1. © 2007 Prentice Hall, Inc. All rights reserved.15–1 Chapter 15 Money and Banking

2. © 2007 Prentice Hall, Inc. All rights reserved.15–2 L E A R N I N G O U T C O M E S After reading this chapter, you should be able to: Define money and identify the different forms that it takes in the nation’s money supply. Describe the different kinds of financial institutions that compose the U.S. financial system and explain the services they offer. Explain how financial institutions create money and describe the means by which they are regulated. Discuss the functions of the Federal Reserve system and describe the tools that it uses to control the money supply. Identify three important ways in which the money and banking system is changing. Discuss some of the institutions and activities in international banking and finance.

3. © 2007 Prentice Hall, Inc. All rights reserved.15–3 What’s in It for Me? If you want to understand where money comes from, and how to get the most benefits from it, then this chapter will be useful. The chapter explains what money is, where it comes from, how the supply of money grows, and the kinds of services available to money users from the financial services industry.

4. © 2007 Prentice Hall, Inc. All rights reserved.15–4 What Is Money? Money must have:  Portability  Divisibility  Durability  Stability

5. © 2007 Prentice Hall, Inc. All rights reserved.15–5 The Functions of Money Medium of Exchange Store of Value Measure of Worth

6. © 2007 Prentice Hall, Inc. All rights reserved.15–6 The Money Supply M1: Spendable  Currency (paper money and coins)  Checks  Checking accounts—demand deposits in banks M2: M1 + Convertible Money  Time deposits  Money market mutual funds  Savings accounts

7. © 2007 Prentice Hall, Inc. All rights reserved.15–7 The Money Supply (cont’d) M-3: M2 + Less Liquid Deposits  Large time deposits and sizable money market funds by large institutions

8. © 2007 Prentice Hall, Inc. All rights reserved.15–8 Credit Cards: Plastic Money? Credit cards are not “money” and are not included in M-1, M-2, or M-3 when measuring the nation’s money supply.

9. © 2007 Prentice Hall, Inc. All rights reserved.15–9 The U.S. Financial System Financial Institutions  Commercial Banks  Companies that accept deposits that they use to make loans, earn profits, pay interest to depositors, and pay dividends to owners  Savings and Loan Associations (S&Ls)  Accept deposits, make loans, and are owned by investors

10. © 2007 Prentice Hall, Inc. All rights reserved.15–10 The U.S. Financial System (cont’d) Financial Institutions  Mutual Savings Banks  All depositors are owners of the bank, so all profits are divided proportionately among depositors via dividends  Credit Unions  A nonprofit, cooperative financial institution owned and run by its members; promotes thrift

11. © 2007 Prentice Hall, Inc. All rights reserved.15–11 The U.S. Financial System (cont’d) Non-Deposit Institutions  Unlike commercial banks, inflowing funds are intended for purposes other than earning interest for depositors  Pension funds  Insurance companies  Finance companies  Securities investment dealers

12. © 2007 Prentice Hall, Inc. All rights reserved.15–12 Special Financial Services Individual Retirement Accounts (IRAS) Trust Services International Services  Currency exchange  Letters of credit  Banker’s acceptance Financial Advice and Brokerage Services Electronic Funds Transfer (EFT) Automated Teller Machines (ATMs)

13. © 2007 Prentice Hall, Inc. All rights reserved.15–13 Regulation of the Banking System Federal Deposit Insurance Corporation (FDIC)  Preserves confidence in the financial system by supervising banks and insuring deposits in banks and thrift institutions  Commercial banks pay fees for membership in the FDIC  The FDIC guarantees the safety of all deposits of every account owner up to the current maximum of $100,000  The FDIC maintains the right to examine the activities and accounts of all member banks

14. © 2007 Prentice Hall, Inc. All rights reserved.15–14 The Federal Reserve System The Fed: The Nation’s Central Bank  Structure  Board of governors  Reserve banks  Open Market Committee  Member banks  Other depository institutions  Functions  Banking for the government  Banking for banks  Controlling the money supply

15. © 2007 Prentice Hall, Inc. All rights reserved.15–15 Controlling the Money Supply Monetary Policy  The Fed manages the nation’s economic growth by managing money supply and interest rates Tools of the Fed  Reserve requirements  Discount rate controls  Open market operations  Selective credit controls

16. © 2007 Prentice Hall, Inc. All rights reserved.15–16 The Changing Money and Banking System Anti-Terrorism Regulations  Bank Secrecy Act (BSA)  USA Patriot Act  Customer Identification Program (CIP) Interstate Banking

17. © 2007 Prentice Hall, Inc. All rights reserved.15–17 The Impact of Electronic Technologies Check 21  Allows banks to present a substitute check for payment instead of the original check Blink Credit Cards  A “contactless” payment system Debit Cards  Allow the transfer of money between accounts  Used with point-of-sale (POS) terminals

18. © 2007 Prentice Hall, Inc. All rights reserved.15–18 The Impact of Electronic Technologies (cont’d) Smart Cards  Credit-card-size plastic cards with an embedded computer chip that can be programmed with “electronic money” E-Cash  Money that moves via digital transmissions on the Internet, outside the established network of banks, checks, and paper currency overseen by the Fed

19. © 2007 Prentice Hall, Inc. All rights reserved.15–19 International Banking and Finance World Bank  Provides a limited scope of financial services International Monetary Fund (IMF)  Promotes the stability of exchange rates  Provides temporary, short-term loans to member countries  Encourages members to cooperate on international monetary issues  Encourages development of a system for international payments