How Banks Work

• How do banks work?• They function and work because people have

trust in them• We give them our money to hold on to• They turn around and give it to someone else

to make money for itself

How Banks Work

• Why do we trust banks more than keeping the money for ourselves?

• They pay interest• If we had the money on hand we’d spend it• Convenience using checks, credit and debit

cards• Online banking

How do banks make money?

• Banks are like any other business out there.• The only difference…• Their product is money• Other companies sell widgets or services,• Banks sell money• How?

Sell Money to Make Money

• They make money off of interest• 1) You give them money for your savings

account• 2) They give you around 1-2% interest– Meaning $100 in savings will be $102 at the end of

the year

Sell Money to Make Money

• 3) They turn around and give it to someone for a loan

• 4) They charge the person borrowing your money around 6% (average)

• 5) This means they get 6%, pay you 2% of that, so they receive 4% in profit from borrowers.

What is a Bank

• Are banks important for our economy?– Why and how?

• They are VERY important• Their primary function is to take your money, give

it to someone else who needs it NOW for numerous things like…

• House• College• Starting your own business

What is a Bank?

• Does your money go to someone else even if you only put in $1000?– You can’t buy a house, go to college, or start your

own business for $1000• YES• It goes to a pool of money– Money from numerous account holder’s– Maximum of 90% of you $1000 can go. Banks must

RESERVE some money.

Helpful for the Economy

• Take your money, and give it to someone who needs to spend money.

• U.S. economy does well when…– American products are bought – leads to more

American products to be produced – leads to more Americans with jobs to produce them.

– You spend money – banks help people spend money -- loans

Lending Scare?

• Is it scary for you, that a bank takes your money, turns around and gives it to someone else?

• Whenever you want your money from a bank, to either pay a bill, write a check, get cash back, doesn’t the bank always have the money?

Lending Scare?

• What would happen if everyone from the same bank, asked for all their money at the same time?

• Bank wouldn’t be able to give you your money.

• This was the case for many banks last year.– Will discuss later

Federal Reserve Act

• The Federal Reserve Act requires banks to keep a certain percentage on hand.

• But if EVERYONE wanted to cash out, there wouldn’t be enough money on hand.

Money?

• If you had $1,000 in Bank of the West, and they went bankrupt, would you get your money back?

• YES• If you had $275,000 in Bank of the West, and

they went bankrupt, would you get ALL of your money back?

• NO• Why?

Insurance

• Because banks run on our trust, the government highly regulates their actions.

• Your money in a bank is protected under the FDIC, (Federal Deposit Insurance Corporation).

FDIC

• If you had $1,000 in the banks, and it went bankrupt, you would get all of your money back.

• If you had $300,000 in the bank, how much would you lose?

• $300,000 – Insured amount ($100,000) =• $200,000• You would get $100,000 back

FDIC Change

• The FDIC sticker said “Insured up to $100,000.”

• What was it last year?• $250,000• Banks took a turn for the worst last year and

many went bankrupt– Stock Market Crash

Bankrupt Bank

• Banks went bankrupt because negligent investing

• No trust in banks• People rushed to take money out• People lost a lot of money• Government stepped in• Increased insurance up to $250,000

What do you think?

• Write 2-3 paragraphs on the pros and cons for the following question.

• Do you think it’s fair a bank will only insure you up to a certain amount?

• Why or why not?– Things to think about– It’s your money, you don’t have to put it in a bank– You put your money in a bank that should act in your

favor, if they lose your money, you should get a full refund.