1. BUSINESS Ferrell Hirt Ferrell A CHANGING WORLD FHF EIGHTH EDITION
Business: A Changing World Part 6 Chapter 15.
FHF
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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
Finance is, simply, the study of money. Money can be anything that is generally accepted in exchange for goods and services. 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 functions as a medium of exchange, a measure of value, and as a store of value. It helps to enable individuals and organizations to transform a desire for a good or service into an action, to assign and compare values of products and resources, and acts as a means of retaining and accumulating wealth. Money works better than bartering as a medium of exchange because it is divisible and is easier to use in multi-party transactions.
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5. Characteristics of Money
Acceptability
Divisibility
Portability
Stability
Durability
Difficulty to counterfeit
This slide lists the characteristics of money. 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. Paper money and coins is a common tangible form of money. We can use checking accounts, checks, and savings accounts to deposit money.
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Types of Money
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
Money market accounts and certificates of deposit are means of storing and increasing the value of money because they both earn interest on the amount deposited.
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8. …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
Credit CARD (Card Accountability Responsibility and Disclosure) Act was passed into law in 2009
Important for all card holders
Credit cards are a means of accessing a preapproved line of credit. However, credit cards have been criticized for encouraging people to spend more money than they have. Click on the hyperlink to access a press release on the FDIC’s credit card rules protecting consumers. The average U.S. consumer has between 3-4 credit cards, so this law affects nearly everyone.
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9. 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
A debit card looks like a credit card but works like a check, withdrawing money from a checking account. Traveler’s checks, money orders and cashier’s checks are other forms of ‘near’ money. They are not actually money themselves, but they represent money and are guaranteed as cash.
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10. The U.S. Financial System
Federal Reserve Board (The Fed)
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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11. The Federal Reserve System
The Federal Reserve System is organized into 12 regions, each with its own Federal Reserve Bank.
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12. The Fed 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 Federal Reserve 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.
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
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13. Monetary Policies Monetary Policy
The means by which the Fed controls the amount of money available in the economy
Aims to keep supply and demand in balance to avoid inflation/deflation
Monetary policy is the means by which the Fed controls the amount of money available in the economy. The Fed 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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14. Four Main Monetary Policy Tools
Open Market Operations: Decisions to buy or sell U.S. Treasury bills 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 Fed 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 methods described in this slide are how the Fed increases or decreases the money supply in circulation.
Buy or sell money on the open market
Requiring a percentage of bank deposits to be held in reserve
Setting the interest rates the Fed charges to loan money to banking institutions
The Fed also has the authority to establish and enforce credit rules
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15. Other Regulatory Functions of the Fed
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. It can regulate member banks and approve bank mergers. The Fed participates in national check processing through check clearinghouses. The Fed also supervises the insurance funds that protect deposits made to member banking institutions.
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16. Tools for Regulating the Money Supply
This table provides a summary of the effects of different regulatory tools on the national economy. Students can find this Table on page 479 in their text.
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17. 2008-2010 Financial Crisis 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
All those moves did not guarantee a quick recovery
To combat the financial crisis of 2008 and the Great Recession, the Fed used every tool in its arsenal. It 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; and guaranteed loans to improve credit markets. However, even all these moves did not assure a quick recovery. Board Chairman Ben Bernanke is a scholar of the Great Depression who used his knowledge to develop policy. In spite of his expertise, the severity and complexity of the recession made recovery protracted and sputtering.
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18. …continued on next page
Banking Institutions
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– also called “thrifts”)
Primarily offer savings accounts and make long-term loans for residential mortgages
Most have merged with commercial banks
New hybrid bank institutions perform multiple functions
Banking institutions accept money deposits from and make loans to individuals and businesses. Commercial banks are the largest and oldest of all financial institutions, relying mainly on checking and savings accounts. They provide loans to businesses and individuals. Savings and Loan Associations, also called thrifts, primarily offer savings accounts and make long-term loans for residential mortgages. Many S&Ls have merged with commercial banks. A new kind of hybrid bank has also emerged that performs multiple functions.
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19. Banking Institutions Credit Unions
Financial institutions owned and controlled by depositors
Usually having a common employer, profession, trade group, or religion
Mutual Savings Banks
Similar to S&Ls, but owned by depositors
Found mostly in New England
Credit unions are like banks, but they are owned and controlled by their depositors. Members usually have a common employer, profession, trade group, or religion. Mutual Savings Banks are similar to S&Ls, but are owned by depositors. They are mostly located in New England.
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20. Insurance for Banks 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
Similar to the FDIC
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, the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA) will be protect their money up to $250,000.
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21. Bank Failures
Nearly 300 banks have failed since 2008; hundreds more are at risk
Washington Mutual
Ameribank
Indymac Bank
Consumers’ money protected by FDIC
Since the Wall Street crisis and the onset of the Great Recession in 2008, hundreds of banks have failed. (Click on the word ‘failed’ for an up-to-date FDIC list of failed banks.) However, most consumers are not affected at all by bank failures because their deposits are insured. Even though many banks have failed in recent years, most depositors would never know it because their money is protected.
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22. 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. Diversified Firms are traditionally non- financial firms that have expanded into the financial field, Insurance Companies are businesses that protect their clients against losses from specified risks. Pension Funds are managed investment pools, often provided as a benefit of employment, to provide retirement income for members.
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23. 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
There are a number of other non-banking institutions where investors can place their money if they desire. A Mutual Fund is an investment company that pools investor money and invests in large numbers of diversified securities. A Brokerage Firm buys and sells securities for clients and provides other investment services. Investment Banks underwrite new issues of securities for corporations, states and municipalities needed to raise money in capital markets. Finance Companies are businesses that offer short-term loans at substantially higher interest rates than banks. Again, the interest rates of these non-banking institutions are higher because they do not offer insurance against loss and many of the investment opportunities are riskier.
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24. One of the most important secondary home mortgage lenders in the U.S.
Created to relieve lenders of debt so they can lend more money
Provides many banks with capital
Has experienced major accounting scandals
Was placed in a conservatorship of the Federal Housing Finance Authority
Failure would have meant partial collapse of the house mortgage market
Fannie May was one of the most important secondary home mortgage lenders in the U.S. It was created to relieve lenders of debt so that they could lend out more money for mortgages. The organization has experienced a number of major accounting scandals and was ultimately placed under the conservatorship of the Federal Housing Finance Authority. Federal officials determined that failure would have meant a collapse of the house mortgage market, making the housing collapse in the U.S. even worse. Click on the logo for a video (7:00) on Fannie Mae. This video may help students understand the importance of this organization and why its failure would have been catastrophic. Fannie Mae would be considered a non-banking institution. It helped relieve other financial institutions of their debts so that they could issue more loans.
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25. 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)
This slide illustrates a number of important terms related to electronic banking, which is becoming increasingly important and popular. 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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26. 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
Technological advances are challenging and changing the banking industry. In spite of the high-profile collapse of banks like Washington Mutual in 2008, the trend toward larger and larger banks continues. It is likely that the future of banking will be shaped by government regulation for some time to come.
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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