1. Understanding Money, Banking, and Credit
Chapter Eighteen
Understanding Money, Banking, and Credit
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What Is Money?
Barter system
A system of exchange in which goods or services are traded directly for other goods or services
Money
Anything a society uses to purchase products, services, or resources
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The Functions of Money
Medium of exchange
Anything accepted as payment for products, services, and resources
Measure of value
A single standard or “yardstick”
Store of value
A means of retaining and accumulating wealth
The Consumer Price Index measures the effects of inflation
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The Consumer Price Index and the Purchasing Power of the Consumer Dollar (Base Period 1982–1984 = 100)
BECAUSE OF INFLATION
Source: The U.S. Bureau of Labor Statistics website, September 30, 2008.
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What do you notice has happened to the value of money over the years?
The Consumer Price Index and the Purchasing Power of the Consumer Dollar (Base Period 2002–2008 = 100)
AS FED PRINTS $ DOLLAR BECOMES WEAKER AND WEAKER
Source: The U.S. Bureau of Labor Statistics website, September 30, 2008.
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6. Important Characteristics of Money
Divisibility
Portability
Stability
Durability
Difficulty of counterfeiting
DIVISIBILITY: CAN BE DIVIDED INTO SMALLER UNITS
PORTABILITY: SMALL ENOUGH TO BE CARRIED
STABILITYSHOULD RETAIN VALUE OVER TIME
DURABILITY: STRONG ENOUGH TO LAST
DIFF COUNTERFIET: FEATURES TO PREVENT FAKE CURRENCY
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7. The Supply of Money: M1 and M2
Demand deposit
An amount on deposit in a checking account
Time deposit
An amount on deposit in an interest-bearing savings account
Two main measures of the supply of money M1
Currency, demand deposits, and travelers checks M2
M1 plus savings accounts, certain money-market securities and small-denomination time deposits or certificates of deposit (CDs) of less than $100,000
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The Supply of Money
Source: The Federal Reserve website, accessed September 30, 2008.
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9. The Federal Reserve System
The central bank of the United States responsible for regulating the banking industry
Controlled by a 7-member board of governors who are appointed by the president and confirmed by the Senate to serve 14-year terms
Composed of 12 district banks and 25 branch banks
District banks are owned by commercial banks that are members of the Federal Reserve system
Main function is to regulate the nation’s money supply by controlling bank reserves requirements, regulating the discount rate, and running open-market operations
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10. Federal Reserve System
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Reserve Requirements
The percentage of its deposits a bank must retain, either in its own vault or on deposit with its Federal Reserve District Bank
More required reserves = less money in circulation
Less required reserves = more money in circulation to stimulate the economy
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Discount rate
The interest rate the Federal Reserve System charges for loans to its member banks
Lower loan rates allow banks to lend more and stimulate the economy
Higher rates slow the economy and check inflation
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13. Open-market operations
The buying and selling of U.S. government securities by the Federal Reserve System for the purpose of controlling the supply of money
To reduce the money supply, the Fed sells government securities on the open market to take money out of circulation
To increase the money supply, the Fed buys government securities
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14. Other Fed responsibilities
Serving as the U.S. government bank
Clearing checks and electronic transfers of funds between banks
Inspection and replacement of worn and unfit currency
Truth-in-Lending Act enforcement
Stock purchase margin requirements
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15. The American Banking Industry
Commercial bank
A profit-making organization that accepts deposits, makes loans, and provides related services to its customers
National bank: A commercial bank chartered by the U.S. Comptroller of the Currency
State bank: A commercial bank chartered by the banking authorities in the state in which it operates
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Source: The Fortune website, accessed September 30, 2008.
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17. Other financial institutions
Savings and loan associations (S&L)
A financial institution that offers checking and savings accounts and certificates of deposit and that invests most of its assets in home-mortgage loans and other consumer loans
Credit unions
A financial institution that accepts deposits from and lends money to only those people who are its members
Members are usually employees of a particular firm, people in a particular profession, or those who live in a community served by a local credit union
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Mutual savings banks
Insurance companies
Pension funds
Brokerage firms
Finance companies
Investment banking firms
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Careers in Banking
The 7 largest banks in the U.S. employ approx. 1,132,000 people
The U.S. Department of Labor expects the number of people employed in banking to grow more slowly than other jobs in the economy between now and the year 2012.
