Principles of Banking

Eleventh Edition

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This textbook has been approved by the American Bankers Association for use in courses for which
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are granted.

2014 by the American Bankers Association

Eleventh Edition
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted
in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout prior
written permission from the American Bankers Association.
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
Catalog Number: 3010759

ISBN: 0-89982-689-X

Contents
EXHIBIT LIST

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PREFACE
ACKNOWLEDGMENTS

CHAPTER 1

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BANKS AS SERVICE PROVIDERS

LEARNING OBJECTIVES
INTRODUCTION
BANK EMPLOYEES

Bank Employee Careers

Bank Employee Training

BANKS AND THEIR CUSTOMERS

Basic Product Users
High-End Savers
Investors
Borrowers
Businesses

BANKS AND THE COMMUNITY

Community Development
Community Support

BANK COMPETITORS
Credit Unions
Savings Institutions
Brokerage Firms
Finance Companies
Insurance Companies
Mutual Funds
Money Market Funds
Mortgage Companies
Money Service Businesses

BANK REGULATORS
Federal Reserve System (Fed)
Office of the Comptroller of the Currency (OCC)
Federal Deposit Insurance Corporation (FDIC)
Consumer Financial Protection Bureau (CFPB)
State Banking Departments
Bank Regulations

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DEVELOPING THE PUBLIC TRUST: A BRIEF HISTORY OF BANKS

AND THE U.S. ECONOMY
The Early Banking System
Central Banking
Dual Banking System
The Federal Reserve System
The Great Depression
Social Change and Consumer Protection
Leveling the Playing Field
New Opportunities
New Responsibilities
The Financial Crisis and the Great Recession

THE FUTURE OF BANKING

Regulatory Evolution
Financial Services Expansion
Continued Competition
Technological Advances
Smaller, More Innovative Branches
Online and Social Media Marketing

SUMMARY
SELF-CHECK AND REVIEW

CHAPTER 2

BANKS AS BUSINESSES

LEARNING OBJECTIVES
INTRODUCTION
BANKS AS FINANCIAL INTERMEDIARIES

The Feds Management of Bank Loans and Deposits

THE BANK AS A BUSINESS ORGANIZATION

Bank and Financial Holding Companies
Bank Structural Change

BANK ASSETS AND LIABILITIES

Statement of Condition
Managing Assets and Liabilities

BANK INCOME AND EXPENSES

Profit and Loss Statement
Loans Versus Investments
Loan Income
Investment Income
Fee Income

EVALUATING BANK PERFORMANCE

Financial Information Users
Performance Measures

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Budgeting and Planning

SUMMARY
SELF-CHECK AND REVIEW

CHAPTER 3

DEPOSIT ACCOUNTS

LEARNING OBJECTIVES
INTRODUCTION
THE DEPOSIT FUNCTION
Money Supply
Safety
Customer Convenience

DEPOSIT ACCOUNT PRODUCTS

Types of Deposit Accounts
Common Deposit Account Products

DEPOSIT-RELATED SERVICES
Options for Depositing Funds
Types of Deposited Items
Accessing Funds and Account Information

OWNERSHIP OF DEPOSIT ACCOUNTS

Consumer Account Ownership
Business Account Ownership

OPENING A DEPOSIT ACCOUNT

Establishing Identity
Evaluating Capacity and Authority

BANK DEPOSITS REGULATION

Electronic Fund Transfers
Expedited Funds Availability
Truth in Savings
Reserve Requirements
FDIC Insurance Protection

SUMMARY
SELF-CHECK AND REVIEW

CHAPTER 4

PAYMENTS: CASH AND CHECKS

LEARNING OBJECTIVES
INTRODUCTION
CASH AS A PAYMENT SYSTEM

United States Legal Tender

Damaged Coin and Currency

CHECKS AS A PAYMENT SYSTEM

Uniform Commercial Code
Elements of Negotiable Instruments

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Other Types of Checks

ELECTRONIC CHECK PROCESSING

THE CHECK PAYMENT PROCESS
The Drawer
The Payee
The Drawee

CHECK FRAUD
Check Counterfeiting and Alteration
Closed Account Fraud
Check Kiting
Bank Efforts to Combat Check Fraud

LAWS AND REGULATIONS

Collection of Checks and Funds Transfers
Expedited Funds Availability Act

SUMMARY
SELF-CHECK AND REVIEW

CHAPTER 5

ELECTRONIC BANKING

LEARNING OBJECTIVES
INTRODUCTION
THE DEVELOPMENT OF ELECTRONIC BANKING
The Roots of Electronic Banking
Trends in Electronic Banking

PROCESSING ELECTRONIC TRANSACTIONS

EFT and ACH
Fedwire, CHIPS, and SWIFT
Other Federal Reserve Services

ELECTRONIC BANKING AND CONSUMERS

Bank Websites
Internet Banking Services
Card Access to Funds

ELECTRONIC BANKING AND BUSINESSES

Electronic Bill Presentment and Payment (EBPP)
Imaging and Remote Deposit Capture

LAWS AND REGULATIONS

Electronic Fund Transfers
Funds Availability
Check Collection and Funds Transfers
Check Conversion
Electronic Signatures

SUMMARY
SELF-CHECK AND REVIEW
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CHAPTER 6

LENDING

LEARNING OBJECTIVES
INTRODUCTION
THE LENDING FUNCTION
Sources of Credit
Banks as Lenders

