Five Common Banking Misconceptions

Banking and banks have been around for centuries, yet most of us know very little about how banking works. Check out these five common fallacies about today’s banking system from Jim Smith, a local bank manager and one of Business and Agri-Industries’ newest part-time instructors.


Here are five common misconceptions about banking:

  1. Banks are insured by the federal government.

While bank deposits are insured by FDIC, which stands for the Federal Deposit Insurance Corporation, some banks are not. Banks pay a premium to be insured by the FDIC, just like any other insured entity.

  1. Banks lend out customer deposits.

Banking hasn’t worked this way for a long time. Banks make adjustments to balance sheets, assets, and liabilities, essentially lending out money from the very loans they issue.

  1. Banks have lots of cash in their vaults.

The total physical US currency supply is about 1.2 trillion dollars, and only about a third of that is in the US. Most banks keep relatively little cash on hand and prefer to handle physical currency as little as possible.

  1. Central banks are all powerful.

The Federal Reserve Act does give central banks some impressive powers, but they have no power over credit rating agencies. Many hedge fund and wealth funds that act as banks are also not under Federal Reserve authority, neither are many international banks.

  1. Banks alone control interest rates.

Credit rating agencies have as much if not more influence over interest rates than banks; their ratings determine the cost of loans.

So were you surprised? The way banking works has changed over the centuries, and other countries with different financial systems have different banking procedures. Whether you are a consumer who uses banks every day or a financial executive who interacts with our banking system, you will benefit by knowing how the system works.

Join us for Parkland’s new course, BUS 171 – Principles of Banking, and get your banking education underway!


An introduction to banking and financial services, BUS 171 will focus on bank terminology, financial performance, managing risk and sources of funds, and lending policies and procedures. Course instructor is Jim Smith, and the course textbook is Bank Management and Financial Services by Peter Rose and Sylvia Hudgins, Richard Irwin Publishing.

Parkland will offer BUS 171 beginning this fall semester, Aug. 24–Dec. 16. Class will meet on Wednesdays, 6–8:45 p.m. in Room B134. The course is 3 credit hours, has no prerequisite, and may be applied toward our Business Management AAS degree.

Sign up now; registration for the course ends Aug. 18!

[Bruce Henrikson is chair of the Business and Agri-Industries department at Parkland.]

One thought on “Five Common Banking Misconceptions”

  1. No bank wants to fail, but on the margin, knowing your depositors are insured by the federal government means you can take risks you otherwise wouldn’t take. And banks surely did.

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