1. BUSINESS Ferrell Hirt Ferrell A CHANGING WORLD FHF EIGHTH EDITION
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. 6 Financing the Enterprise part FHF
CHAPTER 14 Accounting and Financial Statements
In chapter fifteen we define money, its functions and its characteristics. We describe various types of money and how the U.S. Federal Reserve Board manages the money supply while regulating the banking system. We will compare commercial banks, savings and loans, credit unions and mutual savings banks. Finally, we will note the challenges that lie ahead for the banking industry.
CHAPTER 15 Money and the Financial System
CHAPTER 16 Financial Management and Securities Markets
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3. Finance
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
Many materials have been used as money
Many times, relatively scarce objects (e.g. precious metals, fine cloth) were used as money because that automatically limits the money supply for that society. As societies advance and grow, they usually develop paper money, with predetermined values that stand in for the objects that previously were used as money. Fiat money, paper money that does not have a backing in gold or another precious object, is a relatively new concept.
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4. Functions of Money Medium of exchange Measure of value Store of value
Accepted as payment for products and resources
Bartering: Trading one good or service for another of similar value
Inefficient because not always divisible and can be complicated in multiple-party transactions
Measure of value
Single standard for assigning and comparing values of products and resources
Store of value
Means of retaining and accumulating wealth
Money helps to enable individuals and organizations to transform a desire for a good or service into an action. Another primary function is as a means of storing wealth.
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5. Characteristics of Money
Acceptability
Divisibility
Portability
Stability
Durability
Difficulty to counterfeit
Any material that is used as money must fit these criteria.
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Types of Money
Paper Money and Coins
Checking Account (Demand Deposit): Money stored in an account at a bank that can be withdrawn without advance notice
Checks serve as a more secure substitute for cash
Savings Account (Time Deposit): Accounts with funds that usually cannot be withdrawn without advance notice
In today’s modern financial system, money can take many forms.
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7. …continued on next page
Types of Money
Credit Cards
Means of access to preapproved lines of credit granted by a bank or a finance company
Credit card companies have been the subject of criticism and scrutiny
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8. Types of Money 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
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9. The Financial System Federal Reserve Board (The Fed) – US Central Bank
Guardian of the American financial system
Independent agency of the federal government
Established in 1913 to regulate the nation’s banking and financial industry
The U.S. Federal Reserve board is in charge of keeping the economy running by storing money, fostering investment opportunities and making loans. The financial system has grown to be very complex, and the Fed has a very difficult job.
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10. The Central Bank Four major functions:
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 system
The Fed tries to maintain a positive economic environment. As part of this, it is charged with four major duties, as listed in the slide.
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11. Monetary Policies Monetary Policy
The means by which the Central Bank controls the amount of money available in the economy
Aims to keep supply and demand in balance to avoid inflation/deflation
As discussed in chapter one, the U.S. has a modified capitalist system. This means that the federal government engages in regulating the economy in limited ways. The Fed’s monetary policies are one of the ways in which the government ensures that the U.S. economic system remains somewhat in balance.
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12. Four Main Monetary Policy Tools
Open Market Operations: Decisions to buy or sell government bonds in the open market
Buying securities increases money in supply and vice versa
Reserve Requirements: Percentage of deposits a bank must hold in reserve
Has a strong effect on the economy and not used often
Discount Rate: Rate of interest the Central Bank charges to loan money to banking institutions
Lowering discount rate encourages borrowing and expands money supply and vice versa
Credit Controls: Authority to establish and enforce credit rules
In order to effectively control the supply of money, the Fed must know how much money is in circulation– this can be a complex task. The above methods are how the Fed increases or decreases the money supply in circulation.
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13. Other Regulatory Functions of the Central Bank
Regulating member banks
Establishes and enforces banking rules that affect monetary policy and competition
Has authority to approve bank mergers
Check clearing
National check processing through check clearinghouses
Depository insurance
Supervises the federal insurance funds that protect the deposits in member banking institutions
The Fed has other duties in addition to developing monetary policy, as outlined above.
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Banking Institutions
Commercial Banks
Largest and oldest of all financial institutions, relying mainly on checking and savings accounts
Loan to businesses and individuals
New hybrid bank institutions perform multiple functions
Banking institutions accept money deposits from and make loans to individuals and businesses.
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15. Insurance for Banks Federal Deposit Insurance Corporation (FDIC)
Insures personal accounts up to $250,000 in US
Every country sets different limits.
After the Great Depression, during which many people lost all their savings, the government instituted insurance to help protect depositors’ money. This assurance helps to prevent runs on banks and calms jittery depositors during times of economic uncertainty. They know that, even if their bank fails, their money will be protected up to $250,000.
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16. Non-Banking Institutions
Diversified Firms: Traditionally non-financial firms that have expanded into the financial field
Insurance Companies: Businesses that protect their clients against losses from specified risks
Pension Funds: Managed investment pools to provide retirement income for members
Non-banking institutions offer some financial services but do not accept deposits. These institutions are not insured by the federal government. They can offer higher interest rates, but they are riskier also.
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17. Non-Banking Institutions
Mutual Fund: Investment company that pools investor money and invests in large numbers of diversified securities
Brokerage Firm: Buy and sell securities for clients and provide other services
Investment Bank: Underwrites new issues of securities for corporations, states and municipalities needed to raise money in capital markets
Finance Companies: Businesses that offer short-term loans at substantially higher interest rates than banks
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18. Electronic Banking ETF: Electronic funds transfer
ATM: Automated teller machines
ACHs: Automated clearinghouses
Online Banking: Bank at home or anywhere/anytime (Increasing the range of services)
Electronic banking and offering services via the computer or mobile devices has grown exponentially since the late 20th century. Many people can now conduct the majority of their banking and investing online.
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19. Future of Banking
Advances in technology are challenging and changing the banking industry
Trend toward larger banks, even in the wake of financial crisis
Uncertain whether the crisis will continue
Future of the banking industry will be shaped by federal government action
Oversight and regulations to prevent future financial meltdowns
Feel free to ask students: Do you think that government actions will be sufficient to prevent future financial misconduct and disasters in the financial industries? This chapter can be used as a segue into a discussion of students’ understanding of the most recent recession, what caused it and what can be done in the future to ensure greater stability in the banking industry.
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