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Chap020

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Chap020

  1. 1. Chapter 20 Money, Financial Institutions, and the Federal ReserveMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. ChapterTwenty LEARNING GOALS 1. Explain what money is and what makes money useful. 2. Describe how the Federal Reserve controls the money supply. 3. Trace the history of banking and the Federal Reserve System. 4. Classify the various institutions in the U.S. banking system. 20-2
  3. 3. ChapterTwenty LEARNING GOALS 5. Briefly trace the causes of the banking crisis starting in 2008 and explain how the government protects your funds during such crises. 6. Describe how technology helps make banking more efficient. 7. Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund. 20-3
  4. 4. Profile BEN BERNANKE Federal Reserve • Bernanke is a former Princeton economics professor. • Former President George W. Bush appointed Bernanke Chairman of the • Almost every Federal Reserve in 2006. factor related to the economy is influenced by the decisions he makes. 20-4
  5. 5. ChapterTwenty NAME that COMPANY This bank-like store in Austin, Texas, was designed to serve low-income clients who don’t have traditional bank accounts. Customers pay a one-time $10 fee that allows them to cash checks and put the money onto debit cards. Name that company! 20-5
  6. 6. What isMoney? WHAT’S MONEY? LG1 • Money -- Anything people generally accept as payment for goods and services. • Barter -- The direct trading of goods or services for other goods or services. 20-6
  7. 7. What isMoney? STANDARDS for a LG1 USEFUL FORM of MONEY • Portability • Divisibility • Stability • Durability • Uniqueness 20-7
  8. 8. What is theMoneySupply? The MONEY SUPPLY LG2 • Money Supply -- The amount of money the Federal Reserve makes available for people. The money supply is referred to as: - M1 -- Money that can be accessed quickly (coins, paper money, travelers’ checks, etc.). - M2 -- M1 + money that may take a little time to obtain (savings accounts, mutual funds, etc.). - M3 -- M2 + big deposits like institutional money market funds. 20-8
  9. 9. What is theMoneySupply? NEW MONEY LG2 Paper Money Printed in 2010 (In $ Billions) Source: Bloomberg Businessweek, December 20, 2010. 20-9
  10. 10. What is theMoneySupply? HOW LONG DOES LG2 PAPER MONEY LAST? Source: Federal Reserve, www.federalreserve.gov, accessed September 2011. 20-10
  11. 11. What is theMoneySupply? MONEY MILESTONES LG2 20-11
  12. 12. What is theMoneySupply? MONEY FACTS What You Might Not Know About What’s in Your Wallet LG2 • In 2009, the U.S. printed 26,000,000 bills a day! • Each penny costs 1.6¢ and each nickel costs 6¢ to make. • The most-tracked bill on WheresGeorge.com has travelled over 7,600 miles in 4 years! • 2/3 of all U.S. $100 bills are outside the U.S. • 90% of paper money has traces of cocaine! Source: Fast Company, February 2011. 20-12
  13. 13. The GlobalExchange ofMoney EXCHANGING MONEY GLOBALLY LG2 • Falling dollar value: The amount of goods and services you can buy with a dollar decreases. • Rising dollar value: The amount of goods and services you can buy with a dollar increases. • What makes the dollar fall or rise is the position of the U.S. economy relative to other global economies. 20-13
  14. 14. The GlobalExchange ofMoney The IMPACT of a LG2 FALLING DOLLAR • Overseas demand for U.S. products rise. • A favorable exchange rate for U.S. companies increases profits in foreign markets. • U.S. tourism increases which is good for hotels, resorts, theme parks, and retailers that serve international travelers. 20-14
  15. 15. Basics Aboutthe FederalReserve FIVE MAJOR PARTS of the LG2 FEDERAL RESERVE SYSTEM 1. The Board of Governors 2. The Federal Open Market Committee 3. 12 Federal Reserve Banks 4. 3 Advisory Councils 5. The member banks of the system 20-15
  16. 16. Basics Aboutthe FederalReserve The 12 FEDERAL RESERVE LG2 DISTRICT BANKS 20-16
  17. 17. Basics Aboutthe FederalReserve MANAGING the MONEY SUPPLY LG2 • The Fed uses three basic tools: 1. Reserve Requirement -- A percentage of commercial banks’ checking and savings accounts they must keep in the bank or in non-interest-bearing deposits at the local Federal Reserve district bank. 2. Open-Market Operations -- The buying and selling of government bonds. 3. Discount Rate -- The interest rate the Fed charges for loans to member banks. 20-17
  18. 18. The FederalReserve’sCheck-Clearing Role CHECK-CLEARING PROCESS LG2 THROUGH the FEDERAL RESERVE 20-18
  19. 19. ProgressAssessment PROGRESS ASSESSMENT • What is money? • What are the five characteristics of useful money? • What is the money supply, and why is it important? • How does the Federal Reserve control the money supply? • What are the major functions of the Federal Reserve? What other functions does it perform? 20-19
  20. 20. The History ofBanking and theNeed for the The ESTABLISHMENT of theFed LG3 FEDERAL RESERVE SYSTEM • A cash shortage problem in 1907 led to the creation of the Federal Reserve System. • Under the Federal Reserve Act of 1913, all federally chartered banks had to join the Federal Reserve. 20-20
  21. 21. The History ofBanking and theNeed for theFed LARGEST BANK FAILURES LG3 Source: http://www.FDIC.gov, accessed July 2011. 20-21
  22. 22. The U.S.BankingSystem The U.S. BANKING SYSTEM LG4 • Commercial banks • Savings and loan associations • Credit unions • Nonbanks 20-22
  23. 23. CommercialBanks COMMERCIAL BANKS LG4 • Commercial Bank -- A profit-seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and uses those funds to make loans. • A commercial bank has two types of customers: 1. Depositors 2. Borrowers 20-23