LOAN CATEGORIES
Consumer Loans
Real Estate Loans
Business Loans
Government as Borrower and Loan Supporter

THE LENDING PROCESS

The Application and Interview
The Investigation
Loan Documentation
Loan Decision
Loan Administration
Loan Review and Asset Recovery

LOAN POLICY
LAWS AND REGULATIONS
Dodd-Frank and Consumer Lending
Equal Credit Opportunity Act
Truth in Lending Act
Credit CARD Act
Community Reinvestment Act
Loans to Bank Insiders
Home Mortgage Disclosure Act
Real Estate Settlement Procedures Act
Fair Credit Reporting Act
Flood Disaster Protection Act
Bank Lending Limits

SUMMARY
SELF-CHECK AND REVIEW

CHAPTER 7

PERSONAL FINANCIAL PLANNING

LEARNING OBJECTIVES
INTRODUCTION
FINANCIAL HEALTH EQUALS PERSONAL WEALTH
Banks and Financial Planning
Financial Planning Goals
Time Value of Money
Risk Management Considerations

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The Role of the Financial Planner

Ethical Standards
Minimizing Tax Liability

FINANCIAL PLANNING PROCESS

Customer Life Stages
Financial Planning Goals
Financial Products
Net Worth Statement
Cash Flow Strategy

INSURANCE PROTECTION
Life Insurance
Health, Disability, and Long-term Care Insurance
Property, Title, and Vehicle Insurance
Liability Insurance

INVESTMENT SERVICES
Investment Strategies
Portfolio Management

RETIREMENT PLANNING
Social Security and Pensions
Individual Retirement Accounts
Estate Planning

TRUST SERVICES
Estate Settlement
Trust Administration
Guardianships
Personal Agency Services

LAWS AND REGULATIONS

Retail Sales of Nondeposit Investment Products
Consumer Protection in Sales of Insurance
Uniform Trust Laws

SUMMARY
SELF-CHECK AND REVIEW

CHAPTER 8

BUSINESS AND INTERNATIONAL BANKING SERVICES

LEARNING OBJECTIVES
INTRODUCTION
BUSINESS BANKING SERVICES
Cash Management
Insurance
Capital Markets

BUSINESS TRUST SERVICES

Corporate Agency Services

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Employee Benefit Services

INTERNATIONAL BANKING
International Banking Structures
International Payments
Foreign Exchange Services

LAWS AND REGULATIONS

Fiduciary Activities of National Banks, Regulation 9
Gramm-Leach-Bliley Act
Uniform Commercial Code Article 5
Federal Reserve Regulation K
(International Operations of U.S. Banking Organizations)

SUMMARY
SELF-CHECK AND REVIEW

CHAPTER 9

BUILDING RELATIONSHIPS: MARKETING,

SALES, AND CUSTOMER SERVICE

LEARNING OBJECTIVES
INTRODUCTION
MARKETING AND SELLING TODAY

Marketing and Sales

Customer Service
Marketing, the Internet, and Electronic Devices

THE MARKET-DRIVEN STRATEGY

Total Company Effort
Customer Satisfaction
Profitability
Social Responsibility

MEETING CUSTOMER EXPECTATIONS

Responsive Service and Problem Resolution
Competent Staff
Customer Perspective
Courteous Treatment
Reliable Service
Appropriate Products and Services
Professional Appearance
Access to Funds and Staff
Financial Privacy

CROSS-SELLING AND REFERRALS

THE PURCHASING PROCESS
Needs Identification
Prepurchase Searching
Purchase Decision

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Postpurchase Assessment

PRODUCT DEVELOPMENT
LAWS AND REGULATIONS
FDIC Insurance Notification
Unfair, Deceptive, or Abusive Acts or Practices
Do Not Call, Do Not Fax
Prescreening
E-Commerce and Social Media Guidance
CAN-SPAM Act

SUMMARY
SELF-CHECK AND REVIEW

CHAPTER 10

SAFEGUARDING CUSTOMERS AND

LEARNING OBJECTIVES
INTRODUCTION
PROTECTING CUSTOMER INFORMATION
Data Security

CUSTOMER IDENTIFICATION
Account Identification Requirements
Account Access Identification Methods
Identity Theft

FRAUD SCHEMES
Bank Card Fraud
Telephone Fraud
Advance Fee Fraud
Letter of Credit Fraud
Prime Bank Note Fraud
Cashiers Check Scams
Phishing
Pharming
Text Message Fraud
Elder Financial Abuse

SAFEGUARDING BANK ASSETS

Corporate Governance and Ethical Behavior
Employee Hiring and Vendor Management
Crimes Against Banks

SAFEGUARDING THE ECONOMY AND THE NATION

Emergency Preparedness
Terrorism
Money Laundering
Security Breaches

Contents

THE

BANK

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LAWS AND REGULATIONS

SUMMARY
SELF-CHECK AND REVIEW

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ANSWERS TO SELF-CHECK AND REVIEW

Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10

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GLOSSARY

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INDEX

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Principles of Banking

Privacy of Consumer Financial Information

Interagency Guidelines on Information Security
Interagency Guidance on Internet Authentication
Protecting Children Online
Right to Financial Privacy
State Requirements Protecting Social Security Numbers
Red Flag Rules
Bank Security Systems
Bank Secrecy Act
USA PATRIOT Act

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