Banking Systems, 2e© Cengage/South-Western Slide 1

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ROLE OF BANKS IN THE ECONOMY

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ROLE OF BANKS IN THE ECONOMY

List banking activities that contribute to economic stability.Explain how banking expands the economy.

GOALS

Banking Systems, 2e© Cengage Learning/South-Western Slide 2

Identity theftCreditworthy

TERMS

Banking Systems, 2e© Cengage Learning/South-Western

MoneyMoney

Money is a “medium of exchange” & the basis of the modern economy.

Money maintains local, national & global economies.

Banks are fundamental to the flow of that money.

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Banking Systems, 2e© Cengage Learning/South-Western

Main Functions of BanksMain Functions of Banks

Safeguarding moneyTransferring moneyLending moneyExchanging moneyEvaluating creditworthiness of customers

Each of these roles has a ripple effect in the economy that helps keep money moving.

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Banking Systems, 2e© Cengage Learning/South-Western Slide 5

Ways Banks Safeguard your MoneyWays Banks Safeguard your Money

1. Record keeping2. Identity theft

1. When someone achieves financial gain by using another person’s personal information to unlawfully assume the identity of the other person

3. Enforcement - not only is this physical security but it also includes tracking down fraud, embezzlers, making collections, and pursuing legal action against those who inflict losses on the bank

Banking Systems, 2e© Cengage Learning/South-Western

Safeguarding cont’d.Safeguarding cont’d.

4. Transfer security (especially technological security)

5. Sound business practices also safeguard your money (good judgment and management of daily operations)

6. Federal and/or state bank examiners closely review the records of banks to protect consumers

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How Banks Aid the Flow of Money in an EconomyHow Banks Aid the Flow of Money in an Economy

Transferring MoneyLending MoneyCreditworthiness

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TRANSFERRING MONEYTRANSFERRING MONEY

Banks move money between: BanksBanks and individual customers Banks and industry Banks and governments Governments of countries

Banking Systems, 2e© Cengage Learning/South-Western

Transferring Money helps Businesses Transferring Money helps Businesses

Allows businesses to have access to “capital”Businesses use that capital to expandWith that expansion, jobs are createdBusinesses use capital to produce more

products & perform more servicesAll of this makes the economy grow

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Banking Systems, 2e© Cengage Learning/South-Western

Transferring Money between CountriesTransferring Money between Countries

Exchange rates measure the relative strength of one form of currency against another.

These variable rates are often indications of the strength of a nation’s economy.

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Banking Systems, 2e© Cengage Learning/South-Western

The Ability to Transfer Money between Financial InstitutionsThe Ability to Transfer Money between Financial Institutions

Depends on:The stability of the institutionsThe stability of the countries where the banks resideThe security of the money supply itself

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Banking Systems, 2e© Cengage Learning/South-Western Slide 12

LENDINGLENDING

Lending makes up most of a bank’s business.Types of loans provided are:

AutomotiveHomeBusinessGovernment Credit card

The judicious use of credit stimulates the economy

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CREDITWORTHINESSCREDITWORTHINESS

A creditworthy customer hasA good credit ratingSufficient collateral for loansAn ongoing income sufficient to make timely loan

paymentsBanking policies and regulations help guarantee

a secure financial environment.CreditworthinessRatio of loans to deposits

Banking Systems, 2e© Cengage Learning/South-Western

Banking Systems, 2e© Cengage Learning/South-Western Slide 15

HEALTHY, RATIONAL LOANSHEALTHY, RATIONAL LOANS

Matching appropriate loans to qualified consumers is essential for a stable economy.The mortgage crisis occurred because unqualified

buyers were granted loans they could not reasonably be expected to pay back in a timely fashion.

Banking Systems, 2e© Cengage Learning/South-Western

What happens when banks lend their money too freely?What happens when banks lend their money too freely?

Mortgage crisis that began escalating in the summer 2007.

Banks were allowing people to borrow more money than they really should have.

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Banking Systems, 2e© Cengage Learning/South-Western

Ripple EffectRipple Effect

People were buying and building homes that they really couldn’t afford

Families were spending everything they made & going crazy using credit

As the economy grew worse the ripple effect became more apparent.

People lost their jobs so they couldn’t make their house payments.

Houses got foreclosed. Slide 17

Banking Systems, 2e© Cengage Learning/South-Western

Ripple Effect ContinuedRipple Effect Continued

Banks got scared so they stopped lending money to almost everyone (businesses included)

No one could get a mortgage so the construction industry dried up

Cities faced increased costs of having to maintain the safety of abandoned properties (sometime entire neighborhoods)

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GUARANTEEING THE MONEYGUARANTEEING THE MONEY

Banks and the government work together to form the banking system.

They make sure the money supply is: AdequateAppropriateTrustworthy

The Federal Reserve is part of the guarantee process.

Banks guarantee their own policies.

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THE SUBSTANCE OF SOCIETYTHE SUBSTANCE OF SOCIETY

A great part of the economic system is psychological.

Banks are at the heart of our financial system, and their effect on your life cannot be calculated.