Here are some old lecture notes I found (pre crisis):
How Banks Work
Warm Up (5-10minutes)
Get students to shout out all the banks they know. Make a list covering the board. Ask the students what they know about banks and discuss any related points that are raised. If you are met with silence, pose these questions:
Who is the biggest bank in the world? Ans: Citibank, Tokyo-Mitsubishi, HSBC
Have you heard of these famous banks? Rothschilds, JP Morgan, Royal Bank of Scotland
Does anyone work for a bank?
Why are there no foreign retail banks on the streets of China? Ans: Protectionism
Where the world’s banking centres? Ans: London, New York, Hong Kong, Tokyo, Singapore, Switzerland etc
First Point (10 minutes)
Talk about how banks function - because we trust them with our money
We give a bank our money to keep it safe for us and then the bank turns around and gives it to someone else in order to make money for itself.
Still most of us have total trust in the Bank’s ability to protect our money and give it to us when we ask for it.
Banks can lend out considerably more money than they actually have. Therefore, if we all went to the bank to ask for our money at the same time, they would not have enough money to give us.
Vocab (Write on the board after eliciting) – ‘A run on the bank’ ‘credit’ ‘deposit’ ‘loan’
Question (Elicit answers from the students) - Why not put you money under your mattress?
Answer: We use banks because:
1. Interest – banks pay us a small percentage to look after our money,
2. Inflation – over time prices generally increase, thus the value of our money decreases,
3. To stop us spending it,
4. Convenience - cash is not as easy to carry around as an ATM card,
5. Security – in a bank there is less chance of it being stolen, perhaps…
Second Point (15 minutes)
Talk about central banks, The Federal Reserve / Bank of England / ECB in Frankfurt / China’s Central Bank
The Bank of England, also known as the old lady of Threadneedle Street.
• Role: To support the economic policy of Her Majesty’s Government and promote economic growth.
• It has a monopoly on the issue of banknotes (in England and Wales) – Sterling
• It is both the government’s bank and the banker’s bank: ‘lender of last resort’
Vocab: ‘bailout’ ‘money supply control’ ‘banknote’ ‘currency’
• It manages the country’s FX and gold reserves
• It sets the official interest rate (which directly influences commercial interest rates)
• Founded by a Scotsman in 1694 (William Patterson) in order to help the Government pay for a war. Mention how Scots are stereotypically good with money.
Talk about the City of London
The City of London (capital C) is also known as the Square Mile. It is a city within Greater London – it is the historical core and financial / business district. Nobody really lives there- it’s all commercial property. It has a resident population of under 10,000 but a daily working population of 311,000, which is why if you go there on the weekend it is deserted and you can really appreciate the architecture.
Most of the City is governed by the City of London Corporation (who also own a lot property). However there are two enclaves within the City: the Inner Temple and Middle Temple - legal institutions.
The City of Westminster is the political centre – where Parliament is located.
Third point (10 minutes)
Pose this question to the students:
How do banks create money?
Illustrate this Answer on the board:
1. A bank gets a deposit of $100 (it must keep 10% of that as a reserve requirement)
2. The bank lends out the other 90%
3. That $90 is spent in the economy. Let’s say for simplicity that it’s spent in a bar.
4. It eventually finds it way bank into a bank. Let’s say the bar owner takes it there (with the rest of his takings) the next morning.
5. That bank can now lend out $81 of that $90 deposit, (keeping 10% as a reserve requirement).
6. This $81 goes back into the economy for the purchase of goods or services, and eventually finds its way back into another bank.
7. The bank can then lend out 90% of that $81 which is [ask the class]…$73
8. And so the process repeats itself in ever decreasing circles.
In conclusion, $100 makes a much larger ripple in the economy than you may realize.
Fourth Point (10 minutes)
Pose this question to the class and let it hang in the air:
How Do Banks Make Money?
You may get various answers to this but to elicit the real answer ask them the following question:
Every business in the world sells something and banks are no exception. What do banks sell?
Now ask them this:
Then, if banks sell money, what is the price of money?
Ans: The price of money is interest
They make money because they interest they charge on loans is higher than the interest they pay out on deposits.
Loaning money is inherently risky. The bank never really knows if it will get the money back, therefore the riskier the loan, the higher the interest rate the bank charges.
Actually, interest is a small price to pay for using someone else’s money
Talk about house buying and mortgages.
Banks also derive revenue from charging fees. For example
• ATM charges,
• Overdraft charges
• Commissions on securities and investments.
Checking account (USA) / Current account (UK)
World Bank / IMF – International Monetary Fund
Some famous banks:
HSBC – Hong Kong and Shanghai Banking Corporation
Bank of America
Royal Bank of Scotland
UBS – Union Bank of Switzerland