Banking

The word “bank” is probably one of the first few you learn in elementary school, and the idea of keeping your money safe is great; however, banks and banking require a little bit more knowledge than that. Banking is an industry that deals with credit facilities, storage for cash, investments, and other financial transactions, making it an integral part of a country’s economy.

Banks make money by charging an interest rate on loans, where they profit by charging a higher interest rate than the interest rate paid on customer deposits. However, they must comply with the regulations set by the central bank or national government. In the US, banks are required to retain 10% of the customer deposits as reserves, while using the other 90% to provide loans.

Banks are regulated by the Federal Reserve, with the actual details of the requirement determined by the Federal Reserve Board of Governors. When the Fed reduces the reserve requirement for member banks, it is implementing an expansionary monetary policy, which increases the amount of money in the economy. On the other hand, when it increases the reserve requirement, it is implementing a contractionary monetary policy that reduces liquidity. Each bank is insured by the Federal Deposit Insurance Corporation (FDIC), which was created in 1933 after the Great Depression; the FDIC makes sure that the deposits that any customer makes can be retrieved at any time. As of 2008, the protection limit is $250,000 per account.

There are three main types of bank account: savings, checking, and a certificate of deposit. A savings account as the name implies: money that isn’t needed right away, and meant to be saved for a future instance. The bank loans out the money to borrowers and charges interest on the amount of credit disbursed. A checking account allows customers to access their deposited funds as they please, and usually involves having money transfer in and out of the account on a frequent basis. With a certificate of deposit, a fixed amount of money for a defined period of time is held, and a small interest rate is paid upon the money inside.

While accounts can vary, the type of bank can as well. Commercial banks are the most common type of bank, providing business loans, accepting deposits, and offering basic investment products to both individuals and private businesses. Credit unions are only available to a specific category of people who are eligible for membership. It is member-owned and is operated by the members on the basis of people helping people. Traditionally, credit unions served either residents of a local community, members of a church, employees of a specific company or school, etc. Credit unions tend to operate on a smaller scale, allowing for more personal interaction and a better quality of service; on the downside, this limits the amount of services offered, and a credit union may only accept certain types of deposits. There are also investment banks; they help companies raise funds in the stock market and bond market to finance their expansion, acquisitions, or other financial plans. They also facilitate mergers and acquisitions of companies.

When it comes to choosing a bank for yourself, there are a few factors to consider:

• Convenience (distance from your home/work, ATMs)
• Accessibility (a user-friendly website or app, number of branches available)
• Service fees (accounts are charged a fee to maintain, but can be waived by meeting certain requirements)
• Potential perks (signing bonuses, extra services or offers based on the deposit amount)

Throughout your life you’ll need to visit the bank for a variety of reasons; with something that’s so frequent in your life, it would make sense to better understand how they work, and how they can work for you.