Study Questions

Banks - of all types - are Financial Intermediaries. What does that mean?

Any 'Intermediary' - is someone that you go to in order to get something that you don't have. At the same time - it is someone that you take something to that you no longer need. In other words - an intermediary - could also be called a 'market'.

In the old days - you raised crops or animals - and you took those to the local 'market' and maybe you traded your chicken for nails from the blacksmith - or maybe a cow for lumber from the mill. That worked pretty good - but often you might have only a cow to trade - and all you needed was some seed. So you would trade with your cow with the seed dealer for as much seed as a cow was worth (far more than you needed) - so you would then have to find others to trade your excess seed with - until you had only the seed you needed - and other merchandise that you could use (or even trade again later).

For the most part that worked 'ok'. Not great - just 'ok'. The point is - that market - was the ONLY intermediary available.

Then someone came up with the idea of using precious metals - gold and silver - as a means of exchange and even a store of value. If you had a big piece of gold - you could always cut a piece off - when you only needed a little bit - but if a cow was all you had - it didn't work very well to just cut a leg off. The gold could be used any time - it was fairly easy to carry - and most agreed on its value.

Skipping a lot of steps in between - the idea of using gold as a means of exchange and a store of value - eventually came to paper money - which eventually came to things like checking accounts and debit cards. It also came to create a need for a 'bank'. The 'bank' serves as a financial intermediary - since it takes your deposits in the form of cash or checks - and places the funds that the deposit represents into your account. Then - until you need that money - the bank has the ability to lend that very same money to someone who doesn't have enough to do what they need to do. Of course - the bank has the very complicated job of making sure that your money - is available to you when you need it. This is known as liquidity - and will be talked more about - later this semester.

Just remember - when we talk about financial institutions - we are talking about a group that belongs to a larger group known as financial intermediaries.

In years past - for those of you old enough to remember - it seemed there was a bank on every corner. Not just a branch - but an independently chartered banking organization. This was particularly true in Texas - where State banking laws prohibited both Bank Holding Companies and branch banking. Interestingly - at that same time both Savings and Loans (S&L's) and Credit Unions were authorized to have branches - but were limited to the same community.

Bank Holding Companies came into existence long before Branch Banking in Texas. Holding Companies (as the Text explains) can own one or more banks and can even have banks with different types of charters. There was a point - that the 'bank' on every corner - had a different first name - but the same last name. For example, there was Citizens Frost, North Frost, Liberty Frost, etc. - now all of which are just branches of Frost Bank. Many Bank Holding Companies were so situated.

"We really sell two products in banking - money and trust." Steve Katz

Trust is also known as a Fiduciary Relationship. That is, when a customer places their financial trust, with a bank - they are relying on the 'bank' to invest wisely and to take appropriate safe guards. This applies not only with the money that is on deposit - but also with the people they hire. In that manner - every employee of the bank - has the same responsibility - to remember that the money in the bank doesn't belong to the bank - it belongs to the hundreds or thousands of people like you and me - that have placed their trust in that bank.

As this is an "Principles" Course in Banking this text is at a reasonably basic level. As you read through the text - please be aware - that much of the time the use of the word "Bank" is in a generic sense. That is - a 'bank' is a term used to describe a financial institution, whether that institution's charter be from the Texas Banking Department, the Comptroller of the Currency, the National Credit Union Association or the Office of Thrift Supervision.

However, this text was written by the ABA or American Bankers Association - primarily for use in classes made available to BANK employees - and as such is written much more specifically for State or National Banks - than for Credit Unions or Savings Banks. Session 15 will delve into more of the specific differences between types of Financial Institutions.

The text makes the observation that "Employees of financial institutions are responsible...will always be working with the customers in a friendly yet professional manner".

The role of the customer service employee - whether that be teller, new accounts, lending representative etc. - is vital in establishing the relationship of the customer to that bank. Often, a customer may have dealings with only one employee - and how that customer perceives the entire bank - is based on that interaction with only one person.

ASSIGNMENT:

Discuss the role of the 'bank' in the community. Include the impact of lending practices, corporate citizenship and the roles as an employer and user of goods.

Paper length should be two to three pages - Include url's used for your information sources as references. Research paper must be emailed to the instructor by Friday of the third week of classes.