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Why do we have banks?

Banking Services7.1 How Banks Work

7.1 How Banks WorkGoals:

◦Explain how banks operate and benefit consumers.

◦Describe different types of money that are used in the US economy.

7.1 How Banks WorkKey Terms:

◦Inflation◦Federal Deposit Insurance Corporation (FDIC)◦Currency◦Check◦Payee◦Statement

How Banks Work?Banks are private businesses. They are in

business to do what?◦Yes, earn a profit! (make money)

How do banks earn a profit?◦Most of the income banks earn comes from the

interest they charge when they lend money.

How Banks Work?Where do they get the money to lend?

◦Mostly from the deposits made from consumers and businesses.

Here is how is works.1. Banks pay depositors interest on most types of

accounts.2. The interest rates depositors receive are lower

than the interest rates banks charge borrowers.3. The difference between these rates is the

banks income.

For example.Suppose you deposit $10,000 in your bank at

2% interest. ($200)The bank lends your $10,000 to a business and

charges 6% interest.($600)What does the bank earn?

◦The 4% difference. ($600-$200=$400 profit)

Banks other sources of income:◦Fees for credit cards and checking accounts.◦Financial planning services.◦Mortgage Loans & Lines of Credit

How do banks benefit you?Banks provide security

1. Banks keep money safer2. Banks protect your purchasing power• The interest you earn on your money in a bank

increases your purchasing power if over time there is inflation.

• Inflation is a sustained increase in the average level of prices.

3. Banks are heavily regulated to protect both depositors & businesses. (Must have reserves)

4. Most banks are FDIC insured deposits up to $250,000.

How else do banks benefit consumers?

Banks make borrowing easier• They bring together savers and borrowers to help

give loans to reliable borrowers.

Money, money, money…MONEY

Money comes in two forms1. Currency- paper money and coins used for

financial transactions. Usually used for smaller transactions.

2. Checks- an order to a bank to pay a specified sum to the person or business named on the check (payee). Usually used for larger transactions or payments.**Payee- person or business to whoma check is written.