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Money & Banking Questions

1. Banks accept deposits from customers and use those funds to loan to other customers. Funds can also be invested in other instruments. Customers who deposit funds with banks receive interest on those monies, while customers who borrow funds must pay interest. To be successful, banks must lend money (or make other investments) at rates which exceed the rates they pay depositors.

In addition to receiving funds from depositors, banks can also borrow funds from the Federal Reserve. The rate at which these funds are borrowed is called the discount rate. The discount rate is the base rate from which most banks calculate the base rate (prime rate) which they charge their best (lowest risk) corporate customers.

In the United States, commercial banks are heavily regulated because accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC), the Federal Savings and Loan Insurance Corporation (FSLIC) and similar organizations up to $100,000 per institution. The savings and loan crisis which garnered headlines during the last years of the last century was a result of these government organizations having to pay depositors those guaranteed funds in institutions which have failed.

During the 1980s, there was increased pressure on the federal government to remove some of the regulations which prohibited some bank activities. Indeed, savings and loans and banks were largely deregulated during the 1970s when interest rate controls were removed. However, the large number of failures within the thrift industry and the difficulties which the securities industry suffered during the last half of the 1980s have combined to bring about skepticism about the wisdom of removing additional regulations. In fact, there have been calls for additional regulations to be implemented in order to protect taxpayers from additional liability in the future (Whiting, 1991, p. 39).

Regardless of the regulations which may be imposed, the b...

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Money & Banking Questions. (1969, December 31). In LotsofEssays.com. Retrieved 04:34, March 29, 2024, from https://www.lotsofessays.com/viewpaper/1694572.html