Chapter 16: Financial System


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14th edition

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Chapter 16: Financial System

  1. 1. Chapter 16 The Financial System
  2. 2. Learning Objectives1 Outline the structure and importance of 5 Discuss the organization and the financial system. functioning of financial institutions.2 List the various types of securities. 6 Explain the functions of the Federal Reserve System and the tools it3 Define financial market, and distinguish uses to control the supply of money between primary and secondary financial and credit. markets. 7 Evaluate the major features of4 regulations and laws affecting the Describe the characteristics of the major stock exchanges. financial system. 8 Describe the global financial system.
  3. 3. The Financial Systems The financial system is the process by which money flows from savers to users.
  4. 4. Understanding the Financial Systems Financial System s Savers s Users s Financial Institutions s Financial Marketss Savings is a function of many variables.s Funds can be transferred between users and savers directly or indirectly.
  5. 5. Types of Securitiess Securities s Financial instruments s Obligations on the part of the issuer s Businesses and governmentss Provide rate of return to purchaserss Money market instrumentss Bondss Stock
  6. 6. Money Market Instrumentss Short-term debt securities s Issued by governments, financial institutions, and corporationss Investors are paid interest for the use of their fundss Generally low-risks U.S. Treasury bills, commercial paper, and bank certificates of deposit
  7. 7. Bondss Government Bonds s Bonds sold by the U.S. Department of the Treasurys Municipal Bonds s Bonds issued by state or local governments s Revenue bonds are used toward a project that will produce revenue, general obligation bonds are nots Corporate Bonds s A diverse group and often vary based on the collateral
  8. 8. Types of Bonds
  9. 9. Bond Ratingss Price is determined by risk and interest rate.s Several firms rate bonds s Standard & Poor’s (S&P) s Moody’ss Investment-grades Speculative/Junk
  10. 10. Bond Ratings
  11. 11. Stockss Common stock– ownership claims in corporations s Vote on major company decisions s Cash dividends s Price appreciations Preferred stock– stockholders who receive preference in the payment of dividends
  12. 12. Convertible Securitiess Stockholder has the right to exchange the bond or preferred stock for a fixed number of shares of common stock.
  13. 13. Financial Marketss Primary market– firms and governments issue securities and sell them initially to the public s When a firm offers a stock for sale to the general public for the first times Secondary market– collection of financial markets in which previously issued securities are traded among investors
  14. 14. Understanding Stock Marketss Stock market (exchange)– market in which shares are bought and sold by investors, such as the New York Stock Exchange.
  15. 15. Stock Exchangess The New York Stock Exchange– the Big Board is the most famous and one of the oldest stock markets in the world. More than 3,000 stocks are listed on the NYSE.s The Nasdaq Stock Market– the second largest stock market. Over 5,000 companies have their stocks listed on Nasdaq, but many are smaller firms.s Other U.S. Stock Markets: s The American Stock Exchange/AMEX s Regional stock exchanges s Foreign markets
  16. 16. ECNs and the Future of Stock Marketss ECNs– Electronic Communication Networks s The 4th market s Buyers and sellers meet in a virtual market and exchange with one another s Take place on INET or Archipelagos INET and Archipelago have been purchased by Nasdaq and the NYSE
  17. 17. Investor Participation in the Stock Markets Investors use brokerage firms to: 1. Establish an account 2. Enter orders 3. Trade stocks The brokerage firm executes the trade on behalf of the investor, charging a fee for the order.s Market orders Limit order
  18. 18. Financial Institutionss Commercial Bankss Savings Banks and Credit Unionss Non-depository Institutions
  19. 19. Financial Institutions
  20. 20. Electronic Bankings An increasing amount of funds move through electronic funds transfers (EFTs).s Millions of businesses and consumers now pay bills and receive payments electronically.s Most employers directly deposit employee paychecks.s Social Security and other federal payments are made each year electronically.s Most banks now offer customers debit cardss More than 1/3 of American households use some online banking.
  21. 21. Federal Deposit Insurance Corporations Enacted by the Banking Act of 1933s Restored public confidence in the banking systems Before deposit insurance, runs were common as people rushed to withdraw their money from the banks Deposit insurance shifts the risk of bank failures from individuals to the FDIC
  22. 22. Savings Banks and Credit Unionss Offer a variety of consumer servicess 80+% of their loans are real estate loanss Credit unions are cooperative financial institutions owned by depositors/memberss Credit unions are created to serve consumers s Insured by National Credit Union Administration (NCUA), which functions the same as the FDIC
  23. 23. Nondepository Financial Institutionss Insurance Companiess Pension Fundss Finance Companiess Mutual Funds
  24. 24. The Role of the Federal Reserves The Federal Reserves Created In 1913s Central bank of the United Statess Regulates commercial bankss Performs banking-related activities for the U.S. Department of Treasurys Provides services for bankss Sets monetary policy
  25. 25. Organization of the Federal Reserves 12 Federal reserve districts s Own federal reserve banks District banks are run by a nine-member board of directorss The board of governors is the governing bodys Politically independents Federal Open Markets Committee (FOMC) sets most policies concerning monetary policy and interest rates
  26. 26. Check Clearing and the Feds Americans still write billions of paper checks.s The process by which funds are transferred from the check writer to receiver is a multiple-step process managed and cleared by the Fed.s The Check Clearing for the 21st Century Act is making this process more electronic.
  27. 27. Monetary Policys Controlling supply of money and credits Measures of the money supply: M1 & M2s The Fed requires banks to maintain reservess Set the discount rates Open market operations
  28. 28. M1 & M2
  29. 29. Regulation of the Financial Systems Bank regulations Government regulation of the financial markets (SEC)s Industry self-regulation s Rules of conduct by professional organizations like National Association of Securities Dealers s Market surveillance
  30. 30. The Financial System: A Global Perspectives The financial system is more connected.s Financial institutions are more global.s Only 3 of the 30 largest banks in the world are U.S. institutions.s Most nations have a central bank.