Banking and Interest Rates

Financial Institutions Examples of Savings Institutions in the

Financial institutions are the economic Philippines:
entities that help individuals and • Allied Savings Bank
businesses with several financial services, • BPI Direct Savings Bank
enabling them to deposit, save, invest, • BPI Family Savings Bank
and manage their monetary resources. • BDO Elite Savings Bank, Inc.
• Life Savings Bank, Inc.
Types of Financial Institutions • China Bank Savings, Inc.
Depository institutions • UCPB Savings Bank
Financial institutions that accept depo- • RCBC Savings Bank, Inc.
sits (which are insured up to a maximum
level) from individuals and provide loans. Credit Unions
Nonprofit depository institutions that
Types of Depository Institutions: serve members who have a common
Commercial Banks affiliation (such as the same employer or
Financial institutions that accept depo- the same community).
sits and use the funds to provide
Community Powered is not-for profit
commercial (business) and personal
• Their profits get returned to their mem-
loans.
bers
As of March 2018, 22 commercial banks • How it works:
are in operation in the Philippines and — When you open an account at Com-
they are listed below: munity Powered, you deposit money.
• Bank of Commerce — They use deposits to give loans to fe-
• BDO Private Bank, Inc. llow depositors
• Philippine Bank of Communications — They use that money for better pro-
• Philippine Veterans Bank ducts and services, as well as community
• Robinsons Bank Corporation involvement.
• CTBC Bank (Philippines) Corporation — When people pay on their loans, they
• Maybank Philippines, Incorporated make money.

Philippine Deposit Insurance Commi- Nondepository Institutions

ssion (PDIC) Financial institutions that do not offer
• PDIC is a government instrumentality federally insured deposit accounts, but
created in 1963 by virtue of Republic Act provide various other financial services.
3591 to insure the deposits of all banks.
Types of Nondepository Institutions
PDIC exists to protect depositors by
Finance Companies
providing deposit insurance coverage for
Nondepository institutions that specialize
the depositing public and help promote
in providing personal loans to individuals.
financial stability.
• PDIC provides a maximum deposit Securities Firms
insurance coverage of PhP500,000 per Nondepository institutions that facilitate
depositor per bank. the purchase or sale of securities by
firms or individuals by providing invest-
Savings Institutions (or Thrift Institu- ment banking services and brokerage
tions) services.
Financial institutions that accept depo-
sits and provide mortgage and personal Insurance Companies
loans to individuals. Nondepository institutions that provide
insurance to protect individuals or firms
from the financial consequences of pos- If you write a check to cover the credit
sible adverse events. card bill, it will bounce, because you
really only have a $50 account balance.
Investment Companies
By using the register to keep track of the
Nondepository institutions that sell shares
checks that you write, you will know the
to individuals and use the proceeds to
amount of funds available in your
invest in securities to create mutual
account.
funds.
Check Float
Financial Conglomerates
Float
Financial institutions that offer a diverse
Is the time between the deposit of a
set of financial services to individuals or
check and actual payment by the check
firms.
writer’s bank.
How a Financial Conglomerate serves
Check Clearing for the 21st Century Act
individuals:
(Check 21)
Financial Conglomerate This act allows the bank to transmit
Bank Subsidiary electronic images of checks. Thus, if you
• Accepts Deposits make a payment to a person or com-
• Provides Personal Loans pany by check, the check may clear the
• Offers Credit Cards same day.
Securities Subsidiary Substitute Check
• Provides Brokerage Services An account holder will be able to receive
• Offers Mutual Funds a copy of the electronic image of the
Insurance Subsidiary issued check instead of the original
• Provides Insurance Services check.

