The US Banking System can be confusing, especially if you’re someone who came from overseas. Even those who have lived in the United States for quite some time think that the financial institutions and their banking policies are too complicated.
This site attempts to explain the many concepts, information and basic details about the United States banking system in particular.
How Do These Banks Work?
Banking customers can ask banks to loan them money to pay for many things. It could be to buy a home, start a new business or to send their children to school. Bank holders have accounts where they can put money in (which is called a deposit). Your money is tallied and counted towards a large balance “pool”; this is where all deposits go. You can also take money from your overall balance (which is called a withdrawal) when you write checks, attempt money withdrawals, etc. The money you have in your account adds up over time, thanks to interest.
Banks stay in business mostly because of loans. The US Federal Reserve is an institution that sets a maximum loan limit to banks; this limit is the amount of money a bank can set for loans with their customers. For example, Bank A gets a 10% reserve requirement, which is set by the US Federal Reserve. If a customer makes a deposit for $1,000, then Bank A may lend out up to $900 of that money to other customers. The $900 gets out, goes into economic circulation and eventually gets into Bank B. From the $900, around $810 is lent out by Bank B, which re-circulates and the cycle repeats. Loans are one of the primary money-making methods of banks in the United States.
Different Bank Types
Today, there are different kinds of banks that range from commercial to credit unions, but they are about the same when it comes to services and other banking options.
- Commercial Banks. Primarily set up to help businesses with banking services.
- Savings Banks. Started offering lower-wage workers a means to earn more money by setting up a savings account.
- Savings and Loans. Cooperative banks and Savings and Loan banks were created so lower-wage workers could have an option to buy property.
- Credit Unions. Started by individuals who shared a similar trait, i.e., living in a community or working for one company, this type of bank offers emergency loans to individuals who are not qualified for loans from traditional banks.
Interest is money that adds up to the borrowed money over a span of time. Banks make money by charging a percentage of the total loan amount on top of the loan. The interest on loans is significantly higher as compared to the interest that accrues when a customer leaves a balance on their account. Moreover, interest rate mostly depends on the bank and on several defining factors such as how many individuals are borrowing money, how much money the bank has in total and the reserve requirement set by the US Federal Reserve. Other elements include the rate of interest that banks set in order to meet reserve requirements on short-term loans. Loaning is a risky process, so banks try to minimize the risk involved by increasing the interest rate on riskier loans.
Bank Account Types
There are many different account types for banking customers, but more often than not you’d be faced with opening either a Savings Account or a Checking Account. Here are the similarities and differences between the two.
- Checking Account. Customers are best served with a checking account. A checking account allows an individual to withdraw and deposit money with little to no restrictions. You will be given a bank card and a checkbook when you open a checking account. They can be used to pay bills, buy items, withdraw, deposit, etc. Keep in mind that a checking account will normally have service fees and a minimum maintaining balance depending on your account type.
- Savings Account. A savings account is best for customers who want to earn interest on the money they deposit. Minimum balance, service fees and the rate of interest will depend on the bank and the amount of money you initially deposited.