Chapter 10 Lesson 3

How a Bank Gets Its Money

Vocabulary

credit union

nonprofit service cooperative that accepts deposits, makes loans, and provides other financial services

products

things that are sold

corporation

form of business organization recognized by law as a separate legal entity with all the rights and responsibilities of an individual, including the right to buy and sell property, enter into legal contracts, and to sue and be sued

stock

certificate of ownership in a corporation; can be either common or preferred stock

stock

certificate of ownership in a corporation; can be either common or preferred stock

shareholder

person who owns a share or shares of stock in a corporation; same as stockholders

state-chartered bank

bank that receives its charter from the state in which it operates
certificates of deposit/CDs

receipt showing that an investor has made an interest-bearing loan to a financial institution

reserve requirement

formula used to compute the amount of a depository institution’s required reserves

Issuing Stock

  • most banks are established as a corporation
  • corporations can raise funds by selling stocks to shareholders
  • corporations are responsible for it's debt, but shareholders aren't; limited liability
  • when people start a bank,they hire attorneys to complete and the legal papers needed to establish a corporation
  • a state-chartered bank must follow state laws to the minimum amount of financial capital

Consumer and Business Deposits

  • once a bank begins operations, it can accept deposits and will pay interest
  • the rate of interest must be very close to the rates paid by competing financial institutions - savings, loans, credit unions, etc.
  • little payments of interest are made on checking deposits most of the, but more on longer term saving deposits
  • new banks may also offer certificates of deposits or CD's - they're actually not deposits; they are considered loans from a consumer to the bank

Fractional Reserves Expand Bank Deposits

  • bank charges interest every time there's a new loan, but also keeps reserves
  • the bank may continue attracting deposits and making loans until it is "loaned out" or unable to make loans
  • the bank has to report its reserves and its demand deposits to the Fed on a regular basis
  • banks are heavily regulated by the Fed, the Comptroller of the Currency, the FDIC, and possibly even some state banking officials (bankers don't like this, but the regulation has prevented massive failures like those we saw during the great depression)

Loans, Investments, and Fees

  • loans to consumers and businesses are an important part of a bank's profits
  • banks also earn its money on investments
  • if a bank has extra funds that are not loaned out, it could buy U.S. bonds
  • many fees come from maintaining a bank - application fees from applying for a loan, withdrawal fees for using an ATM from another bank, fees for overdrawing your checking account, and fees for bouncing a check.
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