20-1 The Money Supply and Banking Systems Chapter 20

Chapter 20 Objectives After studying this chapter, you will be able to: List the four financial functions of money and define two key measures of the money supply Explain the major functions of the Federal Reserve System and identify other key federal financial institutions Distinguish investment banks from commercial banks and identify the three major types of investment banks 20-2

Chapter 20 Objectives Cont. Identify the major types of commercial banks and outline the impact of banking deregulation over the past three decades Identify the two major sets of economic forces that triggered the meltdown of 2008 and sent the economy into a global recession Outline the efforts to reform the banking industry in the wake of the subprime crisis 20-3

The Meaning of Money 20-4 Money: Anything generally accepted as a means of paying for goods and services It serves as a medium of exchange a unit of accounting a store of value a standard of deferred value

Money Supply Currency and demand deposits MI M1, savings accounts, balances in money market mutual funds, and time deposits M Money Supply: The amount of money in circulation at any given point in time

Exhibit 20.1: Trends in the Money Supply ©2007 Prentice Hall 1-6

The Federal Reserve System Federal Reserve System: The central banking system of the United States Responsible for regulating banks and implementing monetary policy 20-7

The Federal Reserve System Serving as a bank for the federal government and many commercial banks, Supervising and regulating many financial institutions, Managing the nation’s money supply by designing and implementing monetary policy 20-8

The FED’s Tools for Implementing Monetary Policy Federal Funds Rate: The interest rate that member banks charge each other to borrow money overnight from the funds they keep in the Federal Reserve accounts Actions of the Fed Buying and selling Treasury bonds, bills, and notes Adjusting reserves requirements Lending through the discount window

Actions of the Fed 20-10

The FED’s Tools for Implementing Monetary Policy Discount rate: The interest rate that member banks pay when they borrow funds from the Fed. Prime rate: The interest rate a bank charges its best loan customers.

Other Government Banking Agencies and Institutions FDIC Fannie Mae Freddie Mac

Other Government Banking Agencies and Institutions Federal Deposit Insurance Corporation (FDIC): The federal agency responsible for protecting money in customer accounts and managing the transition of assets whenever a bank fails Fannie Mae: The government-sponsored enterprise responsible for guaranteeing and funding home mortgages Freddie Mac: A secondary mortgage institution similar to Fannie Mae.

Investment Banking Investment Banks: Firms that offer a variety of services related to initial public stock offerings, mergers and acquisitions, and other investment matters. Global Investment Banks Regional Investment Banks Boutique Investment Banks

Commercial Banks Retail banks Merchant banks Thrift banks Credit unions Private banks Commercial Banks: Financial institutions that accept deposits, offer various types of checking and savings accounts, and provide loans

Commercial Banks Retail Banks: Banks that provide financial services to consumers Merchant Banks: Banks that provide financial services to businesses can also refer to private equity management Thrift Banks: Banking institutions that offer deposit accounts and focus on offering home mortgage loans Credit Unions: Not-for-profit, member-owned cooperatives that offer deposit accounts and lending services to consumers and small businesses Private Banking: Banking services for wealthy individuals and families

Other Financial Services Independent Mortgage Companies: Nonbank companies that use their own funds to offer mortgages Mortgage Brokers: Nonbank companies that initiate loans on behalf of a mortgage lender in exchange for a fee Finance Companies: Nonbank institutions that lend money to consumers and businesses for cars and other vehicles, home improvements, expansion, purchases, and other purposes Credit Rating Agencies: Companies that offer opinions about the creditworthiness of borrowers and of specific investments

Banking and Financial Bubbles Bubble: A market situation in which frenzied demand for an asset pushes the price of that asset far beyond its true economic value 1-18

Exhibit 20.2: The Housing Bubble 1-19