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GUIDED NOTES 4.02 UNDERSTAND THE BANKING SYSTEM
PART A: FEDERAL RESERVE SYSTEM
1. What is the Federal Reserve System? A
President Woodrow
Organized by the Federal
of The Fed is
banking system AKA The Fed.
signed the Federal Reserve Act into law.
in
. The purpose
a. To
and
system.
b. To ensure a
,
c. To supervise and
help serve the
confidence in the US
and stable
member
efficiently.
d. Prior to the Federal Reserve Act
or coin
and
could issue
2. Who participates in the Federal Reserve?
a. All
the Fed
banks are
I. Optional for
to be part of
banks
b. Divisions are called
c. There are
districts in the
d. Every
comes under a
e. Each Federal Reserve
owned by its
is a
banks.
f.
, the
NC is in
District.
3. What are the
arms of The Fed?
a. Board of
(public) sector.
I. Usually meet about
and
= represent the
a week, ordinarily on
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II. Public is
of
to look into the meetings of the Board
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
business (
Reserve
) sector.
= represents the
4. Purpose of Federal Reserve
a. Established to
and regulate
b. Known as the “
“
c. Assists
more efficiently
with
d. All
Federal Reserve
banks are
e. State banks have the
system
the
to join the
of
the
5. Federal Reserve System Services
FEDERAL SUPERVISION
a.
Fed Supervision: set
Banks are
for many years) of all
or on
bank.
requirements.
to keep a certain percentage (
in the bank’s
with the
federal reserve
I. Reserves =
a. Example: a rush of
(money) set aside for
by
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II. Purpose: to
and protect
b. Fed Supervision:
financial records.
risk of bank
money
member banks. Inspects banks by
I. Audit = an inspection of
of books (records) of the
with banking
who are audited by the
of a tax return.
to verify the
; bank is
. Similar to Individuals/
to review the
c. Fed supervision: approves bank
.
I. Banks merge to be more
a. To offer customers more
national,
b. To offer a
more efficiently
(local, regional,
)
of
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
account for the US
a. Disburses
transfer payments using the
government. The Fed holds a
benefits and other
deposit system
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.
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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. Tight money – policy when
interest rates,
money is available at
(stabalizes) economy
b. Loose money – policy when
interest rates,
money is available at
(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.
Rate =
borrowing
b.
Rate =
borrowing
NOTE: the Federal Reserve
or
HOWEVER, rates the Fed charges member banks “
affect the
rates for
loan money to
(only member banks)
“ and
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 (
Recognition). Scanners read
on checks to
process data
and
through the ACH and Interdistrict
Settlement Fund.
OPEN MARKET POLICY
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10. Fed participates in
and
. What are government securities?
- loans to government in various
for various
periods.
operations by
government
Bills and
(amounts) and
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
are
(cashed in) for face value on the
Examples: Purchase treasury
date for $10,000 (
for $25, redeem in 7
for $50.00.
(from face value) but
(due) date.
for $7,500 (
price), redeem at
). Purchase Series EE savings
for $25, redeem in 7
at
11. Government
a. Savings Bonds – Example
a. Denomination minimum
b. Payable after
c. Earns interest
b. Short-term
to
of the US
Treasury
in
- maturity in
,
year or
or
c. Long-term obligations of the US
- maturity at
to
years, minimum
Treasury
- maturity at
12.
Bank
therefore
rates encourages
borrowing by
Issued to
Treasury
;
years
by member banks and
. 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
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LENDING STANDARDS
13.
Sets
for consumer
and
. Sets limits for
and
member banks. NEWS: Federal Reserve revised bank
banking
. Ex. Lower % of total loans are for
dealing with
by
rules since
/ acreage
SUPPLIES CURRENCY
14.
Money is a
money is
of
and
for
. US
.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
by accepting
from
a. Commercial
services including
accounts
b. Savings and
and
their business
. Types include:
- full service, offer many
,
, and
Associations (S&Ls) – traditionally specialize in
loans, but now are very similar to
banks
c. Mutual
and specialize in
banks –owned by the
and home
d. Credit
their
only and are
for
, serve
by their
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16.
Non-depository Financial Institution: earns money to finance their
by
specific
such as policies,
and
.
a. Life
companies – term,
b.
Companies – stocks,
c. Consumer
bad credit
e.
rates if
,
Outlets –
have a
17.
