the financial
institution Account holder directs withdrawals by writing
checks Parties to a Check
Payee, Drawee, Drawer
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Parties to a Check
Melanie PaigeCharles Paige 319619 Main StreetRaleigh, NC 27601 2-131/1034
July 16, 2010Pay To the Order of _____Donnie Tatum______________________$100.50_One hundred and 50/100 ---------------------------------------------------DOLLARS
State Credit Union
For _______________ Charles Paige
2131/1034:78434 234320 100.50 07-18-2010 2251
Drawer’s Name & AddressJoint Account Payee Check
Date
Drawer’s Signature - Last item completed on check!
Bank Name - Drawee
CheckNumberABA #
MICR Banking #sMemo
Record Keeping
IMPORTANT:
Keep a current balance in check register or on check stub by:
Recording deposits Recording withdrawals
Checks written EFTs Bank Fees
Common Payment Services
Special Checks Travelers check
Requires 1st signature when check issued Requires 2nd signature when check used
Go to link below and read about traveler’s checks and how they work.
http://usa.visa.com/download/merchants/visa_travelers_cheques_acceptance.pdf
Traveler’s Checks
Traveler’s Checks – Draft drawn by a well-known financial institution on itself or its agent, used when traveling
Go to website http://www212.americanexpress.com/
dsmlive/dsm/dom/us/en/personal/cardmember/additionalproductsandservices/giftcardsandtravelerscheques/travelerschequesandforeigncurrency.do?vgnextoid=6d17fc671492a110VgnVCM100000defaad94RCRD
Write questions 1-3 on notebook paper. Use the website to answer the questions.
Click on Learn More about Travelers Checks.
1. List the 4 steps in how to use travelers checks.
2. List 5 ways Travelers Checks mean Peace of Mind.
3. What is the benefit of Cheques for Two?
Certified Check
A certified check is written by a bank for you from your bank account to give to someone.
It's guaranteed funds that the bank reserves from your account.
Go to website: http://www.superpages.com/supertips/what-is-a-certified-check.html
Write Certified Check questions 1-5 from next slide on notebook paper. Use the website to answer the questions.
Certified Check Questions
1. Who issues a certified check?
2. Give two examples of when you might need a certified check?
3. Why can’t a certified check bounce?
4. Why does a creditor require a certified check?
5. Do banks charge a fee for a certified check?
Cashier’s Check SampleCashier’s Check – A check the bank draws on itself
Common Payment Services
Money Order Draft issued by a
post office, bank, express company, or telegraph company for use in paying or transferring funds for the purchaser
Orders issuing agency to pay amount printed on form to another party
Types of Money Orders: Postal money order Express money order Telegraphic money order
Go to website http://en.wikipedia.org/wiki/Money_order
Write questions 1-5 from next
slide on notebook paper. Use
the website to answer the
questions.
Money Order Questions
1. For what amount of money is a money order issued?
2. When was the Postal Order system established?
3. What is a concern about using money orders?
4. Who usually sells money orders in the United States?
5. Name 5 security features of a postal money order.
Common payment services
Opening a checking account Signing a signature card is the first step
Writing a check for payment Endorsing a check for deposit
An endorsement allows the payee to cash the check, deposit the check or transfer payment of the check to someone else.
Different types of endorsements: Blank Full Restrictive
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Check Endorsements
Definition: Signature on the back of a checkWhat does an endorsement do?
Allows payee to cash, deposit or transfer payment of the check to someone else
Provides proof that the payee cashed or transferred payment of the check to someone else
How should a check be endorsed? Endorser (payee who is signing) should sign the check the
way it is on the front of the check and if the name is misspelled, correct the signature directly up under the first endorsement
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Blank Endorsements
Signed with endorser’s name only (endorser is payee from front of check)
Can be cashed by anyone who holds the check with a blank endorsement!
Don’t use blank endorsement before you are ready to cash or deposit!
X Jane Doe
DO NOT WRITE BELOW THIS LINE
Should match payee’s name
Special Endorsement Transfers payment of a check
to someone else. Payee signs check , then
writes “pay to the order of” another person
Can be used to make payment on a debt Juan is payee on check Juan owes Maria money Juan transfers payment to
Maria.Might also endorse:
Juan Delgadopay over to Maria Fernandez
Debt = money owed
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Full Endorsement Example Transfers payment to
someone else Payee signs the
check over to another person to receive payment
Who was payee on check? John
X Pay to the order of
Jane Doe
John Doe
DO NOT WRITE BELOW THIS LINE
Restrictive Endorsement
Limits use of the check so it can be deposited only to endorser’s account.
Safest type of endorsement
Cannot be cashed by a thief or someone who finds the check
Best to use when mailing a check for deposit or when using the ATM for deposit.
Check Writing Procedures
1. Write information in the check register first, (ensure checks are written in numerical order)
2. Write the date the check is written.
3. Write the payee’s name.
4. Write in the numerical amount of the check.
5. Write in the amount of the check in words.
6. Write in the purpose of the check.
7. Sign the check.
How Do I Know the Amount in my Checking Account?Keep a Check Register or
Check Stub Balance
a. Subtract checks written (or debit card transactions) from balance
b. Add deposits to balance
c. Keep a running balance after writing checks or making deposits
Check Register is YOUR documentation of how much money is in your account?
What if mistakes are made?
You will make corrections when you reconcile (balance) bank statement
Bank Reconciliation
What is a bank reconciliation? Document that shows two equal balances
Your record of your checking account The bank’s record of your account
Do they have the same $ balance? Yes, or reconciliation is not complete! Reconciliation helps to find/correct any
mistakes in your register!
Outstanding Checks
What is an outstanding check? Outstanding checks are checks that have not
cleared (been deducted from) the bank statement balance.
Need to know items outstanding in order to reconcile statement
How to know if checks are outstanding: Find out which checks /deposits are outstanding
by comparing the bank statement with the checkbook register
Reconciling a Checkbook
Makes sure the bank’s records agree with your records1. Check for outstanding checks and deposits
2. Check the checks, deposits, ATM activity on the bank statement to make sure that your records are correct
3. Make adjustments to the bank statement and your records to ensure that you and the bank have the same amount of money
4. Reconcile every statement upon receipt
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Steps in a Bank Reconciliation1. Obtain the monthly bank statement.
2. Determine checks paid.
3. Find differences between the monthly bank statement and monthly check register.
4. Calculate the adjusted balance.
5. If the balances do not agree, check the steps again and recalculate.
6. Account balances must be equal!
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