30.1 THE BANKING SYSTEM

30.1 THE BANKING SYSTEM - SECTION 30: THE COMMERCIAL...

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SECTION 30: THE COMMERCIAL BANKING SYSTEM
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FINANCIAL INTERMEDIARIES Banks and other financial institutions that serve as middlemen between people who have money to lend and those who want to borrow money 1. Commercial banks 2. 3. Insurance companies 4. Credit unions 5. Pension funds
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GOAL OF A BANK: MAXIMIZE PROFITS Commercial banks are private corporations Owned by individual stockholders Banks earn profits by borrowing money from depositors and lending the money to borrowers at higher interest rates than they pay to depositors Banks also earn profits by charging fees for services Checking account fees, ATM fees, estate and trust planning
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FUNCTIONS OF BANKS: 1. PROVIDE SAFEKEEPING FOR DEPOSITORS’ MONEY: 2. MAKE LOANS 3. AS A GROUP, BANKS CREATE MONEY
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FRACTIONAL RESERVE BANKING Banks lend out most of the money that has been deposited. Banks retain some of the deposits in its vault. Some of the deposits may be deposited at the local branch of the Federal Reserve System for safety purposes. RESERVES The cash that a bank has in its vault plus any deposits that a bank has at the Federal Reserve Banks earn no interest on reserves sitting in the vault or at the Fed.
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Thus, holding money as reserves is unprofitable. To generate profits, banks lend most of the money that has been deposited.
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REQUIRED RESERVES Every bank is required (by the Federal Reserve System) to keep a certain percentage of deposits as reserves in its vault or at the local Federal Reserve Branch Bank to satisfy any customer withdrawals of deposits. Depositing reserves at the Fed promotes safety of deposits and limits the potential loss during a bank robbery.
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REQUIRED RESERVE RATIO The minimum percentage of deposits that a bank must keep as reserves This percentage is set by the Federal Reserve Board of Governors. REQUIRED RESERVES The minimum amount of reserves a bank must hold Required Reserves = Total Deposits x Required Reserve Ratio
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REQUIRED RESERVES 10% on deposits over 45.4 million 3% on deposits of $6.6 million to $45.4 million 0% on deposits less than $6.6 million
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30.1 THE BANKING SYSTEM - SECTION 30: THE COMMERCIAL...

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