Banking Fundamentals

These are the concepts and principles that govern banking practices

The banking business is one of the essential drivers of most economies since it provides cash to borrowers in exchange for productive investments. The concepts and principles that govern banking practices are known as banking fundamentals.

Banking Fundamentals

How does the Banking Industry Works? Banking is a business sector that manages cash, credit, and other financial activities for individuals and corporations.

Banks must keep at least 10% of each deposit on hand but can lend out the remaining 90% as loans. The Federal Reserve Board of Governors determines the reserve requirement according to market conditions.

The Fed is adopting expansionary monetary policy when it cuts the reserve requirement for member banks. This allows banks to increase their lending capabilities effectively.

Banks, whether physical or virtual, handle the movement of money between individuals and corporations.

Banks receive deposits and issue loans, earning from the difference between the interest rates given on deposits and the interest rates charged on loans.

Banks exist because we trust them. We give a bank our money to keep it secure, and the bank then loans it to someone else to make money.

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The Federal Reserve regulates banks in the United States. Banks must keep at least 10% of each deposit on hand but can lend out the remaining 90% as loans.

The Fed is adopting an economic tightening when it cuts the reserve requirement for member banks. The Federal Reserve supervises banks and other financial institutions.

Other government authorities, such as the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), regulate banks (FDIC). However, banks generate most of their money through lending interest and fees.

Banks generally profit through loan interest and fees charged to their clients.

A banking system is a collection or network of entities offering financial services. These organizations run a payment system, make loans, accept deposits, and assist with investments.

Banks complete two primary functions:

  1. Primary duties

  2. Secondary Purposes

Bank's primary function: Accepting deposits

All banks must carry out two essential fundamental functions:

  1. Deposits are accepted.

  2. Making loans and advances

A) Deposits are accepted.

Commercial banks' fundamental yet critical duties are uniting public money, guaranteeing secure custody of savings, and paying interest to depositors. The bank takes many sorts of public deposits, including:

  • Fixed deposits 
    Term deposits are a type of bank deposit where money is placed for a set time, and no money can be withdrawn. Banks charge a penalty if depositors withdraw before maturity, but the interest rate changes with the length of the deposit.

  • Saving Deposits
    The account can be opened in either a single or joint name. Depositors need to maintain a minimum balance, which varies per institution. 

The interest rate is shallow. Furthermore, there are no restrictions on the number or amount of withdrawals. Therefore, it is suitable for salaried and wage earners.

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  • Current deposits
    Business individuals and functions open current deposits as short-term loans to meet immediate requirements. Accounts have access to an overdraft facility, which is charged at a high-interest rate in addition to the fees for the overdraft account holder's depositors' funds.

  • Recurring Deposits 
    A recurring deposit account is a bank account used by individuals on a salary and small businesses.

Recurring deposits yield a higher interest rate since they benefit from compounded interest. In addition, these accounts allow depositors to save a significant sum of money for some time.

B) Making loans and advances

Banks use public deposits to provide loans to enterprises and people to fulfill their needs. The bank charges a greater interest rate on loans and advances than on promises. The bank's profit is the difference between the lending and deposit interest rates.

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Bank's primary function: Making loans and advances

The following Loans and Advances are available from the bank:

  • Cash Credits
    A short-term borrowing arrangement with a predetermined maximum. Banks allow customers to borrow against a mortgage on a specific property (physical assets and guarantees).

Cash credit is extended to all types of account holders, as well as people who do not have a bank account. The amount removed more than the limit is subject to interest charges. Cash credit allows for a higher loan amount to be granted than overdraft for extended periods.

  • Bank Overdraft
    This service is available to current account holders. It permits holders to withdraw funds at any moment that exceeds the amount accessible in their bank account, but only up to the specified maximum. 

An overdraft facility is provided in exchange for collateral security. As a result, overdraft interest is only charged on the borrowed amount when the loan is taken.

