CH 11, Section 3:
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Federal Reserve System
aka “The Fed”
The US’ central bank
“owned” by member banks
Controlled by the federal government
– President appoints
• Board of governors
• Chairman of the Fed
– Congress approves
Central bank
• a bank that can lend to other banks in times of
need.
• National banks required to join
• State-chartered banks may opt to join.
• Since banks pay to join, they become owners
of the Federal Reserve System.
Federal Reserve notes
• paper currency used by the national system.
• Has replaced all other forms of paper
currency.
– Inconvertible fiat money, since 1934
Run on the bank
• a rush by panicked depositors to withdraw
their funds from a bank before it fails
Bank holiday
• brief period where government required
banks to close.
• In 1933, was done to give Congress time to
pass emergency legislation reorganizing the
banks.
– Banks would have to prove that they could
operate effectively and safely or they could not
open
• Restore public confidence
• Took a long time to end the public fear.
Commercial bank
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handle business and commerce interests.
Demand deposit accounts (DDAs)
Checking accounts
Funds may be removed easily by check or ATM
Thrift institution
• separate financial institution
• Investor accounts
• Now allow DDAs
Mutual Savings Bank
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(MSB) depositor-owned financial organization
Benefits only its depositors.
Savings bank
Many MSBs sold stock and lost their exclusive
member-only benefit status.
NOW Account
• negotiable order of withdrawal.
• Checking account that pays interest.
• More popular since 1980.
Savings and Loan Association
• (S&L) depository institution that invests the
majority of its depositors funds in home
mortgages.
• Mortgage payments and interest sustain
depositors’ accounts.
Credit union
• non-profit service cooperative
• Owned by and operated for the members
• Members usually in the same company or
type of work.
• Lower fees and interest rates for members
• Easier financing
Share draft account
• Interest-earning checking account
• Compete with NOW accounts.
Deregulation
• to remove or relax government restrictions on
business.
• 1980s
• 1. max interest rate on savings accounts
phased out
• 2. NOW accounts allowed nation-wide.
• 3. all depository institutions could borrow
from Fed in time of need.
creditor
• a person or institution to whom money is
owed.
• A lender, direct or indirect
Chapter 12 Financial Markets
Section 1 :
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Saving
abstinence of spending, not spending
Savings
dollars that become available when people
abstain from spending (do not consume)
Financial system
• a network of savers, investors, money
managing institutions that work to transfer
savings to investors.
Certificate of deposit
• a receipt showing that an investor has made a
loan to a bank—or a government or corporate
bond.
• Considered a savings
Financial assets
• claims on the property and income of a
borrower.
Financial intermediaries
• financial institutions that lend the funds that
investors save to borrowers
Nonbank financial institution
• nondepository institutions that channel
savings to borrowers.
– Life insurance companies
– Pension funds
– Real estate investment trusts
Finance company
• a firm that specializes in making loans directly
to consumers
• Buys installment contracts from merchants
who sell goods on credit.
– Merchants sell credit accounts of debtors to the
finance companies.
Bill consolidation loan
• consumers use this loan to pay off all other
debts
– Debtor now pays one loan at one interest rate
– Advice: do NOT use your other credit sources
after you do this…..
premium
• the installment price one pays for insurance
– Monthly, quarterly, annually
• Insurance companies store so much money
from these accounts and often loan money to
others.
Mutual fund
• a company sells stock in itself to investors
• Invests funds in stocks and bonds of other
companies.
• Used by investors as they would use ordinary
stock.
– Most funds have expert managers so risk is low.
– EX. General Motors would use a mutual fund to
raise money to buy stock in Ford and Coca Cola,
etc..
Net asset value
• (NAV) the value of the mutual fund divided by
the number of shares issued by the mutual
fund.
• = market value of the mutual fund share.
Pension
• a regular payment made for income security
of the investor
• Collected after investor
– Works a number of years in a career
– Reaches a certain age
– Suffers an injury (disability)
Pension fund
• an annuity fund set up to collect investor
income and disburse pension payments.
• Run by private firms and various levels of
government.
• Payments are stored money
– Pension funds invest these huge amounts of
money in stocks and bonds
• Private companies make profit doing this
• Government insures a large money pool to pay
pensions
Real estate investment trust
• (REIT) a company organized to make loans to
construction companies that build homes.
• Note: An indicator used to measure the
growth of the economy.
Assessments: Checking for Understanding
• 1 Why was the federal reserve system
created?
• To give the country a central bank that could
lend to other banks in time of need
Assessment
• 3 Explain why the National Banking System
was created
• To bring the state banks under control and to
help finance the US Civil War
Assessment
• 4 Explain why deposit insurance developed in
the 1930s.
• To strengthen banking and insure deposits
Assessment
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5 Identify three depository institutions.
Savings banks
Savings and loan associations
Credit unions
Assessment
• 6 Describe four factors contributing to the S&L
crisis.
• Deregulation
• High interest rates
• Inadequate financial reserves
• fraud
Assessments: Checking for Understanding
• 1 Describe the difference between saving and
savings.
• Saving is not spending
• Savings are dollars left over after you buy your
necessities and not spent on other goods and
services.
Image, p. 301
• What is the purpose of the Federal Deposit
Insurance Corporation?
• To ensure customer deposits in the event of a
bank failure.
• Current emergency legislation until 2014 =
$250,000
• Jan. 1, 2014 = $100,000
Image, p. 302
• What can you infer about the ratio of state
banks to national banks?
• At present, there are almost 2/3s as many
state banks as there are national banks
Images, p. 315
• What do lenders receive in return for their funds?
• Financial assets—claims on the property/income of
borrowers
• New term for the current financial disaster:
• Toxic assets:
• claims on property/income of borrowers that will
probably go bankrupt or into foreclosure
– Means anyone owning these assets will take a large loss or
not get any of the debts back.
Quick Write
• Why do you think we began policies of
deregulation in the 1980s? Do you think we
should return to more regulatory policies?