Guided Notes 4.02 Understand the Banking System

GUIDED NOTES 4.02 UNDERSTAND THE BANKING SYSTEM

PART A: FEDERAL RESERVE SYSTEM

1. What is the Federal Reserve System? A banking system AKA The Fed. President Woodrow signed the Federal Reserve Act into law. Organized by the Federal in . The purpose of The Fed is

a. To and confidence in the US system.

b. To ensure a , and stable

c. To supervise and member and help serve the efficiently.

d. Prior to the Federal Reserve Act could issue or coin

2. Who participates in the Federal Reserve?

a. All banks are to be part of the Fed

a.I. Optional for banks

b. Divisions are called

c. There are districts in the

d. Every comes under a

e. Each Federal Reserve is a owned by its banks.

f. NC is in , the District.

3. What are the arms of The Fed?

a. Board of = represent the (public) sector.

a.I. Usually meet about a week, ordinarily on and NAME

a.II. Public is to look into the meetings of the Board of

a.III. Usually discuss policy such as and interest rates. Current chairman of the Board of Governors is ; Alan is the retired chairman. Chairman is by the and by similar to procedure for Supreme Court

b. District Reserve = represents the business ( ) sector.

4. Purpose of Federal Reserve

a. Established to and regulate

b. Known as the “ “

c. Assists with the more efficiently

d. All banks are to join the Federal Reserve

e. State banks have the of the system

5. Federal Reserve System Services

FEDERAL SUPERVISION

a. Fed Supervision: set requirements. Banks are to keep a certain percentage ( for many years) of all in the bank’s or on with the federal reserve bank.

a.I. Reserves = (money) set aside for

a.I.a. Example: a rush of by

a.II. Purpose: to risk of bank and protect money

b. Fed Supervision: member banks. Inspects banks by financial records.

b.I. Audit = an inspection of to verify the of books (records) of the ; bank is with banking . Similar to Individuals/ who are audited by the to review the of a tax return.

c. Fed supervision: approves bank .

c.I. Banks merge to be more

c.I.a. To offer customers more (local, regional, national, )

c.I.b. To offer a of more efficiently

c.I.c. To with a growing array of other service companies such as: money and other mutual funds, companies, credit and credit arms of industrial firms (General Electric and Ford Motor)

AGENT FOR FEDERAL GOVERNMENT

6. Fed acts as of government. The Fed holds a account for the US

a.I.a. Disburses benefits and other transfer payments using the deposit system NAME

b. Accepts some types of federal money. Example – Federal tax such as payroll taxes, federal income tax, and social security taxes are using federal deposit into a national bank.

MONETARY POLICY

7. Fed regulates .

What is monetary policy? When the Federal Reserve money and conditions in the to achieve economic . How? The Fed determines the of money in and available for , then either or to stabilize/stimulate the economy.

a.I.a. Tight money – policy when money is available at interest rates, (stabalizes) economy

a.I.b. Loose money – policy when money is available at interest rates, (stimulates) economy

8. Fed money to member banks. Monitors the of interest which is the used by the Fed to money to banks. Compare banks to (go-betweens) trading in money at “ “ prices. The Fed charging interest rates affect (member banks) who pass rates to .

a.I.a. Rate = borrowing

a.I.b. Rate = borrowing

NOTE: the Federal Reserve loan money to or (only member banks) HOWEVER, rates the Fed charges member banks “ “ and affect the rates for

9. Fed acts as house. Clears/ /settles checks for member banks. Federal Reserve uses the (ACH) to complete fund (check settlements) banks. Interdistrict Settlement Fund in used for district transfers. Checks/deposit slips have MICR coding ( NAME

Recognition). Scanners read on checks to process data and through the ACH and Interdistrict Settlement Fund.

OPEN MARKET POLICY

10. Fed participates in operations by and government . What are government securities? Bills and - loans to government in various (amounts) and for various periods.

Advantages and Disadvantages = + offer a rate of interest over a fixed of ; + attractive because not subject to ; - cannot be easily and are .

Open Market Operations – government securities are sold at a (from face value) but are (cashed in) for face value on the (due) date.

Examples: Purchase treasury for $7,500 ( price), redeem at date for $10,000 ( ). Purchase Series EE savings for $25, redeem in 7 for $25, redeem in 7 at for $50.00.

11. Government

a.I.a. Savings Bonds – Example

a.I.a.a. Denomination minimum

a.I.a.b. Payable after

a.I.a.c. Earns interest to

a.I.b. Short-term of the US

Treasury - maturity in year or Issued to in , or

a.I.c. Long-term obligations of the US Treasury - maturity at to years, minimum ; Treasury - maturity at years NAME

12. Bank rates encourages by member banks and therefore borrowing by . The purpose of us to regulate the . It is the most method of controlling the Who controls the open market operations? Federal Market Committee (FOMC) – A committee within the Reserve

LENDING STANDARDS

13. Sets for consumer dealing with and . Sets limits for and by member banks. NEWS: Federal Reserve revised bank rules since banking . Ex. Lower % of total loans are for / acreage

SUPPLIES CURRENCY

14. Money is a of for . US money is and .Federal Reserve supplies currency. Legal for all , public and private. Paper currency supplied is “ “ Printing currency (paper money, ) Bureau of and . Counterfeiting is a federal . Coinage is MINTED (supplied) and regulated by the Dept. of , US