  24. 24. ServicesProvided byCommercial COMMERICAL BANKS’Banks LG4 SERVICES • Demand Deposit -- The technical name for a checking account; money is available on demand from the depositor. • Time Deposit -- A savings account; a bank can require a prior notice before you make a withdrawal. • Certificate of Deposit -- A savings account that earns interest, to be delivered on the certificate’s maturity date. 20-24
  25. 25. BANKING on SOCIAL MEDIA (Social Media in Business)• Banks are using the Internet and social media to communicate with Gen Y customers.• Today 29 million Bank of America customers use online banking.• 6.5 million customers use smartphones for mobile banking.• Banks are following other companies leads and embracing social media. 20-25
  26. 26. WHAT to TELL the TELLER (Making Ethical Decisions)• The bank teller mistakenly gives you $320 instead of the $300 you asked for.• You bring the error to her attention, but she disagrees she miscounted the money.• You wonder whether to just keep the extra $20 even though you know her accounts will not balance at the end of the day.• What are your alternatives? What do you do? 20-26
  27. 27. Savings andLoanAssociations SAVINGS and LG4 LOAN ASSOCIATIONS • Savings and Loan Associations (S&Ls) -- A financial institution that accepts both savings and checking deposits and provides home mortgage loans. • Often known as thrift institutions because their original purpose was to promote customer thrift and home ownership. 20-27
  28. 28. Credit Unions CREDIT UNIONS LG4 • Credit Unions -- Nonprofit, member-owned financial cooperatives that offer the full variety of banking services to their members. • As nonprofits, credit unions enjoy an exemption from federal income taxes. 20-28
  29. 29. OtherFinancialInstitutions NONBANKS LG4 • Nonbanks -- Financial institutions that accept no deposits, but offer many of the services provided by regular banks. Nonbanks include: - Life insurance companies - Commercial finance companies - Pension funds - Corporate financial - Brokerage firms services 20-29
  30. 30. The RISE of the NONBANK (Spotlight on Small Business)• About ¼of American households don’t have a bank account.• Mango Store is a bank-like facility in Austin, Texas. Clients pay a one-time $10 fee that lets them cash as many checks as they want by putting the money onto debit cards.• Mango hopes its customers will increase their earning power and remain customers over time. 20-30
  31. 31. OtherFinancial WHAT ATTRACTS CUSTOMERSInstitutions LG4 to ONLINE BANKING • Free identity theft protection • Free credit score monitoring • Personal financial management • Instant messaging service • Bank’s blog Source: comScore, www.comscore.com, accessed September 2010. 20-31
  32. 32. ProgressAssessment PROGRESS ASSESSMENT • Why did the U.S. need a Federal Reserve Bank? • What is the difference between a bank, a savings and loan association, and a credit union? • What is a consumer finance company? 20-32
  33. 33. ProtectingYour Funds PROTECTING LG5 DEPOSITORS’ MONEY • The Federal Deposit Insurance Corporation (FDIC) -- An independent agency of the U.S. government that insures bank deposits up to $250,000. • The Savings Association Insurance Fund (SAIF) -- Insures holders of accounts in savings and loan associations. • The National Credit Union Administration (NCUA) -- Provides up to $250,000 coverage per individual depositor per institution. 20-33
  34. 34. Using Technologyto Make BankingMore Efficient TECHNOLOGICAL LG6 ADVANCEMENTS in BANKING • Electronic Funds Transfer System -- Messages about a transaction are sent from one computer to another so funds can be transferred quickly and more economically. • Debit Card -- Serves the same function as a check; it withdrawals funds from a checking account. 20-34
  35. 35. Using Technologyto Make BankingMore Efficient SMART CARDS LG6 • Smart Card -- A combination of a credit card, debit card, phone card, driver’s license, and more. 20-35
  36. 36. InternationalBanking and MAKING TRANSACTIONS inBanking Services LG7 OTHER COUNTRIES • Letter of Credit -- A promise by the bank to pay the seller a given amount if certain conditions are met. • Banker’s Acceptance -- A promise the bank will pay some specified amount at a particular time. • Money exchange allows companies to go to a bank and exchange currencies to use in a particular country (i.e. dollars for euros). 20-36
  37. 37. The World Bankand theInternational LEADING INSTITUTIONS inMonetary Fund LG7 INTERNATIONAL BANKING • World Bank -- Lends most of its money to less-developed nations to improve their productivity and help raise standards of living and quality of life. • International Monetary Fund (IMF) -- Fosters cooperative monetary policies that stabilize the exchange of one national currency for another. About 185 countries are a part of the IMF. 20-37
  38. 38. NEW ISSUES FACING the WORLD BANK and the IMF (Reaching Beyond Our Borders)• A debt crisis in Europe; Japan trying to recover from its earthquake and tsunami; major disruptions in the Middle East; China and Brazil are having problems with high inflation; and rising food prices are happening all over the planet.• Poorer nations are having a particularly hard time because of the high food prices.• The IMF and the World Bank are both trying to come up with answers to the global issues that have become very serious. 20-38
  39. 39. ProgressAssessment PROGRESS ASSESSMENT • What are some of the causes for the banking crisis beginning in 2008? • What is the role of the FDIC? • How does a debit card differ from a credit card? • What is the World Bank and what does it do? • What is the IMF and what does it do? 20-39

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