Regulation of Banks

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Lending and Other Services

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Another common activity of banks is lending, or loaning money. People borrow money from banks (and other lending institutions) for such things as a new house, a new car, college tuition, or starting a business. Businesses borrow money to expand or to buy new equipment. People and businesses repay the loans in installments, or amounts due at regular periods of time, such as once a month. Each installment includes two parts: a portion of the loan itself, called the principal, and an amount of interest paid to the bank as a profit.

Modern banks handle a number of other types of financial transactions besides checking, savings, and lending. In the 1970s and 1980s laws were changed in the United States that allowed other types of companies, such as insurance companies, the ability to provide banking services. As a result, many banks added new services in order to compete. Some of these “full-service banks” now sell insurance, provide help with taxes, and handle investments in stocks and bonds in addition to handling loans and deposit accounts.

How Banks Handle Money

Even though people keep their money in banks, all the money does not remain in the bank as cash. Banks keep only a portion of the money deposited as cash. They use the rest to lend money to other people and to make their own investments. They keep all the information on deposits, loans, and other transactions in a record called a ledger. In a modern bank, much of these ledger transactions are managed by computers.

Banks exchange money through a type of organization called a clearinghouse. Banks send messengers to the clearinghouse to deliver checks from other banks and to pick up their own checks. In the United States, twelve banks in a national system called the Federal Reserve act as a type of clearinghouse for other banks. There are also automated clearinghouses that allow banks to exchange money electronically.

Banking is a very complex business, and the exchange of money from one bank to another leaves much room for criminal activity. For this reason governments often regulate, or oversee, banks to make sure that they are following the law. In the United States the Federal Reserve System sets various policies for banks. Another regulator, the Comptroller of the Currency, acts as the chief bank examiner for all banks. The Comptroller of the Currency and the Federal Reserve must approve the expansion of banks into multiple offices (called branches) and the combining of banks (called mergers). The Federal Deposit Insurance Corporation (FDIC) was created during the 1930s to protect people's deposits when banks close down. The FDIC insures all deposits up to 100,000 dollars.

Types of Banks

The banks described so far are called commercial banks because they work with people to manage day-to-day commerce. There are other types of banks that operate in similar ways as commercial banks. Investment banks sell only stocks and bonds. Savings banks operate like commercial banks, but the people who deposit money in the bank actually own the bank and share in any profits. Central banks, such as the Bank of England or the U.S. Federal Reserve, set monetary policies for their entire countries. There are also banks that specialize in international development, or lending money to underdeveloped nations to build roads, dams, and other projects.

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Дата добавления: 2014-11-29