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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.
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 from your account when you write checks or make withdrawals. Money is also added to your account as you accrue interest.
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.
There are several different types of banking institutions, and although initially they were all very distinct, nowadays they’re more or less the same
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 bank, so banks charge higher interest rates for riskier loans.
There are several different types of bank accounts. The two most common are checking accounts and savings accounts.