The Union Banking

  • Discounting the Bill of Exchange
    A short-term loan in which the seller discounts the bill from the bank in exchange for a fee. The bank lends money by ignoring or buying bills of exchange.

After subtracting the standard discount costs, it pays the bill to the drawer (seller) on the buyer's behalf. When the bill matures, the bank hands it to the drawee or acceptor to receive the bill amount.

  • Loans
    Banks lend customers short- or medium-term durations of 1 to 5 years in exchange for tangible assets. In addition, banks can now lend money on a long-term basis. 

The borrower repays the money in either a single sum or installments over a certain period. The bank charges interest on the borrowed amount, whether it is withdrawn or not. The interest rate is lower than that of overdrafts and cash credits.

Secondary Purposes

Secondary functions, like primary functions, are divided into two categories:

  1. Bank agency functions

  2. Functions of Utility

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A) Bank Agency Functions

Because banks act as agents for their customers, they must execute the following agency functions:

  • Transfer of Funds: The transfer of funds from one branch or location to another.

  • Recurring Collections: Collecting dividends, salaries, pensions, and other comparable periodic payments on behalf of clients.

  • Periodic Payments: Making recurring payments on behalf of the customer for rent, utility bills, and so on.

  • Collection of Cheques: Like collecting money from bills of exchange, the bank contains money from cheques through its clients' clearing sections.

  • Portfolio Management: Banks manage their clients' portfolios. It purchases and sells the customers' shares and debentures and debits or credits the account.

  • Other Agency Functions: This bank acts as a client representative for other institutions. It serves as the client's executor, trustee, administrator, advisor, and so on.

ATM Machine

B) Functions of utility

  • Issuing letters of credit, traveler's checks, and so forth.

  • They provide safe deposit vaults or lockers to safeguard valuables, essential papers, and securities.

  • Providing consumers with foreign exchange trading services

  • Share and debenture underwriting

  • Dealing

Types of banking institutions

Commercial banks, investment banks, insurance companies, brokerage firms, and credit unions are the most frequent forms of financial institutions.

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1. Commercial banks

A commercial bank is the most common type of bank in the US. They provide a wide range of services to both individuals and businesses. They make money by offering business loans to people and organizations, earning interest, and charging service fees.

Their products include deposit acceptance, primary investment products, and international trade services.

2. Investment banks

Investment banks provide access to capital markets to corporate customers to generate funds for expansion. They help companies raise funds in the stock and bond markets to fund development, acquisitions, and other financial endeavors.

Investment banks also assist mergers and acquisitions by identifying companies suitable for purchase and meeting the buyer's criteria.

Investment banks make money through corporate counseling customers, investing in financial markets, and representing clients in mergers and acquisitions. In the United States, large investment banks include Merrill LynchGoldman SachsJ.P. Morgan, and Bank of America.

Investment banks

3. Insurance companies

This word refers to a single entity that writes insurance policies, pays claims, and bears all of the risks connected with such policies. As a result, the government strictly regulates these businesses (also known as insurers) to guarantee they have the financial wherewithal to cover their risk.

4. Brokerage firms

A brokerage business or company acts as a go-between for buyers and sellers of stock shares, bonds, options, and other financial instruments.

Brokers are rewarded through commissions or fees levied after the transaction is finished. Most budget brokerages now provide zero-commission stock trading to their consumers.

Companies compensate for this income loss through other means, such as compensation from exchanges for high numbers of orders and trading fees for other goods such as mutual funds and bonds.

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5. Credit Union

A credit union is a member-owned organization based on individuals helping others.

The ownership structure of credit unions enables them to deliver more personalized and lower-cost banking services. However, because of their lower operating scale, credit unions may pay higher interest rates than banks.

Types of Bank Accounts & features

Some of the types are:

1. Current account

A current account is a deposit account for traders, company owners, and entrepreneurs who need to make and receive payments more often than other accounts.