Savings Account
Banking Services Offered
Checking Services Credit Card Financing
• Debit Card Safety Deposit Box
A card that is used to make purchases
A box at a financial institution where a
that are charged against a checking
customer can store documents, jewelry,
account.
or other valuables.
• Mobile Banking
• Paying Bills on Time Automated Teller Machine (ATM)
• Checking Account Fees A machine where individuals can deposit
• Monitoring Your Account Balance and withdraw funds any time of the day.
• Reconciling Your Account Balance
Cashier’s Check
Example: A check that is written on behalf of a
Your most recent checking account person to a specific payee and will be
statement shows that you have a charged against a financial institution’s
balance of $300. However, yesterday you account.
wrote checks totaling $250 to pay bills.
Money Order
When these checks clear, your balance
A check that is written on behalf of a
will be $50. Today you received a credit
person for a fixed amount that is paid in
card bill for $200. Even though this
advance.
amount is less than the balance shown
on your most recent statement, you do Traveler’s Check
not have sufficient funds in your checking A check that is written on behalf of an
account to pay this bill. individual and will be charged against a
large well-known financial institution or investment because other investments
credit card sponsor’s account. could be worth less in one year than they
are worth today. The trade-off is that you
Selecting a Financial Institution will receive a relatively low rate of interest
Criteria Used to Select a Financial Insti- on your investment.
tution Term Structure of Interest Rates
Convenience The relationship between the maturities
You should be able to deposit and of risk-free debt securities and the
withdraw funds easily, which means the annualized yields offered on those
financial institution should be located securities.
close to where you live or work.
Loan Rates
Paying Bills Online
Annualized Deposit Rates Offered on
Many financial institutions have estab-
Deposits with Various Maturities
lished a system in which you can pay
Annualized Deposit
bills online instead of writing and sending Maturity
Rate (%)
checks.

Deposit Rates and Insurance 1 month 1.1

The interest rates offered on deposits
3 months 1.3
vary among financial institutions. You
should comparison shop by checking the
6 months 1.4
rates on the types of deposits that you
might make.
1 year 1.6
Fees
Many financial institutions charge fees 2 years 1.8
for various services.
3 years 1.9
Interest Rates on Deposits and Loans
4 years 2.0
Certificate Of Deposit (CD)
An instrument that is issued by a
5 years 2.1
depository institution and specifies a
minimum investment, an interest rate,
10 years 2.4
and a maturity date.

Risk-free Rate Yield Curve

A return on an investment that is Normal Yield Curve
guaranteed for a specified period. In a normal yield curve, longer-term
bonds have higher yields than shorter-
Risk Premium
term bonds.
An additional return beyond the risk-free
rate that can be earned from a deposit
guaranteed by the government.
Yield

Comparing Interest Rates and Risk

When considering investments that have
different degrees of risk, your choice
depends on your risk tolerance. If you
plan to use all of your invested funds for Maturity
necessities one year from now, you may
need to avoid risk completely. In this Flat Yield Curve
case, you should choose a risk-free A flat yield curve occurs when short-term
and long-term interest rates are roughly Monetary Policy
equal. It suggests that investors do not The actions taken by the Federal Reserve
expect significant changes in interest to control the money supply.
rates in the near future.
Open Market Operations
The Fed’s buying and selling of Treasury
securities.
Yield

Shift in the Government Demand for

Funds
The U.S. government frequently borrows
substantial amounts of funds. Any shift in
Maturity
the government’s borrowing behavior
Inverted Yield Curve can affect the aggregate demand for
An inverted yield curve is characterized funds and affect the interest rate.
by short-term interest rates being higher
than long-term rates. This is considered How the Fed Can Stimulate the Economy
an unusual and often concerning pheno- Fed Increases
menon, as it can indicate that investors Supply of Funds in
expect economic challenges or a poten- Banking System
tial recession in the near future.

Interest Rates
Decrease
Yield

Firms Are More Individuals and

Maturity Willing to Borrow Firms Are More
Funds to Expand Willing to Borrow
Steep Yield Curve Their Business Funds
A steep yield curve occurs when there is
a significant difference between short-
term and long-term interest rates. It can Spending Increases
indicate that investors anticipate econo- and Economic
mic growth and rising inflation. Conditions Improve
Steep

Normal Shift in the Business Demand for

Funds
Yield

When economic conditions change, bu-

sinesses review their spending plans and
adjust their demand for funds. This shift
in demand affects the interest rate.
Maturity
Example
Why Interest Rates Change Assume that businesses have just
become more optimistic about the
Shift in Monetary Policy
economy and expect an increase in
Money Supply
consumer demand for the products they
Demand deposits (checking accounts)
produce. Consequently, they are more
and currency held by the public.
willing to expand and must borrow more
funds to support their expansion. Their
actions result in an increase in the
aggregate demand for funds, similar to
the effect of increased government
borrowing. The shift results in a higher
interest rate.