Understanding Money and Financial Institutions

7/29/2019 Understanding Money and Financial Institutions

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Copyright 2008 by South-Western, a division of Thomson Learning. All rights reservedChapter 18

1

Understanding Money

and Financial Institutions

Prepared by

Deborah BakerTexas Christian University

CHAPTER 18

THE FUTURE OF BUSINESS

Gitman & McDaniel

6th Edition


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Learning Goals

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What is money, what are its characteristicsand functions, and what are the three partsof the U.S. money supply?

How does the Federal Reserve manage themoney supply?

What are the key financial institutions, and

what role do they play in the process offinancial intermediation?


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How does the Federal Deposit InsuranceCorporation (FDIC) protect depositors

funds?

What role do U.S. banks play in theinternational marketplace?

What trends are reshaping financialinstitutions?

Learning Goals

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6

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What is money, what are its characteristics andfunctions, and what are the three parts of the U.S.

money supply?

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Show Me the Money


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Money Anything that is acceptable as paymentfor goods and services.

1

Show Me the Money


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Characteristics of Money

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Divisibility

Portability

Durability

Scarcity


7/39Copyright 2008 by South-Western, a division of Thomson Learning. All rights reservedChapter 18 71

Functions of Money

Functionsof Money

Store of Value

Standard of Value

Medium of Exchange


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The U.S. Money Supply

Currency Coins and paper money.

Travelers checks, cashiers checks,

money orders.


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Time Deposits

Demand Deposits

Deposits at a financial institutionthat pay interest.Cannot be withdrawn on demand.

Money in checking accounts.Can be withdrawn on demand.



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M2

M1

Describes the U.S. monetary supply.Includes all M1 monies plus time

deposits and other money that arenot immediately accessible.

The total amount of readily availablemoney in the system and includescurrency and demand deposits.




What is money, and what are its characteristics?

What are the main functions of money?

What are the three main components of the U.S. moneysupply? How do they relate to M1 and M2?

Concept Check

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12/39Copyright 2008 by South-Western, a division of Thomson Learning. All rights reservedChapter 18

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How does the Federal Reserve managethe money supply?

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The Federal Reserve System


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FederalReserveSystem

The central bank of the United States. Itconsists of 12 district banks, eachlocated in a major U.S. city.

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The Fed


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Federal Reserve Districts and Banks

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The Federal Reserve Systems Responsibilities

Making check clearing easier

Distributing currency

Setting rules on credit

Carrying out money policy


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Carrying Out Monetary Policy

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Tools Usedby the Fed

Discount Rate

Reserve Requirements

Open Market Operations


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Carrying OutMonetary Policy

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Discount Rate

ReserveRequirements

Open MarketOperations

Interest rate charged by Fedto member banks.

Cash amount forbanks to hold.

Purchase or sale ofU.S. government bonds.


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Copyright 2008 by South-Western, a division of Thomson Learning. All rights reservedChapter 18 18

Setting Rules on Credit

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Selective Credit Controls

Marginrequirements

Consumercredit rules


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What are the four key functions of the Federal ReserveSystem?

What three tools does the Federal Reserve System useto manage the money supply, and how does eachaffect economic activity?

Concept Check

2


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What are the key financial institutions, andwhat role do they play in the process of

financial intermediation?

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U.S. Financial Institutions


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FinancialIntermediation

The process in which financial institutionsact as intermediaries between thesuppliers and demanders of funds.

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Financial Intermediation


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Financial Intermediation Process

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Depository Financial Institutions

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Commercial Banks

Thrift Institutions

Credit Unions


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Depository Financial Institutions

Savings accounts

Checking accounts

Money market deposit accounts

Certificates of deposit

Consumer loans

Business loans

Money transfer

Electronic funds transfer

Automated teller machine

Debit cards

Smart cards

Online banking

Services


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Nondepository Financial Institutions

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Insurance Companies

Pension Funds

Brokerage Firms

Finance Companies


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What is the financial intermediation process?

Differentiate between the three types of depository

financial institutions and the services they offer.

What are the four main types of non-depositoryfinancial institutions?

Concept Check

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How does the Federal Deposit InsuranceCorporation (FDIC) protect depositors funds?

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Insuring Bank Deposits


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Federal DepositInsuranceCorporation

An independent, quasi-publiccorporation backed by the full faith andcredit of the U.S. government that

insures deposits in commercial banksand thrift institutions for up to a ceilingof $100,000 per account.

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Insuring BankDeposits


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The Major Deposit Insurance Funds

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The National Credit Union Share Insurance Fund

The Savings Association Insurance Fund (SAIF)

The Bank Insurance Fund (BIF)


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The Role of the FDIC

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Examines and supervises about 5,250 banks

Insures about $3 trillion of deposits

Insures member banks in the Federal ReserveSystem


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FDIC Actions forFinancially-Troubled Banks

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Lend money to the bank

Recommend bank merger

Require bank to use new management practicesor replace its managers

Buy loans from the bank

Provide extra equity capital

Cover all deposits, even over $100,000


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What is the FDIC, and what are its responsibilities?

What are the major deposit insurance funds?

What can the FIDC do to help financially troubledbanks?

Concept Check

4


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What role do U.S. banks play in the internationalmarketplace?

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International Banking


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International Banking

Offer trade-related services

Provide loansForeign-currency

exchange

Fund overseasinvestments


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Difficulties with International Expansion

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International banks subject to fewerregulations

Governments protect banks against foreigncompetition

High-risk venture due to political andeconomic uncertainty


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What is the role of U.S. banks in international banking?

What challenges do U.S. banks face in foreign

markets?

Concept Check

5


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What trends are reshaping financial institutions?

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Trends in Financial Institutions


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Trends in Financial Institutions

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Return to branch banking

New focus on money laundering

The Ivy League Mom

Regulatory and compliance issues


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What factors are creating a difficult economicenvironment for banks?

Why are Ivy League moms such an attractive marketsegment to the financial services industry?

What impact has terrorism had on the bankingindustry?

What is the retail branch renaissance, and why is it

so important to banks?

Concept Check

6

Understanding Money and Financial Institutions

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