Coins

These accounts store more liquid deposits and have no daily transaction restrictions. Current accounts allow for overdrafts or withdrawals above what is currently available in the statement.

Furthermore, unlike savings accounts, which yield interest, these accounts pay no interest. To run current reports, you must maintain a minimum balance.

2. Savings plan

A savings bank account is a regular deposit account that pays a low-interest rate. The number of transactions you may do per month is limited.

Banks provide a range of savings accounts based on depositor type, product characteristics, age or purpose of holding the bill, and so on.

Piggy Bank

There are many different kinds of savings accounts ranging from regular savings accounts, savings accounts for children, older citizens, or women, institutional savings accounts, family savings accounts, and many more are available.

You can choose from a variety of savings programs. There are zero-balance and sophisticated savings accounts with features such as auto sweep, debit cards, bill payments, and cross-product perks.

When you have a savings account with a bank and establish a second account, such as a Demat account, you earn a cross-product advantage.

3. Salary statement

Among the several types of bank accounts, your salary account is the one you created due to the partnership between your employer and the bank. This is the account to which all employees' wages are credited at the start of the pay cycle.

Employees can select the sort of pay account that best suits their needs. For example, the bank with a salary account also has reimbursement accounts where your allowances and reimbursements are credited.

Cash

4. Account for fixed deposits

Fixed and recurring deposits are two sorts of accounts where you may put your money and receive a respectable interest rate.

A fixed deposit (FD) account allows you to receive a fixed interest rate for locking up a specified amount of money for a set period until the FD matures. FDs have maturities ranging from seven days to ten years.

The interest rate you earn on FDs varies based on the term of the FD. In most cases, you cannot remove funds from an FD before it matures. Some banks allow for early withdrawals. However, the interest rate you earn is lower in this situation.

5. Account for recurring deposits

A recurrent deposit (RD) has a set duration. To earn interest, you must spend a set amount of money regularly (every month or once a quarter). Unlike FDs, which need a lump sum deposit, the amount required to invest here is less and more regular.

You cannot adjust the RD's term or amount invested monthly or quarterly. Even with RDs, early withdrawal incurs a penalty in the form of a reduced interest rate. An RD's maturity span might range from six months to ten years.

6. NRI accounts

Several bank accounts are available to Indians and Indian-origin persons residing abroad. These are known as abroad accounts.

They contain two savings and fixed deposit categories: NRO (non-resident ordinary) and NRE (non-resident external). In addition, banks also provide non-resident foreign currency fixed deposit accounts.

Core banking system

A core banking system is a back-end system that conducts daily banking transactions and posts updates to accounts and other financial records. Deposit, loan, and credit processing capabilities are often included, as well as connections to general ledger systems and reporting tools.

Mastercard

Core banking is a banking service provided by a networked bank branch in which consumers can access their bank accounts and conduct basic transactions from any member branch location.

Deposit, loan, and credit processing are all part of the system. Core banking services include opening new accounts, servicing loans, calculating interest, processing deposits and withdrawals, and customer relationship management.

CORE stands for Centralized Online Real-time Environment, and it indicates that the consumer may interact with the bank as a single entity regardless of location – to give consumers more freedom in terms of utilizing their accounts and conducting transactions from anywhere on the earth.

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What are Finance and banking?

Banking, leverage or debt, credit, capital markets, money, investments, and the formation and management of financial institutions are all part of Finance. In addition, microeconomic and macroeconomic ideas underpin basic economic concepts.

Banking and Finance delve into the fast-paced world of money, stocks, loans, and investments. Finance is an essential aspect of our economy because it offers liquidity in the form of cash or assets that individuals and corporations need to invest in for the future.

Card chip

Banking and Financial Services include, but are not limited to, checking and savings accounts, loans, credit cards, cash management services, lines of credit, investment services, and trust services.

Trust services include college savings, estate, investment, business, and business and trust management services.

