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FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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Page 1: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

part

CHAPTER 15 Money and the Financial System

6

FHF

15-2

CHAPTER 14 Accounting and Financial Statements

Financing theFinancing theEnterpriseEnterprise

CHAPTER 16 Financial Management and Securities Markets

Page 3: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

FinanceFinanceFinanceFinance

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

Many materials have been used as money

15-3

Page 4: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Functions of MoneyFunctions of MoneyFunctions of MoneyFunctions of Money

Medium of exchange• Accepted as payment for products and resources

• Bartering: Trading one good or service for another of similar value

Inefficient because not always divisible and can be complicated in multiple-party transactions

Measure of value• Single standard for assigning and comparing values of

products and resources

Store of value• Means of retaining and accumulating wealth

15-4

Page 5: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Characteristics of MoneyCharacteristics of MoneyCharacteristics of MoneyCharacteristics of Money

Acceptability

Divisibility

Portability

Stability

Durability

Difficulty to counterfeit

15-5

Page 6: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Types of MoneyTypes of MoneyTypes of MoneyTypes 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Checking Account (Demand Deposit): Money stored in an account at a bank that can be withdrawn without advance notice

• Checks serve as a more secure substitute for cash

Savings Account (Time Deposit): Accounts with funds that usually cannot be withdrawn without advance notice

15-6

…continued on next page

Page 7: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Types of MoneyTypes of MoneyTypes of MoneyTypes of Money

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

15-7

…continued on next page

Page 8: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Types of MoneyTypes of MoneyTypes of MoneyTypes of Money

Credit Cards

Means of access to preapproved lines of credit granted by a bank or a finance company

Credit card companies have been the subject of criticism and scrutiny

Credit CARD (Card Accountability Responsibility and Disclosure) Act was passed into law in 2009

• Important for all card holders

15-8

…continued on next page

http://www.fdic.gov/news/news/press/2010/pr10121.html
http://www.fdic.gov/news/news/press/2010/pr10121.html
Page 9: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Types of MoneyTypes of MoneyTypes of MoneyTypes of Money

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

15-9

Page 10: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

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

Federal Reserve Board (The Fed)

Guardian of the American financial system

Independent agency of the federal government

Established in 1913 to regulate the nation’s banking and financial industry

15-10

Page 11: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

The Federal Reserve SystemThe Federal Reserve SystemThe Federal Reserve SystemThe Federal Reserve System

15-11

Page 12: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

The FedThe FedThe FedThe Fed

Four major functions:

1.Controls the money supply with monetary policy

2.Regulates financial institutions

3.Manages regional and national check-clearing procedures

4.Supervises the federal deposit insurance of commercial banks in the Federal Reserve system

15-12

Page 13: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Monetary PoliciesMonetary PoliciesMonetary PoliciesMonetary Policies

Monetary Policy

The means by which the Fed controls the amount of money available in the economy

Aims to keep supply and demand in balance to avoid inflation/deflation

15-13

Page 14: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Four Main Monetary Policy Tools Four Main Monetary Policy Tools Four Main Monetary Policy Tools Four Main Monetary Policy Tools

1. Open Market Operations: Decisions to buy or sell U.S. Treasury bills in the open market

Buying securities increases money in supply and vice versa

2. Reserve Requirements: Percentage of deposits a bank must hold in reserve

Has a strong effect on the economy and not used often

3. Discount Rate: Rate of interest the Fed charges to loan money to banking institutions

Lowering discount rate encourages borrowing and expands money supply and vice versa

4. Credit Controls: Authority to establish and enforce credit rules

15-14

Page 15: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Other Regulatory Functions Other Regulatory Functions of the Fedof the Fed

Other Regulatory Functions Other Regulatory Functions of the Fedof the Fed

Regulating member banks

Establishes and enforces banking rules that affect monetary policy and competition

Has authority to approve bank mergers

Check clearing

National check processing through check clearinghouses

Depository insurance

Supervises the federal insurance funds that protect the deposits in member banking institutions

15-15

Page 16: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Tools for Regulating Tools for Regulating the Money Supplythe Money Supply

Tools for Regulating Tools for Regulating the Money Supplythe Money Supply

15-16

Page 17: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

2008-2010 Financial Crisis2008-2010 Financial Crisis2008-2010 Financial Crisis2008-2010 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

All those moves did not guarantee a quick recovery

15-17

Page 18: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Banking InstitutionsBanking InstitutionsBanking InstitutionsBanking 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– also called “thrifts”)

Primarily offer savings accounts and make long-term loans for residential mortgages

Most have merged with commercial banks

New hybrid bank institutions perform multiple functions

15-18

…continued on next page

Page 19: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Banking InstitutionsBanking InstitutionsBanking InstitutionsBanking Institutions

Credit Unions

Financial institutions owned and controlled by depositors

Usually having a common employer, profession, trade group, or religion

Mutual Savings Banks

Similar to S&Ls, but owned by depositors

Found mostly in New England

15-19

Page 20: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Insurance for BanksInsurance for BanksInsurance for BanksInsurance 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

Similar to the FDIC

15-20

Page 21: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Bank FailuresBank FailuresBank FailuresBank Failures

Nearly 300 banks have failed since 2008; hundreds more are at risk

• Washington Mutual

• Ameribank

• Indymac Bank

Consumers’ money protected by FDIC

15-21

http://www.fdic.gov/bank/historical/bank/index.html
Page 22: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Non-Banking InstitutionsNon-Banking InstitutionsNon-Banking InstitutionsNon-Banking Institutions

Diversified Firms: Traditionally non-financial firms that have expanded into the financial field

Insurance Companies: Businesses that protect their clients against losses from specified risks

Pension Funds: Managed investment pools to provide retirement income for members

15-22

…continued on next page

Page 23: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Non-Banking InstitutionsNon-Banking InstitutionsNon-Banking InstitutionsNon-Banking Institutions

Mutual Fund: Investment company that pools investor money and invests in large numbers of diversified securities

Brokerage Firm: Buy and sell securities for clients and provide other services

Investment Bank: Underwrites new issues of securities for corporations, states and municipalities needed to raise money in capital markets

Finance Companies: Businesses that offer short-term loans at substantially higher interest rates than banks

15-23

Page 24: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

One of the most important secondary home mortgage lenders in the U.S.• Created to relieve lenders of debt so they can lend

more money

Provides many banks with capital

Has experienced major accounting scandals

Was placed in a conservatorship of the Federal Housing Finance Authority

Failure would have meant partial collapse of the house mortgage market

15-24

http://bevideos.mhhe.com/business/video_library/0073364231/swf/Clip_39.html
Page 25: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Electronic BankingElectronic BankingElectronic BankingElectronic Banking

ETF: Electronic funds transfer

ATM: Automated teller machines

ACHs: Automated clearinghouses

Online Banking: Bank at home or anywhere/anytime (Increasing the range of services)

15-25

Page 26: FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

FHF

Future of BankingFuture of BankingFuture of BankingFuture of Banking

Advances in technology are challenging and changing the banking industry

Trend toward larger banks, even in the wake of 2008-2010 financial crisis• Uncertain whether the crisis will continue

Future of the banking industry will be shaped by federal government action• Oversight and regulations to prevent future financial

meltdowns

15-26


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