2. HOW BANKS WORK
• We give our money to a bank that keeps it safe for
us.
• The bank gives our money to someone else in order
to make money for itself.
• Banks can use more money than they have in cash.
3. FUNCTIONS OF BANKS
• To put their account holders’ money to use by
lending it out to others who can then use it to buy
homes, businesses and many more.
• Banks are critical to our economy.
4. FUNCTIONS OF BANKS
• To create money in the economy by making loans.
• The amount of money that banks can lend is
directly affected by the reserve requirement set by
the Federal Reserve.
• The reserve requirement is 3-10% of a bank’s total
deposits.
• This reserve is either in cash on hand or in the bank’s
reserve account with the Fed.
6. TRUST WITH THE BANKS
• Banking is all about TRUST!
• Banks lend that same money we deposit with the
banks and more to other people every day, that
is, they consistently extend more credit than they
have cash.
7. TRUST WITH THE BANKS
• Banks will not have enough money if everyone
withdraws their money at the same time, although
the Federal Reserve Act requires banks to keep a
certain percentage of their money in the reserve.
• In the event of a bank failure, your money is
protected as long as the bank is insured by the
Federal Deposit Insurance Corporation (FDIC).
Depositors are typically protected for up to
$100,000.
10. HOW BANKS MAKE MONEY
• Banks sell money. E.g. in the form of
loans, certificates of deposit (CDs) and other
financial products.
• They make money on the interest they charge on
loans.
11. HOW BANKS MAKE MONEY
• Interest rate
• Depends on both the number of people who want to
borrow and the amount of money the bank has available
to lend.
• Since lending money is a risky business, the riskier the loan
the higher the interest rate the bank charges.
12. HOW BANKS MAKE MONEY
• Banks charge a fee for services like checking, ATM
access and overdraft protection.
• Investments and securities.