The major contrast between other financial institutions and banks is that non-banks do not accept deposits into savings and demand deposit accounts, whereas banks do.

The fast-paced professions in money, stocks, loans, and investments are known as banking and Finance. Finance is a critical component of our economy because it provides the liquidity (money or assets) that individuals and corporations need to invest in the future.

Sources of income for banks

The major source of income for the bank is interest on different loans and advances made to industries, corporations, and people. Therefore, the interest on these loans is their primary source of revenue.

Revenue

Diversified banks generate revenue in several ways; nonetheless, banks are considered lenders at their heart.

Banks normally borrow money from depositors and repay it with interest. Then, banks will lend the money to borrowers, charging higher interest rates and benefitting from the interest rate spread.

Furthermore, banks often diversify their business portfolios and create revenue from financial services such as investment banking and wealth management. However, the money-making business of banks may be divided into the following categories:

  • Interest earnings

  • Profits from capital markets

  • Fee-based earnings

  • Interest Earnings

Commercial banks make most of their money by charging interest. It is carried out by removing cash from depositors who do not require it now.

Depositors receive a certain interest rate and funds protection in return for depositing their money. Banks then lend the deposited cash to borrowers who need it as soon as possible.

Profits from capital markets

Capital markets are simply a marketplace that connects firms needing capital to investors to support development or initiatives. Banks will assist in the execution of deals using their in-house brokerage services.

Paper

The investment banking teams will also assist with corporate mergers and acquisitions (M&A). Capital market income is a highly volatile source of revenue for banks.

Fee-based earnings

Banks charge a variety of fees for services provided, as well as fees for certain investment products such as mutual funds.

Banks also charge fees for various other services and products that they provide. As a result, fee-based income sources are attractive because they are stable over time and do not fluctuate.

It is beneficial, especially during economic downturns when interest rates may be artificially low and capital market activity slows down.

Challenges a bank faces

Some of the challenges are:

1. Growing Competition

FinTechs represent a serious threat since they often target some of the most profitable financial services sectors. According to Goldman Sachs, these startups will account for up to $4.7 trillion in yearly income siphoned from established financial services corporations.

One Dollar

As a result of these new sector entrants, several financial institutions are looking for partnerships and/or acquisition prospects as a stopgap solution; for instance, Goldman Sachs recently made news for aggressively investing in FinTech.

Traditional banks and credit unions must learn from FinTechs to preserve a competitive advantage. FinTechs have achieved success by delivering a streamlined and intuitive client experience.

2. A Cultural Change

Technology has grown ingrained in our society - from artificial intelligence (AI)-enabled wearables that monitor the wearer's health to smart thermostats that allow you to modify heating settings from internet-connected devices - and this applies to the banking business.

Manual procedures and systems have no place in the digital era. Banks and credit unions must consider technological solutions to banking sector difficulties.

Bank teller

As a result, financial institutions must foster an innovative culture using technology to enhance current processes and procedures for optimal efficiency.

This cultural change toward a technology-first mindset mirrors the broader industry adoption of digital transformation.

3. Regulatory Accountability

As a result of the enormous increase in regulatory costs compared to revenues and credit losses after the 2008 financial crisis, regulatory compliance has become one of the most critical banking sector concerns. From Basel's risk-weighted capital requirements to the Dodd-Frank

Discussion

Act, and from the Financial Account Standards Board's Current Expected Credit Loss (CECL) to the Allowance for Loan and Lease Losses (ALLL), banks and credit unions must comply with an increasing number of regulations; compliance can place significant strain on resources and is frequently dependent on the ability to correlate data from disparate sources.

4. Modifications to Business Models

The expense of compliance management is only one of multiple banking sector concerns compelling financial firms to adjust their business practices.

Traditional sources of banking profitability are under strain due to rising capital costs, low-interest rates, declining return on equity, and diminished proprietary trading. Regardless, shareholder expectations remain intact.

