Part 6
Financing the
Enterprise
© 2015 McGraw-Hill Education.
15-2
CHAPTER 14
Accounting and Financial Statements
CHAPTER 15
Money and the Financial System
CHAPTER 16
Financial Management and Securities Markets
15-3
Learning Objectives
LO 15-1 Define money, its functions, and its characteristics.
LO 15-2 Describe various types of money.
LO 15-3 Specify how the Federal Reserve Board manages the
money supply and regulates the American banking
system.
LO 15-4 Compare and contrast commercial banks, savings and
loan associations, credit unions, and mutual savings
banks.
LO 15-5 Distinguish among nonbanking institutions such as
insurance companies, pension funds, mutual funds, and
finance companies.
LO 15-6 Investigate the challenges ahead for the banking
industry.
15-4
Money in the Financial System
Finance
• The study of money; how it’s made, how it’s lost, and how it’s managed
Money (Currency)
• Anything generally accepted in exchange for goods and services
• Medium of exchange
Before fiat
money, the trade
of goods and
services was
accomplished
through bartering
• Trading one good or service for another of
similar value
• Inefficient because not always divisible and can
be complicated in multiple-party transactions
15-5
Functions of Money
Measure of
Value
• Money serves as a common standard or yardstick of the
value of goods and services
Store of Value
• Money serves as a way to accumulate wealth (buying
power) until it is needed
• The value of stored money is directly dependent on the
health of the economy
To be used as a medium of exchange,
money must have:
•
Acceptability
•
Stability
•
Divisibility
•
Durability
•
Portability
•
Difficult to counterfeit
15-6
Types of Money
Paper Money and Coins
Checking Account (Demand Deposit)
•
Money stored in an account at a bank or other institution that can be
withdrawn without advance notice
Savings Accounts (Time Deposits)
•
Accounts with funds that usually cannot be withdrawn without advance
notice
Money Market Accounts
• Accounts that offer higher interest rates than standard bank rates but with
greater restrictions
Certificates of Deposit (CDs)
• Savings accounts that guarantee a depositor a set interest rate over a
specified interval as long as the funds are not withdrawn before the end of
the period—six months or one year for example
15-7
Types of Money
Credit Cards
• Means of access to preapproved lines of credit granted by a bank or
finance company
Debit Card
• A card that looks like a credit card but works like a check
• Using it results in a direct, immediate, electronic payment from the
cardholder’s checking account to a merchant or third party
Traveler’s Checks, Money Orders, and Cashier’s Checks
• Common forms of “near” money
• Guaranteed as cash
15-8
Financial Systems
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
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
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
15-9
Four Main Monetary Policy Tools
1. Open Market Operations
• Decisions to buy or sell U.S. Treasury bill in the open market
• Buying securities increases money in supply and vice versa
2. Reserve Requirements
• Percentage of deposits a bank must hold in reserve
• Has a strong effect on the economy and not used often
3. Discount Rates
• Rate of interest the Fed charges to loan money to banking institutions
• Lowering discount rate encourages borrowing and expands money
supply and vice versa
4. Credit Controls
• Authority to establish and enforce credit rules
15-10
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
15-11
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
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
15-12
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
Bank
Failures
• More than 380 banks have failed between 2009 2011
• Consumers’ money protected by FDIC
15-13
Nonbanking 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
15-14
Nonbanking 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
15-15
Electronic Banking
Electronic Funds Transfer (EFT)
• Any movement of funds by means of an electronic terminal, telephone,
computer, or magnetic tape
Automated Teller Machines (ATM)
• The most familiar form of electronic banking, which dispenses cash,
accepts deposits, and allows balance inquiries and cash transfers from
one account to another
Automated Clearinghouses (ACHs)
• A system that permits payments such as deposits or withdrawals to be
made to and from a bank account by magnetic computer tape
Online Banking
• Bank at home or anywhere/anytime
• 62% of adults list Internet banking as their preferred banking method