Understanding the US Banking System
The United States banking system can seem complicated and confusing. Even many Americans don’t completely
understand it much of the time. For international students coming into the United States, it can seem downright
baffling. This article will attempt to provide you with the basic details about what you need to know to understand
the United States banking system.
How Banks Work
The primary function of banks is to lend account holders’ money to other people, who will use that money to buy
home, businesses, or send their children to college. When you deposit your money at a bank, that money goes into a
large pool of money, and the amount of money that you deposited is credited to your account. Money is subtracted
your account when you write checks or make withdrawals. Money is also added to your account as you accrue
Banks create money in the economy by making loans. The Federal Reserve sets a reserve requirement for banks that
determines the amount of money that banks are allowed to lend. This is best explained through an example. If a bank
receives a deposit of $100, and the reserve requirement set by the Federal Reserve is 10%, the bank is allowed to
lend out $90 of that deposit. That $90 goes back out into the economy, and eventually ends up deposited in another
bank, which is then able to lend out $81 of the $90, and so on and so forth. This is how banks create money.
Types of Banks
There are several different types of banking institutions, and although initially they were all very distinct,
nowadays they’re more or less the same
- Commercial Banks
- Commercial banks were initially established to provide services for businesses.
- Savings Banks
- Savings banks were meant to provide a place for lower-income workers to save their money.
- Savings and Loans
- Savings and loan associations and cooperative banks were established to make
it possible for lower-income workers to buy homes.
- Credit Unions
- Credit unions were started by people who shared a common bond (such as working in the same
place or living in the same community) to provide emergency loans for people who
couldn’t afford to get loans from traditional lenders.
These days, there isn’t much differentiating the types of banks from each other. When choosing a bank for
yourself, however, you’ll still want to research the services they offer.
Interest is a charge for the use of borrowed money. Banks make money by charging interest on the loans they make.
They can do this because the interest they charge on loans is higher than the interest that they deposit into their
customers’ accounts. A bank’s specific interest rate depends on several variables, including the number
of people who want to borrow and the amount of money the bank has to lend. This amount is also dependent upon the
reserve requirement set by the Federal Reserve. It may also be affected by the funds rate, the interest rate that
banks charge each other for short-term loans to meet their reserve requirements. Loaning money is risky for the
so banks charge higher interest rates for riskier loans.
Types of Accounts
There are several different types of bank accounts. The two most common are checking accounts and savings
- Checking accounts
- Checking accounts are probably what you, as an international student, will need. They allow you
to deposit and withdraw money frequently. When you open a checking account,
you usually get a checkbook and a bank card, which you can use to make
purchases and pay bills. Often these accounts have minimum monthly balances
and service fees, and these vary according to the type of account you have.
- Savings accounts
- Savings accounts are for long-term deposits for earning interest. Interest rates, minimum
balances, and service fees for savings accounts vary from bank to bank, and
also depend on the amount of money deposited. You will probably not need a
savings account as an international