Savings

To retain profitability, several institutions have created new competitive service offerings, rationalized business lines, and sought long-term improvements in operating efficiencies.

Failure to adapt to shifting needs is not an option, so financial institutions must be designed for agility and be ready to pivot when necessary.

5. Increasing Expectations

The modern customer is sharper, savvier, and more educated than ever, and they demand a high level of personalization and ease from their banking experience.

Changing consumer demographics play a significant part in these heightened expectations: with each new generation of banking customers comes a deeper awareness of technology and, as a result, a higher expectation of digital experiences.

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Millennials have led the march toward digitalization, with five out of six saying they prefer to communicate with companies through social media.

Banks may anticipate future generations, beginning with Generation Z, to be even more involved in omnichannel banking and technologically savvy.

Baby Boomers and senior members of Generation X place high importance on human connection and prefer to visit physical branch sites.

Additional Bank Challenges

Some of the additional bank challenges:

1. Retention of Customers

Customers in the financial services industry want personalized and meaningful experiences delivered via simple and intuitive interfaces on any device, anywhere, and at any time.

Although it is difficult to quantify customer experience, customer turnover is measurable, and customer loyalty is increasingly becoming an endangered idea.

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Customer loyalty results from strong client relationships that begin with understanding the customer and their expectations and continue with a continuing client-centric approach.

In a global Accenture Financial Services survey of over 33,000 banking clients from 18 regions, 49 percent said customer service fosters loyalty.

Financial institutions may improve interactions that result in higher customer happiness and wallet share, as well as a consequent drop in customer turnover, by understanding the consumer and engaging with them properly.

2. Obsolete Mobile Experiences

Every bank and credit union today has its own branded mobile application; however, simply having a mobile banking strategy does not mean it is being used to its full potential.

Invest

To keep customers happy, a bank's mobile experience must be speedy, easy to use, fully-featured (think live chat, voice-enabled digital help, and so on), secure, and regularly updated.

Some banks have even begun to reimagine what a banking app may be by providing mobile payment functionality, allowing customers to use their cellphones as secure digital wallets and instantly send money to family and friends.

3. Breach of Security

With a string of high-profile breaches in recent years, security has emerged as a key problem for the banking industry and a major worry for bank and credit union consumers. As a result, financial institutions must invest in cutting-edge technology-driven security measures to keep sensitive consumers secure.

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4. Outdated Applications

Digital transformation is no longer a nice concept; it is a must for life. Banks and credit unions may cut expenses while improving data analytics by adopting cutting-edge technologies.

On the other hand, using old-fashioned company management apps or siloed systems will leave you behind in this increasingly digital-first world.

5. Constant Innovation

Business success demands intelligence, adaptability, strong customer connections, and ongoing innovation.

Constant Innovation

Financial sector businesses that use cutting-edge business technology, particularly cloud apps, have a significant advantage in the digital transformation race: they can innovate more quickly.

Insights without action, however, are useless – financial institutions must be ready to pivot when necessary to meet market needs while improving the client experience.

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Services that banks offer

A few of the services are:

1. Deposit Facilities

Account opening, cheque issuance, nomination facilities, death claims, stop payment instructions, periodic interest payment, introduction procedures, and so on would be required for current, savings, and term deposit accounts.

Facility

2. Credit Facilities

Banks provide a wide range of credit facilities, including term loans, cash credit, bill discounting, auto loans, farm loans, business credit, retail loans, guarantees and letters of credit, and several other need-based services.

These would include credit requests, services and sureties, interest rate regulation, service charges, and other terms and conditions, requests for upgrades, penalty waivers, one-time settlements, and so on.

3. Remittances and Payments 

Money transfer refers to transferring funds from one account to another, from one place to another, or between two countries.

It includes issues with modern payment systems such as Electronic Clearing Service (ECS), Real-Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), and SWIFT.

