© 2007 prentice hall, inc. all rights reserved.15–1 chapter 15 money and banking

© 2007 Prentice Hall, Inc. All rights reserved. 15–1

Chapter 15Chapter 15

Money and BankingMoney and Banking


L E A R N I N G O U T C O M E SL E A R N I N G O U T C O M E SAfter reading this chapter, you should be able to:After reading this chapter, you should be able to:

Define Define moneymoney and identify the different forms that it takes in the and identify the different forms that it takes in the nation’s money supply.nation’s money supply.Describe the different kinds of financial institutions that compose Describe the different kinds of financial institutions that compose the U.S. financial system and explain the services they offer.the U.S. financial system and explain the services they offer.Explain how financial institutions create money and describe the Explain how financial institutions create money and describe the means by which they are regulated. means by which they are regulated. Discuss the functions of the Federal Reserve system and Discuss the functions of the Federal Reserve system and describe the tools that it uses to control the money supply.describe the tools that it uses to control the money supply.Identify three important ways in which the money and banking Identify three important ways in which the money and banking system is changing.system is changing.Discuss some of the institutions and activities in international Discuss some of the institutions and activities in international banking and finance. banking and finance.


What’s in It for Me?What’s in It for Me?

If you want to understand where money comes If you want to understand where money comes from, and how to get the most benefits from it, from, and how to get the most benefits from it, then this chapter will be useful.then this chapter will be useful.

The chapter explains what money is, where it The chapter explains what money is, where it comes from, how the supply of money grows, comes from, how the supply of money grows, and the kinds of services available to money and the kinds of services available to money users from the financial services industry. users from the financial services industry.


What Is Money?What Is Money?

Money must have:Money must have: PortabilityPortability

DivisibilityDivisibility

DurabilityDurability

StabilityStability


The Functions of MoneyThe Functions of Money

Medium of ExchangeMedium of ExchangeMedium of ExchangeMedium of Exchange

Store of ValueStore of ValueStore of ValueStore of Value

Measure of WorthMeasure of WorthMeasure of WorthMeasure of Worth


The Money SupplyThe Money Supply

M1: SpendableM1: Spendable Currency (paper money and coins)Currency (paper money and coins) ChecksChecks Checking accountsChecking accounts—d—demand deposits in banksemand deposits in banks

M2: M1 + Convertible MoneyM2: M1 + Convertible Money Time depositsTime deposits Money market mutual fundsMoney market mutual funds Savings accountsSavings accounts


The Money Supply (cont’d)The Money Supply (cont’d)

M-3: M2 + Less Liquid DepositsM-3: M2 + Less Liquid Deposits Large time deposits and sizable money market Large time deposits and sizable money market

funds by large institutionsfunds by large institutions


Credit Cards: Plastic Money?Credit Cards: Plastic Money?

Credit cards are not “money” and are not Credit cards are not “money” and are not included in M-1, M-2, or M-3 when measuring included in M-1, M-2, or M-3 when measuring the nation’s money supply.the nation’s money supply.


The U.S. Financial SystemThe U.S. Financial System

Financial InstitutionsFinancial Institutions Commercial BanksCommercial Banks

Companies that accept deposits that they Companies that accept deposits that they use to make loans, earn profits, pay interest use to make loans, earn profits, pay interest to depositors, and pay dividends to ownersto depositors, and pay dividends to owners

Savings and Loan Associations (S&Ls)Savings and Loan Associations (S&Ls) Accept deposits, make loans, and are Accept deposits, make loans, and are

owned by investorsowned by investors


The U.S. Financial System (cont’d)The U.S. Financial System (cont’d)

Financial InstitutionsFinancial Institutions Mutual Savings BanksMutual Savings Banks

All depositors are owners of the bank, so all profits are All depositors are owners of the bank, so all profits are divided proportionately among depositors via dividendsdivided proportionately among depositors via dividends

Credit UnionsCredit Unions A nonprofit, cooperative financial institution owned and run A nonprofit, cooperative financial institution owned and run

by its members; promotes thriftby its members; promotes thrift


The U.S. Financial System (cont’d)The U.S. Financial System (cont’d)

Non-Deposit InstitutionsNon-Deposit Institutions Unlike commercial banks, inflowing funds are Unlike commercial banks, inflowing funds are

intended for purposes other than earning interest for intended for purposes other than earning interest for depositorsdepositors Pension fundsPension funds Insurance companiesInsurance companies Finance companiesFinance companies Securities investment dealersSecurities investment dealers


