14 Money, Banking, and Financial Institutions McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill...

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14 Money, Banking, and Financial Institutions McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Page 1: 14 Money, Banking, and Financial Institutions McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

14

Money, Banking, and Financial Institutions

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: 14 Money, Banking, and Financial Institutions McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Functions of Money

•1) Medium of exchange

•Used to buy/sell goods

•2) Unit of account

•Goods valued in dollars

•3) Store of value

•Hold some wealth in money form

•Money is liquid

LO1 14-2

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Money Definition M1

•M1

•Currency

•Checkable deposits

•Institutions offering checkable deposits

•Commercial banks

•Savings and loan associations

•Mutual savings banks

•Credit unions

LO1 14-4

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Money Definition M2

•M2

•M1 plus near-monies

•Savings deposits including money market deposit accounts (MMDA)

•Small-denominated time deposits

•Money market mutual funds (MMMF)

LO1 14-6

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Money Definitions

January 2010

Source: Federal Reserve System

LO1 14-7

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What “Backs” the Money Supply?

•Guaranteed by government’s ability to keep value stable

•i.e., ability to remove some from circulation

Less money, value goes upMore money, value goes down

•Acceptability

•Legal tender

•Relative scarcity

LO2 14-8

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Federal Reserve - Banking System

•Historical background

•Board of Governors

•12 Federal Reserve Banks

•Serve as the central bank

•Quasi-public banks

•Banker’s bank

LO3 14-10

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Federal Reserve – Banking System

Commercial BanksThrift Institutions

(Savings and Loan Associations,Mutual Savings Banks,

Credit Unions)

The Public(Households and

Businesses)

12 Federal Reserve Banks

Board of Governors

Federal Open Market Committee

LO3 14-11

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Federal Reserve – Banking System

LO3

The 12 Federal Reserve Banks

14-12

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Federal Reserve – Banking System

•Federal Open Market Committee

•Aids Board of Governors in setting monetary policy

•Conducts open market operations

•Commercial banks and thrifts

•6,800 commercial banks

•8,700 thrifts

LO3 14-13

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Federal Reserve Functions

•Issue currency

•Set reserve requirements

•Lend money to banks

•Collect checks

•Act as a fiscal agent for U.S. government

•Supervise banks

•Control the money supplyLO4 14-14

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Federal Reserve Independence

•Established by Congress as an independent agency

•Protects the Fed from political pressures

•Enables the Fed to take actions to increase interest rates in order to stem inflation as needed

LO4 14-15

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Financial Institutions

World’s 12 Largest Financial Institutions, 2009

Royal Bank of Scotland (UK)Barclays (UK)

Deutsche Bank (Germany)BNP Paribas (France)HSBC Holdings (UK)

JPMorgan Chase (US)Credit Agricole (France)

Citigroup (US)Mitsubishi UFJ (Japan)

UBS (Switzerland)ING Group (Netherlands)

Bank of America (US)

0 1.5 2.5 3.5

Source: Forbes Global 2000, http://www.forbes.com

Assets (Trillions of U.S. Dollars)

LO4 14-16

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The Financial Crisis of 2007 and 2008

•Mortgage Default Crisis

•Many causes

•Government programs that encouraged home ownership

•Declining real estate values

•Bad incentives provided by mortgage-backed bonds

LO5 14-17

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The Financial Crisis of 2007 and 2008

•Securitization- the process of slicing up and bundling groups of loans into new securities

•As loans defaulted, the system collapsed

•“Underwater” homeowners abandoned homes and mortgages

LO5 14-18

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The Financial Crisis of 2007 and 2008

•Failures and near-failures of financial firms

•Countrywide: second largest lender

•Washington Mutual: largest lender

•Wachovia

•Other firms came close

LO5 14-19

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The Financial Crisis of 2007 and 2008

• Troubled Asset Relief Program (TARP)•Allocated $700 billion to make

emergency loans•Saved several institutions from

failure

LO6 14-20

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The Financial Crisis of 2007 and 2008

• The Fed’s lender-of-last-resort activities•Primary Dealer Credit Facility•Term Securities Lending Facility•Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

•Commercial Paper Funding Facility

LO6 14-21

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The Financial Crisis of 2007 and 2008

• Money Market Investor Funding Facility

• Term Asset-Backed Securities Loan Facility

• Interest Payments on Reserves

LO6 14-22

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Post-Crisis U.S. Financial Services

•Major Categories of Financial Institutions•Commercial Banks

•Thrifts

•Insurance Companies

•Mutual Fund Companies

•Pension Funds

•Securities Firms

•Investment BanksLO7 14-23

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Institution Description Examples

Commercial Banks State and national banks that provide checking and savings accounts and make loans

JP Morgan Chase, Bank of America, Citibank, Wells Fargo

Thrifts Savings and loan associations, mutual savings banks, credit unions that offer checking and savings accounts and make loans

Charter One, New York Community Bank

Insurance Companies

Firms that offer policies through which individuals pay premiums to insure against lose

Prudential, New York Life, Northwestern Mutual, Hartford

Mutual Fund Companies

Firms that pool customer deposits to purchase stocks or bonds

Fidelity, Vanguard, Putnam, Janus, T Rowe Price

Pension Funds Institutions that collect savings from workers throughout their working years and then invest the funds to pay retirement benefits

TIAA-CREF, Teamsters’ Union, CalPERs

Securities Firms Firms that offer security advice and buy and sell stocks and bonds for clients

Merrill Lynch, Smith Barney, Charles Schwab

Investment Banks Firms that help corporations and governments raise money by selling stocks and bonds

Goldman Sachs, Morgan Stanley, Deutsche Bank, Nomura Securities

Major Categories of Financial Institutions

LO7 14-24

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