FHF Ferrell Hirt Ferrell M: Business 2 nd Edition

FHF 15 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Money and the Financial System

FHF The study of money—how it’s made, how it’s lost, and how it’s managed Money Anything generally accepted in exchange for goods and services Finance 15-3

FHF Medium of exchange Accepted as payment for products and resources Measure of value Single standard for assigning and comparing values of products and resources Store of value Means of retaining and accumulating wealth Functions of Money 15-4

FHF Acceptability Divisibility Portability Stability Durability Difficulty to counterfeit Characteristics of Money 15-5

Types of Money FHF Paper Money and Coins Checking Account (Demand Deposit) – Money stored in an account at a bank that can be withdrawn without advance notice Savings Account (Time Deposit) – Accounts with funds that usually can not be withdrawn without advance notice 15-6

Types of Money (continued) FHF Money Market Account Higher interest rates than standard bank rates with greater restrictions. Certificates of Deposit (CDs) Savings accounts that guarantee a set interest rate over a period of time providing funds are not withdrawn before maturity 15-7

Types of Money (continued) FHF Credit Cards Means of access to preapproved lines of credit granted by a bank or a finance company 15-8

FHF Types of Money (continued) Debit Card A card that looks like a credit card but works like a check. A direct electronic payment from the cardholder’s checking account Traveler’s Checks, Money Orders, Cashier’s Checks Other common forms of “near” money. Guaranteed as “cash.” 15-9

FHF Federal Reserve Board (the Fed) Guardian of the American financial system. Independent agency of the federal government established 1913 to regulate the nation’s banking and financial industry The US Financial System 15-10

FHF The Federal Reserve System 15-11

FHF Controls the money supply with monetary policy Regulates financial institutions Manages regional and national check-clearing procedures Supervises the federal deposit insurance of commercial banks in the Federal Reserve system The Fed 15-12

FHF Monetary Policy The means by which the Fed controls the amount of money available in the economy Open Market Operations – Decisions to buy or sell U.S. Treasury bills in the open market Monetary Policies 15-13

FHF Reserve Requirements Percentage of deposits a bank must hold in reserve. Discount Rate Rate of interest the Fed charges to loan money to banking institutions Credit Controls Authority to establish and enforce credit rules Monetary Policies (continued) 15-14

FHF Tools for Regulating the Money Supply 15-15

FHF The Fed used every tool in its arsenal Reduced discount rate to almost zero Increased money supply Bought and sold financial assets in nearly frozen markets Created liquidity for failing financial institutions that could not sell their assets Guaranteed loans to improve credit markets Board Chairman Ben Bernanke is a scholar of the Great Depression Financial Crisis 15-16

Regulatory Functions FHF Major responsibility of the Fed to regulate banks that are members of the Federal Reserve system Check clearing Depository insurance 15-17

FHF Commercial banks Largest and oldest of all financial institutions, relying mainly on checking and savings accounts Loan to businesses and individuals Savings and Loan Associations (S&Ls) Financial institutions that primarily offer savings accounts and make long-term loans for residential mortgages also called “thrifts” Banking Institutions 15-18

FHF Credit Unions Financial institutions owned and controlled by depositors; usually having a common employer, profession, trade group or religion. Mutual Savings Banks Financial institutions similar to S&Ls, but owned by depositors Banking Institutions (continued) 15-19

FHF Federal Deposit Insurance Corporation (FDIC) Insures personal accounts up to $250,000 National Credit Union Association (NCUA) Regulates and charters credit unions Insures deposits through its National Credit Union Insurance Fund, like the FDIC Insurance for Banks 15-20

FHF Over 100 banks have failed since 2008, hundreds more at riskfailed Washington Mutual Ameribank Indymac Bank Consumers’ money protected by FDIC Bank Failures 15-21

FHF Bank Failures (continued) In spite of the 2008 failures of financial institutions, the problem pales in comparison with the late 1980s recession 15-22

FHF Diversified firms Insurance companies Pension funds Mutual fund Brokerage firms Finance companies Non-Banking Institutions 15-23

FHF ETF: Electronic funds transfer ATM: Automated teller machines ACHs: Automated clearinghouses Online banking: Bank at home or anywhere/anytime Electronic Banking 15-24

Challenge and Change in the Banking Industry Better management and regulation has helped save the economy from a repeat of the 1980s Savings & Loan problems Far fewer bank failures The industry still needs better oversight Challenge and Change in the Banking Industry FHF 15-25

Future of Banking FHF Trend towards larger banks, even in the wake of financial crisis Even small banks can now offer high-tech services thanks to the internet 15-26

FHF 15-27