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4. Export, Import, and Foreign Exchange Services

Banks do not just offer domestic banking services but also international financial services. Individuals and businesses can get export and import credit, foreign letters of credit, cross-border payments, currency exchange, remittances from abroad, and other services.

5. Investment Banking and Wealth Management

These services include personal banking, asset management, executor and trusteeship arrangements, and other similar ones.

6. Auxiliary Services

Banks also provide a wide range of auxiliary or subsidiary services, such as secure custody and safe deposit locker facilities, solvency certifications, insurance, and mutual fund services, credit and debit cards, and gold coin sales.

Banking communication would inevitably involve all of the foregoing operations and the services and facilities that banks provide to their clients. To connect correctly with banks, the writer must have a good grasp of financial services and how to obtain those services.

Bank VS Banking

A bank is an institution, and banking is what that institution does. For example, collecting deposits, discounting bills, drafts, orders, money transfers, assisting businesses, etc.

Banking is the profession of a banker, as well as the maintenance or administration of a bank. Banking communication would invariably include all of the above procedures and the services and facilities that banks offer to their customers.

Bank VS Banking

To communicate effectively with banks, the writer must understand financial services and how to access them.

Every country must have a central bank empowered by the government to make monitoring policies. It serves as a financial middleman.

Aside from the central bank, there are several sorts of banks, such as retail, investment, and so on. Commercial banks primarily deal with receiving deposits and making loans.

Retail banks include community development banks, community banks, and postal savings banks. Investment banks can learn from merchant banks and industrial banks. Banking is a bank's business activity.

Banking is simply any activity carried out by a bank for commercial interests.

Some of the services provided by banks in India are listed below. They include acting as money changers, issuing cheques, acting on standing orders, and providing safety locker facilities for valuable things.

Banks also act as institutional investors in the financial market and issue letters of credit in import and export businesses. Banking may now be done through the internet, known as online banking.

Bank regulations

Bank regulation is a type of government regulation that binds banks to particular rules, limits, and standards, among other things, to ensure market transparency between financial institutions and the persons and organizations with which they do business.

Bank Regulations

Bank regulation aims to make financial institutions profitable by preventing excessive risk. Reserve requirements, capital requirements, and limits on investments that banks may make are all examples of regulation.

In money and banking, we learned that banks must keep a certain amount of their deposits on hand as reserves.

While some bank reserves are stored in cash, most are kept in the bank's account at the Federal Reserve, which is used to finance depositor withdrawals. Bank legislation also limits the kind of investments that banks may undertake.

Banks are authorized to issue loans to individuals, corporations, and other financial entities. In addition, they are permitted to purchase US Treasury securities but not to invest in the stock market or other assets judged too risky to protect depositors.

The federal government has five financial industry regulators:

1. Comptroller of the Currency (OCC)

The Office of the Comptroller of the Currency (OCC) is a separate division of the United States Department of Treasury.

All national banks, federal savings organizations, and federal branches and agencies of foreign banks are chartered, regulated, and supervised by the OCC. The OCC, established by the National Currency Act of 1863, oversees banks to ensure they operate securely and satisfy all standards.

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The OCC is in charge of capital, asset quality, management, profits, liquidity, market risk sensitivity, information technology, compliance, and community reinvestment. The OCC is a separate bureau inside the Treasury Department.

Its mission statement is to " ensure that national banks and federal savings organizations operate safely and soundly, offer fair access to financial services, treat customers fairly, and comply with applicable laws and regulations."

Congress does not fund the Office of the Comptroller of the Currency. Instead, national banks and federal savings organizations subsidize the exams and processing of company applications. The OCC also earns money from its investments, mostly US Treasury securities.

2. Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) is one of two organizations that safeguard deposits in American depository institutions; the other is the National Credit Union Administration, which governs and insures credit unions.

