Ferrell Hirt Ferrell
M: Business
nd
2 Edition
FHF
Money and the Financial System
FHF
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
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
FHF
15-3
Functions of Money
Medium of exchange
• Accepted as payment for products and resources
Measure of value
• Single standard for assigning and comparing values of
products and resources
Store of value
• Means of retaining and accumulating wealth
FHF
15-4
Characteristics of Money
• Acceptability
• Divisibility
• Portability
• Stability
• Durability
• Difficulty to counterfeit
FHF
15-5
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withdrawn without advance notice
• Savings Account (Time Deposit) – Accounts
with funds that usually can not be withdrawn
without advance notice
FHF
15-6
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period of time providing funds are not withdrawn before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
Types of Money (continued)
FHF
15-7
Credit Cards
• Means of access to preapproved lines
of credit granted by a bank or a
finance company
Types of Money (continued)
FHF
15-8
Types of Money (continued)
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.”
FHF
15-9
The US Financial System
Federal Reserve Board (the Fed)
• Guardian of the American financial system.
Independent agency of the federal government
established 1913 to regulate the nation’s banking
and financial industry
FHF
15-10
The Federal Reserve System
FHF
15-11
The Fed
• 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
FHF
15-12
Monetary Policies
Monetary Policy
• The means by which the Fed controls the amount of
money available in the economy
• Open Market Operations – Decisions to buy or sell U.S.
Treasury bills in the open market
FHF
15-13
Monetary Policies (continued)
Reserve Requirements
• Percentage of deposits a bank must hold in
reserve.
Discount Rate
• Rate of interest the Fed charges to loan money to
banking institutions
Credit Controls
• Authority to establish and enforce credit rules
FHF
15-14
FHF
Tools for Regulating the Money Supply
15-15
2008-2009 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
Board Chairman Ben Bernanke is a scholar of the Great
Depression
FHF
15-16
Regulatory Functions
Major responsibility of the Fed to regulate banks
that are members of the Federal Reserve system
• Check clearing
• Depository insurance
FHF
15-17
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)
• Financial institutions that primarily offer savings accounts
and make long-term loans for residential mortgages also
called “thrifts”
FHF
15-18
Credit Unions
• Financial institutions owned and controlled by
depositors; usually having a common employer,
profession, trade group or religion.
Mutual Savings Banks
• Financial institutions similar to S&Ls, but owned by
depositors
Banking Institutions (continued)
FHF
15-19
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, like the FDIC
FHF
15-20
Bank Failures
• Over 100 banks have failed since 2008, hundreds
more at risk
• Washington Mutual
• Ameribank
• Indymac Bank
• Consumers’ money protected by FDIC
FHF
15-21
In spite of the 2008 failures of financial institutions,
the problem pales in comparison with the late 1980s recession
Bank Failures (continued)
FHF
15-22
Non-Banking Institutions
• Diversified firms
• Insurance companies
• Pension funds
• Mutual fund
• Brokerage firms
• Finance companies
FHF
15-23
• ETF: Electronic funds transfer
• ATM: Automated teller machines
• ACHs: Automated clearinghouses
• Online banking: Bank at home or
anywhere/anytime
Electronic Banking
FHF
15-24
Challenge and Change in the Banking
Industry
Banking Industry
Better management and regulation has helped save the
economy from a repeat of the 1980s Savings & Loan
problems
• Far fewer bank failures
The industry still needs better oversight
FHF
15-25
Future of Banking
• Trend towards larger banks, even in the wake of
2008-2009 financial crisis
• Even small banks can now offer high-tech services
thanks to the internet
FHF
15-26
FHF
15-27