Banks, as you know, are financial institutions
that accept deposits from citizens and pay interest in return. What
most students do not think about is the entrepreneurial nature of
banks. Banks are not all service institutions, most operate in order
to make a profit. Even if they are a non profit they do have to make
money in their operation in order to pay expenses. Banks do this in a
variety of ways.
- They charge interest on loans. Where do
they get the money for the loans? The answer is from their
depositors and from the Fed. They pay interest to depositors but
charge a higher rate on money they lend out. For example, a bank
may pay 3% on a savings account but charge 9.5% in interest on a
loan. In the case of money borrowed from the Fed, banks pay a
percentage rate on money they borrow, called the discount
rate. Banks then loan that money and charge a higher rate on
the loan then the rate that they paid. Its called using other
- Banks operate on fractionalized
deposits. They do not keep all of the depositors money on
hand. They use depositors money to make money. They do this
usually by giving loans and earning interest. Usually these loans
are real estate loans, sometimes they are car loans, student loans
etc. Some banks make commercial real estate loans, others do not.
Prior to the depression banks were allowed to invest in the stock
market. A law was passed after the bank crash to end this practice
and force banks and investment institutions to be different
entities. Recently that law expired and has not been renewed. What
does this mean? Well for certain we will see a wave of mergers. We
may also see banks stepping into rather dangerous territory of
investing and being connected to the stock market.
- Banks charge fees. It used to be the case
that checking and savings accounts were free. Today banks have
fees for minimum deposit, per check fees and ATM fees. When
ATM's were first introduced they were supposed to replace bank
branches, save banks operating expense and that savings would be
passed on to consumers. This has not happened. Instead, ATM's have
become a revenue stream for banks as they charge up to $1.50 per
transaction. In some cases you get hit with a double whammy. If
you use the ATM of a bank other than your own both your bank as
well as the ATM's bank may charge you a fee.
Most banks have great options for high interest
savings accounts for
making your money work for you. If what you need is spending power, but
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- Specializes in helping business and making
- These were, until deregulation, the only
banks that could make investments in commercial real
- Were not interested in small depositors
until mid 1800's
- Were the only type of banks, until
deregulation, that could issue checking accounts.
- These are the big banks. They are for
- Depositor owned financial
- No owners or board of
directors, instead there is an elected "Board of
- Non Profit
- Many Mutual Savings Bank's
eventually became Savings Banks when they decided to
go public and sell stock to raise capital.
- These operate to make a
- These banks are owned by
stockholders and managed by a board of
- The purpose of both was to have a safe
place for depositors to save and earn interest.
- Until deregulation, these banks were not
allowed to make investments in commercial real estate.
- In 1972 savings banks gained the power to
issue checking accounts in New England and by 1980 nationwide.
They could now really compete with the big commercial banks.
Savings and Loan
- Financial organization that invested the
majority of funds in home mortgages.
- Began as cooperative clubs with members
taking turn borrowing to buy homes.
- In 1930's FSLIC created to insure
- In the 1980's, with deregulation, many of
these S&L's (or thrifts as they are also called) emerged as
aggressive entrepreneurial organizations. In many cases S&L's
were owned and run by individuals. The lack of regulations, as we
shall see, allowed these individuals to take unwise risks and
defraud their depositors and the government. This led to the
Banking Crisis of the 1980's.
- These are non profit institutions but were
not always managed properly.
- Owned and operated by and for their
members. Like a mutual savings bank.
- Usually organized by a union or employers
to serve employees.
- These are not technically banks and do not
fall under federal banking guidelines. This allows them to act in
ways that banks cannot and gives them a competitive
- Historically Credit Unions would only allow
members of the business or union that formed it to be a member.
Today outsiders can be "sponsored in." As a result real banks have
protested that credit unions should be brought under federal
- In the past costs were kept low because
they borrowed office space, managerial help, etc. from the
employer or union. This has changed as they have become more like
full service banks but are not faced with some of the regulations
other banks face. This gives Credit Unions an advantage that many
other banks are fighting on the state and national
- Direct deposit a major feature that only
Credit Unions had because of their unique relationships with the
business or union. This also now exists with many other types of
- Non profit.
- Newest type of bank, really commercial
- Only loan money and make investments to
business to buy, sell and merge. They fund IPO's and
- For profit... BIG PROFIT!!
The mutual savings bank (MSB) is one of the oldest savings
institutions in the United States. It is a depositor-owned financial
organization operated for the sole benefit of its depositors. But
because there were no stockholders, boards of trustees were made up
of businesspeople that served without pay. Later, many MSB's decided
to sell stock to raise additional financial capital. These
institutions became known as savings banks, because depositors did
not mutually own them. Mutual savings banks got their start in the
early 1800's. At that time, commercial banks catered to the needs of
business and weren't interested in the accounts of small wage
earners. That is when savings banks emerged to fill that need. They
were popular with consumers and began to spread as westward expansion
progressed. By the mid-1800's, commercial banks began to notice the
savings accounts of factory workers and other wage earners. They bean
to compete more heavily with the savings banks. As a result, savings
banks did not spread beyond their base in the industrial northeast.
However, savings banks are a powerful economic influence. In 1972
the Consumer's Savings Bank of Worcester, Massachusetts, introduced a
Negotiable Order of Withdrawal (NOW) account, which is a type of
checking account that pays interest. Because commercial banks had a
virtual monopoly on checking accounts at the time, NOW accounts were
strongly opposed. While NOW accounts were allowed to remain in New
England, at the national level, commercial bankers pushed for federal
legislation that temporarily prevented NOW accounts from spreading
outside New England. The savings and loan (S&L's) association is
another type of financial institution, which invested the majority of
its funds in home mortgages. S&L's began as cooperative clubs
for homebuilders in the 1800's. The association's members promised
to deposit a certain sum regularly into the association. Members
then took turns borrowing money to build their homes. In short,
people had arrangements for funding for home building in areas where
other sources of financing were not available. In the 1930's, the
Federal Home Loan Bank Board was created to supervise and regulate
the individual savings and loan associations. Created underneath it
was the Federal Savings and Loan Insurance Corporations (FSLIC) which
insured savings and loan deposits. Credit unions, which are owned
and operated by and for their members, are another type of depository
institution. Costs are generally low because a sponsor often
provides management, help, and office facilities. Most credit unions
are organized around an employer, meaning that contributions
generally are deducted directly from a worker's paycheck. Recently,
some credit unions began to offer checking deposits. Known as share
drafts, they look like any other check or NOW account and provide
members with a way to earn interest on deposits that are also
available on demand. The positive aspect of credit unions is that
they make low interest loans to their members beacuse they are non
profit, member service organizations.
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