The FDIC guarantees deposits, audits, and supervises financial institutions for safety, soundness, and consumer protection facilitates the resolution of large and complex financial institutions and oversees receiverships.

FDIC

The FDIC's principal goal is to prevent "run on the bank" scenarios, which destroyed numerous banks during the Great Depression. For example, when a bank faced liquidation, small groups of frightened clients raced to remove their funds.

Following the spread of panic, a rush of customers attempting to do the same resulted in banks being unable to accept withdrawal requests.

Others who were the first to withdraw money from a failing bank would gain, while those who waited risked losing their assets overnight. Prior to the FDIC, there was no assurance for the protection of deposits other than the bank's soundness.

3. Federal Reserve System (FRS)

The Federal Reserve System is the United States of America's central banking system.

The Federal Reserve Act was enacted on December 23, 1913, in response to a succession of financial panics that led to a need for central control of the monetary system to relieve financial crises.

The Federal Reserve conducts the nation's monetary policy, regulates banking institutions, monitors and protects consumer credit rights, maintains financial system stability, and provides financial services to the United States government.

Federal Reserve

In addition, the Fed runs three wholesale payment systems: the Fedwire Funds Service, the Fedwire Securities Service, and the National Settlement Service.

The Federal Reserve is a key economic and banking power. Their open-mouth activities are well-known for openly announcing the current interest rate.

The Federal Reserve Act, signed by President Woodrow Wilson on December 23, 1913, established the Fed in reaction to the financial panic of 1907. Prior to it, the United States was the only major financial power that did not have a central bank.

The Fed has considerable authority to intervene to protect financial stability and is the primary supervisor of Federal Reserve System members' banks. It serves as the lender of last resort for member institutions with no other borrowing options.

4. National Credit Union Administration (NCUA)

The National Credit Union Administration (NCUA) is a government-backed insurer of credit unions in the United States.

It is one of two agencies that provide deposit insurance to depositors in depository institutions in the United States, the other being the Federal Deposit Insurance Corporation, which insures commercial banks and savings institutions.

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The National Credit Union Administration (NCUA) is an independent federal agency established by the United States Congress to regulate, charter, and monitor federal credit unions.

The National Credit Union Administration, established by the United States Congress in 1970, is an independent federal organization that guarantees deposits at federally insured credit unions, protects credit union members and charters, and regulates federal credit unions.

Credit unions, like banks, are federally insured; however, the Federal Deposit Insurance Corporation does not cover credit unions (FDIC). Instead, the National Credit Union Administration (NCUA) is the federal credit union insurer, making credit unions just as safe as commercial banks.

5. Office of Thrift Supervision (OTS)

The Office of Thrift Supervision was a government agency of the United States Treasury that chartered, supervised, and controlled all federally chartered and state-chartered savings banks and savings and loans organizations.

The Office of Thrift Supervision was responsible for developing and implementing laws that governed the country's savings and loan industry.

The OTS, a Bureau of the Treasury, was disbanded on October 19, 2011. The Dodd-Frank Wall Street Reform and Consumer Protection Act transferred its rulemaking power and operative regulations to other agencies.

Old Treasury Building

This bureau was responsible for ensuring the safety and soundness of thrift bank deposits. It achieved this by auditing and inspecting banks to verify compliance with government regulations and procedures.

The OTS budget is supported by fees received from the institutions it supervises.

It competed with several other federal agencies that controlled banks, and this competition prompted OTS to lower reserve requirements for riskier loans to attract larger banks.

For example, Washington Mutual and Countrywide Financial paid fees totaling 18% of the OTC's budget. Countrywide Financial was transferred to OTS supervision in 2006 owing to its lax standards, notably reserve requirements to cover its loans. totaling

As a result, thrift reserve requirements fell to one-third of their average in 2002, and borrowers began to fail in huge numbers several years later.

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Researched and authored by Manal Fatima | LinkedIn

Edited  by Colt DiGiovanni | LinkedIn

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