, mutual funds
companies -
d. Mortgage companies – loan money for
homes
f.
, universal
and
based; used if you do
account
Pawnshops – loan money based on
of item
Which characteristics of financial institutions are of interest?
a. Services
b.
c. Convenience
d. Fees and
e.
18.
SERVICES: does the institution offer
services?
a. Savings
b. Depository of
taxes
c. Checking – various
to meet customers
d.
- short-term for
e.
Cards
f.
Cards
capital, long-term for
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g. Safe
boxes
h. Trust management
19.
SAFETY: Is the institution insured against
?
a. Federal
Corporation (FDIC)
Created by
the nation’s
supervises financial
to maintain stability and public confidence in
system: insures
,
b. National
(NCUA) charters and supervises
20.
Association
CONVENIENCE: Does the institution offer the
desired?
a. Physical
available
b.
Services are easy to access and use
c. ATM
21.
RESTRICTIONS: Are there
other restrictions?
a. Minimum
to stay in
balance,
22.
balances that must be kept or
are often
FEES AND
of the services?
a. Flat
- money amount
at all times. If account keeps minimum
(eliminated)
: What are the short and long-term
fees
b. Fees per
I. NSF (
funds) fees
II. Checks
III. Debit
c. Number of
d. Minimum balance required to
allowed
fees begin
fees
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23.
COMMON
a.
SERVICES
EFT – Electronic Funds
b.
Bill pay
c. Checking
(Personal or business)
d.
Checks: Certified,
e. Money orders 24.
, Traveler’s
, Express,
ONLINE BILL PAY
a. Use the
to make
b. Often
based
c. Privacy can be an issue – Change
sites
frequently; use only
Answer questions 1 – 3 in space provided:
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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
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I. Automated Teller Machines (
)
II. Pay by
systems
III.
or Withdrawals – paychecks,
automated bill payment
IV. Point of Sale transfers -
cards
V. Automatic
and
b. Checking accounts – used by
to manage
and
transactions.
I. Check – a
form issued by the
institution. Account holders
withdrawals by writing
checks. Parties to a check = Payee, Drawee and Drawer
Parties to a Check
Drawer’s Name & Address
Joint Account
Payee
ABA #
Check
Number
Check
Date
Melanie Paige
Charles Paige
619 Main Street
Raleigh, NC 27601
319
2-131/1034
July 16, 2010
Pay 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
Memo
Who is the:
Payee:
Drawee:
Bank Name - Drawee
Drawer’s Signature Last item completed on check!
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MICR Banking #s
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Drawer:
RECORD KEEPING – keep a
check stub by: recording
written, EFTs, and bank fees)
in check registry or on
(checks
, recording
c. Traveler’s Check – used by travelers for safety. Requires 1st
when check is issued and 2nd signature when check is
drawn by a well-known financial institution on
. Draft
or its agent.
Answer questions 1 – 3 in space provided:
d. Certified check is written by a
bank account to give to someone. It is
reserves from your account.
Answer certified check questions 1 – 5 in the space provided:
for you from
funds that the bank
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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:
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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
check,
the check or
check to someone else. Different types of endorsements are:
to cash the
payment of the
I.
II.
III.
b. Definition:
on the back of a check
c. Provides
that the
or transferred payment of the check to someone else
cashed
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). 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
.
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I. Full endorsement – transfers
signs the check over to
payment.
g. Restrictive endorsement only to
account;
cannot be
by a
who finds the check; best to use when
when using the ATM for
to someone else;
person to
use of the check so it can be
type of endorsement;
or someone
a check for deposit or
.
CHECK WRITING PROCEDURES
29. Write information in the
checks are written in
first (ensure
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
35.
of the check (memo)
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
making
d. The check register is
in your account.
e. Corrections are made when you
statement
balance after
.
checks or
documentation of how much money is
(balance) the bank
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
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38. Outstanding checks are checks that have not
from) the bank statement balance. You need to know items
order to
statement
(been
in
39. Find out which checks/deposits are
statement with the
by comparing the
40. Reconciling a checkbook: make sure the
records
records agree with
a. Check for
checks and
b. Check the checks, deposits and
sure that
records are
c. Make
to ensure that you and the
activity on the bank statement to make
to the bank statement and your
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
monthly check register
between the monthly bank statement and
d. Calculate the
balance
e. If the
and
f.
Account balances must be
do not agree, check the steps