How does the Federal Reserve work? Banks in general?

The Federal Reserve is not a Government entity. They are a private centralized bank of the USA. They print IOU's that we call the dollar.

The dollar is actually the Federal Reserves liabilities. The general idea is that the Federal Reserve regulates other banks in America. The only thing they can regulate is by saying how much a bank needs to hold in Reserve. For example, if they say that a bank needs to have 20% in reserve, suddenly banks can't loan out as much money and that effects the economy because there is suddenly less available "money" (or as you now know debt.) They could also drop the reserve ratio which allows banks to loan out more money.

In Europe there is no reserve ratio so every euro you put in the bank can be loaned out to someone else instantly. This seems to be working out for them right now since their banking system hasn't collapsed.It also works because people tend to not use cash very often. So at the end of the day bankers can meet together and exchange the small differences in deposits.

For example, if I got a loan for $100 and I used it to pay someone, chances are that $100 bill would end up in a bank within 24 hours. Does that make sense? Yes the bank does make interest on the money that you keep in your checking and/or savings accounts.

That money is instantly loaned out. Sometimes to people, sometimes to other banks who are a little short on cash. The Federal Reserve decides what the interest rate is for banks to loan to other banks.

Right now it is 6% APR. Usually the loans are made for a one day period, just so a bank can keep it's required reserve and still make loans. Banks can also get a loan from the Federal Reserve.

The Federal Reserve (and I know this will sound hypocritical) won't actually send cash to that bank to hold in reserve, it will simply say, "okay you've got us backing these loans" and then that bank can loan out more money. Lately, however, the Federal Bank has tried not to loan out money to other banks. Also, banks can hold some of their cash reserve in the Federal Reserve, if they choose to.

Some do, some don't... Taking out a loan is usually based in part upon your salary, your credit score, and your job history/stability. Having a co-signer or a down payment (depending on what type of loan it is) will also help you get a loan. Generally speaking the bank does not have the money to give you a large loan.

The fact is, most people are pretty satisfied with simply having the number written into their account- therefor cash is not needed. They simply write the number into the account, knowing that you won't spend that money right away.

Banks make money by providing liquidity in our economic system. They do this by taking in deposits and then lending out a certain percentage of those deposits. What they hold, is called reserves.

Here's an example....I'm a bank and I take in 100,000 in savings deposits. Let's say that I am required to hold reserves of 20%. So I am able to lend out 80,000.So I lend out the money and charge interest and the payments flow back to me.

As my reserves go above 20% because of additional deposits, loan payments, and profits from fees, I lend out more money. As long as a lot of people, all at once come to me and demand their money, I'll be ok since I always have 20% reserves to meet day to day demands. That's why you can get a better interest rate on savings when you buy a CD.

If I as a bank, can know that you won't demand that money for 6 months or 1 year or 5 years, whatever the CD term is, then that serves to make my reserve situation more stable.

This article: money.howstuffworks.com/fed.htm explains the Federal Reserve very well Basically... when you take out a loan, the bank is giving you money on the trust that you will eventually pay them back more - making them money in the long term. To do this, they obviously must have the money in the first place, which comes from other peoples savings. The rest of the money the bank will invest (stock markets etc), in order to get quicker returns on your money.

Obviously they will make more money on their investment of your money than you will get back from them in interest, however your interest is guaranteed (their return is not). That's how they make their money :-).

The Federal Reserve is the gatekeeper of the U.S. Economy. It is the central bank of the United States -- it is the bank of banks and the bank of the U.S.Government. The Fed regulates financial institutions, manages the nation's money and influences the economy.By raising and lowering interest rates, creating money and using a few other tricks, the Fed can either stimulate or slow down the economy.

This manipulation helps maintain low inflation, high employment rates, and manufacturing output. How do I take out a loan, based on what? To take out a loan, you need to submit an application to the bank.

Base on your credit history and the the purpose of the loan, it will get approved or denied. The interest rate is also decided based on your credit history and the the purpose of the loan. Does the bank actually have that money in house to cover?Yes.

In other words, one cannot lend something one does not have. In fact, every deposit of any kind into a bank is a loan to that bank from people. Without deposits, which are essentially and fundamentally loans from people to banks, the bank could do nothing, it would have no assets.

Does the bank make interest off of my money when it is in their checking / savings?Yes. Banks make their money by investing your money at a higher rate of return than you are receiving. This also could be by lending it to borrowers at a higher rate.

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