Traits of successful bankers
Ability to interact with people
Strong background in accounting
Appreciation for the banking-finance relationship
Basic computer skills
Ability to sell and market Banking Products
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20. Traditional Services Provided by Financial Institutions
Checking accounts
Check—a written order for a bank or other financial institution to pay a stated dollar amount to the business or person indicated on the check
NOW account—an interest-bearing checking account
Savings accounts
Day to Day Savings account
Certificate of deposit (CD)—a document stating that a bank will pay the depositor a guaranteed interest rate for money left on deposit for a specified period of time
Short- and long-term loans
Line of credit—a short-term loan that is approved before the money is actually needed
Revolving credit agreement—a guaranteed line of credit
Collateral—real estate or property pledged as security for a loan
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21. Traditional Services Provided by Financial Institutions (cont’d)
Credit card (using borrowed money)
Banks and other financial institutions charge merchants fees (a percentage of each credit card transaction) for handling the transactions for the merchant
Banks impose monthly finance charges on the unpaid balances (essentially, a line of consumer credit) of cardholders
Debit card( using your own money)
a card that electronically subtracts the amount of a purchase from the cardholder’s bank account at the moment the purchase is made
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23. As a result of the recent financial crisis
More emphasis on evaluating the creditworthiness of loan applicants
An increase in government regulation of the industry
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24. Globalization of the banking industry
A reduction in the number of banks, S&Ls, credit unions, and financial institutions because of consolidation and mergers
Globalization of the banking industry
The importance of customer service as a way to keep customers from switching to competitors
Increased use of credit and debit cards and a decrease in the number of written checks
Continued growth in online banking
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Online Banking
Electronic funds transfer (EFT) system
Automated financial transactions
Automated teller machines (ATMs)
Automated clearinghouses (ACHs)
Point-of-sale terminals
DIRECT DEPOSIT
PERCENTAGE OF THE $10
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26. International Banking
Popular methods of paying for import and export transactions
Letter of credit
A legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time
Banker’s acceptance
A written order for the bank to pay a third party a stated amount of money on a specific date
Currency exchange
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27. Federal Deposit Insurance Corporation (FDIC)
And other agencies like it
As a result of the Depression, to restore public confidence in the banking industry, the FDIC was created to insure deposits against bank failures
UP TO PER ACCOUNT
JOINT IT IS
3 PEOPLE IS
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Credit Management
Credit
Immediate purchasing power that is exchanged for a promise to repay borrowed money, with or without interest, at a later date.
The five Cs of credit
Character—the borrower’s attitude toward credit obligations
Capacity—the borrower’s financial ability to meet credit obligations
Capital—the extent of the borrower’s assets or net worth
Collateral—borrower assets that can be pledged as security for the loaned amount
Conditions—general economic conditions that can affect a borrower’s ability to repay the loan
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30. How Do You Get Money from a Bank or Lender?
For individuals
Shop around for low interest rates, but you have a better chance at an institution where you already have an account
Fill out a loan application
Describe how you will use the money and how you will repay it
Prepare for an interview
If rejected, ask the loan officer why
For businesses
Develop a relationship with your banker
Apply for a preapproved line of credit or revolving credit agreement even if you do not need the money
Supply financial statements and tax documents
Prepare a convincing cover letter
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31. Checking credit information
Credit information sources regarding businesses
Global credit-reporting agencies
Local credit-reporting agencies
Industry associations
Other firms that have given the firm credit
Credit information concerning individuals
Experian
Trans Union
Equifax
Fair Credit Reporting Act
Consumers have a right to know what information is in their credit bureau files
Consumers have a right to request that information in their files be verified, and they can file an explanation of their side of a dispute
SOME CC COMPANIES HAVE THIS FEATURE BUIT IN TO THEIR WEBSITES
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32. Credit collection procedures & techniques
Sound Firm
Fair, allowing for compromise
Not harassing
Techniques
Subtle reminders
Telephone calls
Personal visits
Legal action
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