PART B: BANKING

CLASSIFICATION OF FINANCIAL INSTITUTIONS

15. Depository Financial Institution: earns money to their business by accepting from . Types include:

a. Commercial - full service, offer many services including , , and accounts NAME

b. Savings and Associations (S&Ls) – traditionally specialize in and loans, but now are very similar to banks

c. Mutual banks –owned by the and specialize in and home

d. Credit - for , serve their only and are by their

16. Non-depository Financial Institution: earns money to finance their by specific such as policies, and .

a. Life companies – term, , universal

b. Companies – stocks, , mutual funds

c. Consumer companies - rates if bad credit

d. Mortgage companies – loan money for , and homes

e. Outlets – based; used if you do have a account

f. Pawnshops – loan money based on of item

17. Which characteristics of financial institutions are of interest?

a. Services

c. Convenience

d. Fees and

18. SERVICES: does the institution offer services? NAME

a. Savings

b. Depository of taxes

c. Checking – various to meet customers

d. - short-term for capital, long-term for

e. Cards

f. Cards

g. Safe boxes

h. Trust management

19. SAFETY: Is the institution insured against ?

a. Federal Corporation (FDIC)

Created by to maintain stability and public confidence in the nation’s system: insures , supervises financial

b. National Association (NCUA) charters and supervises

20. CONVENIENCE: Does the institution offer the desired?

a. Physical available

b. Services are easy to access and use

c. ATM

21. RESTRICTIONS: Are there balances that must be kept or other restrictions?

a. Minimum - money amount to stay in at all times. If account keeps minimum balance, are often (eliminated) NAME

22. FEES AND : What are the short and long-term of the services?

a. Flat fees

b. Fees per

b.I. NSF ( funds) fees

b.II. Checks

b.III. Debit

c. Number of allowed fees begin

d. Minimum balance required to fees

23. COMMON SERVICES

a. EFT – Electronic Funds

b. Bill pay

c. Checking (Personal or business)

d. Checks: Certified, , Traveler’s

e. Money orders - , Express,

24. ONLINE BILL PAY

a. Use the to make

b. Often based

c. Privacy can be an issue – Change frequently; use only sites

Answer questions 1 – 3 in space provided:

______NAME

______

25. COMMON PAYMENT SERVICES – EFT

a. Electronic Funds Transfer – banking method in which and technology is used as a for and other paper forms of

a.I. Automated Teller Machines ( )

a.II. Pay by systems

a.III. or Withdrawals – paychecks, automated bill payment

a.IV. Point of Sale transfers - cards

a.V. Automatic and

b. Checking accounts – used by and to manage transactions.

b.I. Check – a form issued by the institution. Account holders withdrawals by writing checks. Parties to a check = Payee, Drawee and Drawer

Who is the:

Payee: NAME

Drawee:

Drawer:

RECORD KEEPING – keep a in check registry or on check stub by: recording , recording (checks written, EFTs, and bank fees)

c. Traveler’s Check – used by travelers for safety. Requires 1st when check is issued and 2nd signature when check is . Draft drawn by a well-known financial institution on or its agent.

Answer questions 1 – 3 in space provided:

d. Certified check is written by a for you from bank account to give to someone. It is funds that the bank reserves from your account.

Answer certified check questions 1 – 5 in the space provided: NAME

e. Money order – draft issued by a , bank, express company or company for use in paying or funds to the purchaser. Orders agency to pay amount on form to another party. Types of money orders: money order, money order, money order.

Answer money order questions 1 – 5 in the space provided:

OPENING A CHECKING ACCOUNT

26. Signing a card is the step.

27. Writing a check for

28. Endorsing a check for

a. An allows the to cash the check, the check or payment of the check to someone else. Different types of endorsements are:

a.III.

b. Definition: on the back of a check

c. Provides that the cashed or transferred payment of the check to someone else

d. Endorser (payee who is signing) should the check the way it is on the of the check and if the name is , correct the directly the first endorsement

e. Blank endorsement – signed with the endorser’s name only ( is the from the of the check). NAME

Can be cahsed by who holds the check with a endorsement. Don’t use blank endorsement you are ready to cash or deposit

f. Special endorsement - payment of a check to someone else. Signs check, then writes “pay to the order of” another person, can be used to make payment on a .

f.I. Full endorsement – transfers to someone else; signs the check over to person to payment.

g. Restrictive endorsement - use of the check so it can be only to account; type of endorsement; cannot be by a or someone who finds the check; best to use when a check for deposit or when using the ATM for .

CHECK WRITING PROCEDURES

29. Write information in the first (ensure checks are written in order)

30. Write the the check is written

31. Write the name

32. Write in the amount of the check

33. Write in the amount of the check in

34. Write the of the check (memo)

35. the check

CHECK REGISTER OR CHECK STUB BALANCE

36. How do I know the amount in my checking account?

a. checks written (or debit card transactions) from balance

b. deposits to balance

c. Keep a balance after checks or making .

d. The check register is documentation of how much money is in your account.

e. Corrections are made when you (balance) the bank statement NAME

BANK RECONCILIATION

37. Document that shows two balances. Your record of your checking account and the record of your . Do you have the same balance? Reconciliation helps to find/ any in your check register

38. Outstanding checks are checks that have not (been from) the bank statement balance. You need to know items in order to statement

39. Find out which checks/deposits are by comparing the statement with the

40. Reconciling a checkbook: make sure the records agree with records

a. Check for checks and

b. Check the checks, deposits and activity on the bank statement to make sure that records are

c. Make to the bank statement and your to ensure that you and the have the same amount of money

d. Reconcile every statement

41. Steps in bank reconciliation:

a. Obtain the bank statement

b. Determine checks

c. Find between the monthly bank statement and monthly check register

d. Calculate the balance

e. If the do not agree, check the steps and

f. Account balances must be