Overview
This lecture explains the essential functions of banks, different types of banks, how banks are regulated for safety, and key factors to consider when choosing a bank for personal or business needs.
What Is a Bank and Its Role
- A bank is a financial institution that accepts deposits and makes loans.
- Banks offer products like checking accounts, savings accounts, and certificates of deposit (CDs).
- They serve as secure places for savings and sources for financing.
- Banks help keep money circulating in the economy through lending activities.
Evolution and Services of Banks
- Banking has existed since the 14th century, evolving in the range of financial products offered.
- Basic services include checking accounts (for payments/withdrawals), savings accounts (interest-earning), and loan services.
- Banks earn profit by charging higher interest rates on loans than they pay on deposits.
- Traditional brick-and-mortar banks now compete with online-only banks.
Banking Regulations and Safety
- U.S. banks are regulated at state and federal levels to ensure safety and compliance.
- The FDIC insures deposits up to $250,000 per depositor, per bank, per account type.
- The Dodd-Frank Act introduced stress tests for large banks to ensure financial stability after the 2008 crisis.
Types of Banks
- Retail banks serve the general public with services like accounts, loans, and credit cards.
- Commercial/corporate banks serve businesses with services such as cash management and business loans.
- Investment banks assist corporations with mergers, acquisitions, and underwriting.
- Central banks manage national monetary policy and do not serve the general public.
Banks vs. Credit Unions
- Credit unions are nonprofit, member-owned institutions offering limited services but often lower fees and better rates.
- Members of credit unions own shares and profits are reinvested for their benefit.
Deposit Safety and Insurance
- FDIC insures bank deposits; customers are automatically covered.
- The SIPC insures brokerage accounts for up to $500,000, including $250,000 for cash.
Choosing a Bank
- Consider if you want business and personal accounts at the same or different banks.
- Large banks offer nationwide convenience; small/community banks may provide more personalized service.
- Assess location convenience, service range, digital tools, and fees such as overdrafts and maintenance charges.
Key Terms & Definitions
- Bank — institution accepting deposits, making loans, and offering related financial services.
- FDIC — federal agency insuring deposits in U.S. banks up to $250,000.
- Credit Union — member-owned, nonprofit financial cooperative.
- CD (Certificate of Deposit) — time deposit offering higher interest if funds are left untouched for a set period.
- SIPC — organization providing limited insurance for securities at brokerage firms.
- Dodd-Frank Act — law enhancing bank regulation for financial stability.
- Stress Test — assessment ensuring banks have enough capital to survive economic downturns.
Action Items / Next Steps
- Compare banks' fees, product offerings, and insurance coverage before opening an account.
- Use the FDIC’s BankFind tool to check if a bank is insured.
- Consider your banking needs (locations, services, online access) in your selection process.