What is a Bank?

While the question may seem elementary, the answer can be quite complex. Understanding what banking is all about will help you make better financial decisions. A bank is a financial institution where you can deposit your money. Banks provide a system for easily transferring money from one person or business to another. Using banks and the many services they offer saves us an incredible amount of time, and ensures that our funds "pass hands" in a legal and structured manner. There are also other types of financial institutions that operate just like banks. We'll cover these later.

Why Do You Need a Bank Account?

With all the changes taking place in the banking marketplace today, you might ask yourself Do I really need a bank? Why can't I just find a way to avoid all these fees? What types of accounts are available to me? It can be mind-boggling. There are many reasons why a banking relationship is vital: o When you deposit money in a bank, you have the comfort of knowing your money is in a safe, insured place. Deposits in most banks are insured by the Federal Deposit Insurance Corporation (FDIC). This means your money is protected up to $100,000 per depositor. You can also think of it as "out of sight, out of mind." If you don't have a daily visualization of your cash at hand, you'll probably be less tempted to spend it frivolously. o Most people and businesses, including your employer, need to have a paper trail to document transactions. Checks are a perfect way to keep a permanent record of business activities, even when they are personal. Even if you bank online, there is a well-documented trail of all your transactions. o Using a personal checking account can save you time and money. Imagine how much lost time, travel expense, inconvenience, and potential aggravation you could incur every month if you had to buy money orders or, worse yet, visit all your creditors in person. The ability to simply write a check and drop it in the mail is invaluable. For example, every time you need cash to pay a bill, you simply write a check to your creditor. Your creditor deposits your check in their bank. Your creditor's bank processes your check through the Federal Reserve Banking System (The Federal Reserve Banking System operates as the U.S. Central bank and, among other activities, provides banking services to financial institutions and the U.S. government), and the money is pulled from your checking account. Resultfor very little effort on your part, your creditor gets paid. o The same principles apply to savings accounts. Establishing a savings account keeps your money safe while allowing easy access to it. Plus, you get the benefit of earning some interest on your balance and putting your money to work for you.

How Banks Operate

In addition to providing a safe place for your money, banks also loan money to businesses and consumers. A large portion of a bank's business is lending. How do banks get the money they loan? The money comes from depositors like you. Banks use these deposits to make loans. Every fee you pay to your bank enables them to reinvest in themselves, giving them more money to loan to you, for another fee, of course. Banks are in business to make a profit. Their profit generally comes from the difference in interest paid to depositors and the interest earned on loans. Making loans helps banks make money, and offering checking accounts is a way to attract deposits, which banks turn into profitable loans. Banks cannot legally loan all of their deposited money all at once. The Federal Reserve Board, which is part of the Federal Reserve System, requires that banks must keep a certain percentage of their deposits in reserve at all times, assuring you, the customer, can withdraw your money when you need to. The remaining funds, which are not subject to reserve, are used to make consumer loansOther Services Offered by Banks o Credit Cards

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Personal Loans Home and Car Loans Mutual Funds Business Loans Safe Deposit Boxes Debit Cards Trust Services Signature Guarantees

and many other investment services.

What do u Know about Banking? Functions of Bank? Banking means: transacting business with a bank; depositing or withdrawing funds or requesting a loan etc. or engaging in the business of banking; maintaining savings and checking accounts and issuing loans and credit etc

Functions of Bank? Functions of banks include: 1. issue of money, in the form of banknotes and current accounts subject to cheque or payment at the customer's order. These claims on banks can act as money because they are negotiable and/or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the payee may bank or cash. 2. Netting and settlement of payments banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economise on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. 3. Credit intermediation banks borrow and lend back-to-back on their own account as middle men. 4. Credit quality improvement banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. 5. maturity transformation banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a

stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets).

How bank makes profit and Generate Revenue? Banks are making profits through the Deposits and Loans. Giving Interest on lower rates to the Deposits. Charging Interest on Higher rates to the Loans. In-between is the Profit to the Bank and all the administrative expenses are covered by the charges. The primary way is through lending money to their customers. A second way would be to issue bonds. A third way would be to sell stock Types of Bank Account A bank account is a record of the financial transactions between the customer and the banking institution. The banking institutions have provided several types of accounts to cater to the needs of all sorts of individuals. One of the most important functions of banks is accepting deposits, which is aimed towards generating savings for the purpose of utilizing them in profitable investments. People, on the other hand, also prefer to deposit their savings in the banks, as they can earn interest and also avoid the danger of theft. Types of Bank Accounts Though, the types of accounts offered can vary from bank to bank, here are some of the common bank accounts offered by commercial banks. Checking Account A checking account is also known as a current account or a transactional account. Money deposited in this type of account can be withdrawn at any time, as there in no restriction on the number of withdrawals and the amount of money withdrawn. Customers are generally given paper checks to carry out day-to-day transactions, like paying bills, making purchases, or transferring money to another account. ATM (Automated Teller Machine) facility is also provided to the customers. However, no interest is paid on the deposited money and sometimes, customers have to pay a charge to the banks for rendering this service. This type of account is generally maintained by businessmen or concerns, as they have to make a number of financial transactions each day. A transactional account is sometimes called a demand deposit account, as no notice is required to withdraw money, i.e. money is available on demand.

Savings Account Savings accounts are aimed towards mobilizing small savings from the general public. There are certain restrictions regarding the number of withdrawals and the amount to be withdrawn in a particular time period. However, money deposited in this account, earns a fair rate of interest. Though the customers can't withdraw their money with checks, they can avail the ATM facility for the same. A passbook is also provided, which keeps track of all the financial transactions. Money Market Account A money market account is a type of deposit account, in which money can be deposited to earn a higher rate of interest than the savings account. However, a minimum balance is required to be maintained to earn interest and avoid fees. There is also a limit on the number of transactions that can be carried out in a particular month. The customers are usually allowed to make 6 withdrawals per month. Certificate of Deposit A certificate of deposit is also known as time deposit or fixed deposit account. This type of bank account requires the customers to deposit a certain sum of money for a fixed time period. The money deposited in this account can't be withdrawn before the date of maturity. However, some banks allow customers to withdraw money before maturity, by charging a penalty. The rate of interest paid on time deposits is usually higher than the other types of bank accounts. In addition to this, the interest paid on this account depends on the maturity period, i.e. longer the maturity period, the higher is the rate of interest paid. Banking institutions offer several different types of bank accounts to satisfy the individual needs of their customers. These bank accounts enable the public to deposit their money in banks and thereby earn a monetary return. Types of Deposits? What are financial products? Instrumental products? Cheque, DD What is an Over Draft? Diff between Current A/c and Savings A/c? Diff between Debit card and Credit card? What is Plastic money? ATM, Top 5 private banks? Diff between Nationalized bank and Private Banks?

Types of Cheques?