Special Financial ServicesSpecial Financial Services

Individual Retirement Individual Retirement Accounts (IRAS)Accounts (IRAS)

Trust ServicesTrust Services

International ServicesInternational Services Currency exchangeCurrency exchange

Letters of creditLetters of credit

Banker’s acceptanceBanker’s acceptance

Financial Advice and Financial Advice and Brokerage ServicesBrokerage Services

Electronic Funds Electronic Funds Transfer (EFT)Transfer (EFT)

Automated Teller Automated Teller Machines (ATMs)Machines (ATMs)


Regulation of the Banking SystemRegulation of the Banking System

Federal Deposit Insurance Corporation (FDIC)Federal Deposit Insurance Corporation (FDIC) Preserves confidence in the financial system by Preserves confidence in the financial system by

supervising banks and insuring deposits in banks supervising banks and insuring deposits in banks and thrift institutionsand thrift institutions

Commercial banks pay fees for membership in Commercial banks pay fees for membership in the FDICthe FDIC

The FDIC guarantees the safety of all deposits of The FDIC guarantees the safety of all deposits of every account owner up to the current maximum of every account owner up to the current maximum of $100,000$100,000

The FDIC maintains the right to examine the The FDIC maintains the right to examine the activities and accounts of all member banksactivities and accounts of all member banks


The Federal Reserve SystemThe Federal Reserve System

The Fed: The Nation’s Central BankThe Fed: The Nation’s Central Bank StructureStructure

Board of governorsBoard of governors

Reserve banksReserve banks

Open Market CommitteeOpen Market Committee

Member banksMember banks

Other depository institutionsOther depository institutions

FunctionsFunctions Banking for the governmentBanking for the government

Banking for banksBanking for banks

Controlling the money supplyControlling the money supply


Controlling the Money SupplyControlling the Money Supply

Monetary PolicyMonetary Policy The Fed manages the nation’s economic growth by The Fed manages the nation’s economic growth by

managing money supply and interest ratesmanaging money supply and interest rates

Tools of the FedTools of the Fed Reserve requirementsReserve requirements

Discount rate controlsDiscount rate controls

Open market operationsOpen market operations

Selective credit controlsSelective credit controls


The Changing Money The Changing Money and Banking Systemand Banking System

Anti-Terrorism RegulationsAnti-Terrorism Regulations Bank Secrecy Act (BSA)Bank Secrecy Act (BSA) USA Patriot ActUSA Patriot Act

Customer Identification Program (CIP)Customer Identification Program (CIP)

Interstate BankingInterstate Banking


The Impact of Electronic TechnologiesThe Impact of Electronic Technologies

Check 21Check 21 Allows banks to present a substitute check for Allows banks to present a substitute check for

payment instead of the original checkpayment instead of the original check

Blink Credit CardsBlink Credit Cards A “contactless” payment systemA “contactless” payment system

Debit CardsDebit Cards Allow the transfer of money between accountsAllow the transfer of money between accounts Used with point-of-sale (POS) terminalsUsed with point-of-sale (POS) terminals


The Impact of Electronic Technologies The Impact of Electronic Technologies (cont’d)(cont’d)

Smart CardsSmart Cards Credit-card-size plastic cards with an embedded Credit-card-size plastic cards with an embedded

computer chip that can be programmed with computer chip that can be programmed with “electronic money”“electronic money”

E-CashE-Cash Money that moves via digital transmissions on the Money that moves via digital transmissions on the

Internet, outside the established network of banks, Internet, outside the established network of banks, checks, and paper currency overseen by the Fedchecks, and paper currency overseen by the Fed


International Banking and FinanceInternational Banking and Finance

World BankWorld Bank Provides a limited scope of financial servicesProvides a limited scope of financial services

International Monetary Fund (IMF)International Monetary Fund (IMF) Promotes the stability of exchange ratesPromotes the stability of exchange rates

Provides temporary, short-term loans to member Provides temporary, short-term loans to member countriescountries

Encourages members to cooperate on international Encourages members to cooperate on international monetary issuesmonetary issues

Encourages development of a system for Encourages development of a system for international paymentsinternational payments

© 2007 prentice hall, inc. all rights reserved.15–1 chapter 15 money and banking

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