Money, Banking and the Markets

Lesson 2 Banking and Money Growth

About Banking Aim:

How do banks enhance the benefits provided by money?

Do Now: Describe at least two ways

having your money in the bank is better than putting it under your mattress.

About Banking Do Now answers:

1. It is protected from being stolen or destroyed.

2. You can earn interest on moneythat you place in the bank.

About Banking How would a person be able to accumulate

more and more money over the years? She spends less than she earns.

For reasons we identified earlier, where is all this money going to be built up? In the bank!

What is an appropriate name to give a person who accumulates money? A saver.

About Banking We might think of a saver as a “profitable” person.

With whom else do we associate the term profit? Businesses, which can also be savers.

Banks provide savers choices such as: Savings accounts Certificate of Deposits (CD’s)

For basic money management, they offer: Checking accounts from which we write checks and use

debit cards to pay our money to others

About BankingChecking Accounts

• Deposit/Withdraw money

• Earn interest• Pay bills on line• Pay with debit card

Savings Accounts

• Deposit/Withdraw money, but less often

• Earn interest at a higher rate than checking

Certificate of Deposit

• Fixed interest rate• Term commitment• Penalty if

withdrawn before maturity

Opposite savers are those who want to borrow money. Identify good reasons why a person would want to borrow: Buy a home Pay for college

Not-so-good reasons to borrow? Live beyond one’s means by buying

expensive cars and vacations

About Banking

What are good reasons for a business to borrow money? To acquire more office space, a new factory,

or a warehouse To upgrade its equipment

Where do individuals and businesses go to borrow money? A bank!

About Banking

We see that banks are in the middle between savers and borrowers.

The formal term for being in the middle is intermediary. In this instance, the bank is a financial intermediary.

About Banking

Savers Borrowers

How Banks Make Money

Pay savers a lower rate of interest Charge borrowers a higher rate of interest

Exercise: ABC Bank pays savers 2% interest per year but charges borrowers 5%. What does it earn on each dollar saved and lent?• 3%, which is known as the spread

Lesson Summary 1 of 21. Where do savers place their money?2. What benefits do savers receive? 3. Where do borrowers go to borrow

money?4. What do we call a party, like a bank,

that is a middleman (in this case between savers and borrowers)?

5. What bank offering do people use for basic money management, including paying others?

Lesson Summary 2 of 26. What term refers to the

difference in the rate the bank pays savers and the rate it charges borrowers?

7. How do banks enhance the benefits provided by money?

Web Challenge #1Q: What is the spread banks achieve today?

• A: While deposit rates are very uniform, the same is not true for loans. Different loans have different risks and different interest rates.

• Challenge: Visit bank sites and find out the spread on home equity loans and auto loans.

Web Challenge #2Q: If the spread for a bank is just a few percent, what does this say about the percentage of loans that go bad?

• A: It has to be very small. If it was about equal to the spread, then the bank would make no money!

• Challenge: Using the search term “delinquent loans”, find out the percentage of loans that are overdue, the first sign of trouble.

Web Challenge #3Q: When a bank loans out the majority of the money savers place with it, what’s the enormous assumption it makes about the behavior and expectations of savers?

• A: They’ll never all want to withdraw their money at the same time because the money isn’t at the bank!

• Challenge: Research what a “run on the bank” is, as well as what governments do to prevent it.

What will be the profit/loss to the bank?

• Saver deposits $1000 in a bank at the interest rate of 5% and the bank lends $1000 to a borrower at the interest rate of 8%.– a. Spread?– b. Dollar amount profit/loss?

• Saver deposits $1000 in a bank at the interest rate of 8% and the bank lends $1000 to a borrower at the interest rate of 5%.– a. Spread? – b. Dollar amount profit/loss?