Page 463 - Business Principles and Management

Unit 5

hold assets of nearly $680 billion, including
loans valued at over $450 billion. Because
credit union members are owners, their savings
make up most of the owner’s equity of the
organizations. Total member savings are just
over $577 billion.

REGULATING BANKS
Banks operate in an environment of high risk.
Customers who deposit funds with banks risk
that the bank will not have adequate funds to
PHOTO: © GETTY IMAGES/PHOTODISC. loans to customers, they risk that the customer
pay the interest or return the money when the
customer requests its return. When banks make

will be unable to repay the loan with interest
according to the terms of the loan. Of course
customers should be careful to deposit money
with banks that have the financial strength and
history to protect deposits. Banks carefully
review loan applicants and their applications to
determine if they are creditworthy. However,
there are many examples of bank failures that resulted in large financial losses to
Competition among financial businesses and individuals. The bank failures of the early 1900s and again during
institututions has grown as the the Great Depression in the 1930s were so dramatic in terms of the number of
services offered become more people affected and the size of their financial losses that the federal government
similar. Can you name three increased its regulation of banks and banking.
financial institutions in your
community from which you THE FEDERAL RESERVE SYSTEM The Federal Reserve System (Fed) is the central bank
might obtain financial services? of the United States. It was developed to regulate banking and manage the econ-
omy through control of the money supply. Approved by Congress in 1913, the
Fed is made up of a chairman and a board of governors appointed by the presi-
dent of the United States. The chairman and board members are financial and
economic experts who establish the interest rates at which member banks can
borrow money. These rates in turn affect the rates on many of the loans and de-
posits made by consumers and businesses.
Most commercial banks and savings banks are members of the Fed system
and must meet its requirements and regulations, which affect the types of loans
they can make, the amount of assets that can be loaned, and the security require-
facts & ments for loans. Banks are required to keep a percentage of their assets in reserve,
with some deposited in one of the 12 Federal Reserve district banks.
figures THE FDIC In 1933, consumers lost confidence in banks and tried to withdraw all
of their money at nearly the same time. Banks had not kept enough money in
reserve to make the payments. As a result, more than 4,000 U.S. banks closed,
Federal Reserve district banks with losses averaging nearly $1,000,000 each. Those losses were actually suf-
are not traditional banks that fered by the banks’ customers, who could not withdraw their deposits. Although
serve businesses and consumers. many of those funds were ultimately recovered and nearly 80 percent was repaid
They are government banks rep- to consumers, Congress wanted to avoid another “rush” on the banks in the fu-
resenting the U.S. Treasury. They ture. It established the Federal Deposit Insurance Corporation (FDIC), a federal
offer services to U.S. commercial agency that insures deposits in banks and savings institutions up to approxi-
banks, credit unions, and sav- mately $100,000 per depositor account. Retirement accounts are insured up to
ings and loans, so they are often $250,000. Since its creation in 1934, no insured deposits have been lost by cus-
called “bankers’ banks.” tomers of failed members of the FDIC.

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