31 Money, Banking, and Financial Institutions Mc. Graw-Hill/Irwin

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31 Money, Banking, and Financial Institutions Mc. Graw-Hill/Irwin   Copyright © 2012 by The Mc.31 Money, Banking, and Financial Institutions Mc. Graw-Hill/Irwin Copyright © 2012 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Functions  of Money  • Medium of exchange • Used to buy/sell goods • UnitFunctions of Money • Medium of exchange • Used to buy/sell goods • Unit of account • Goods valued in dollars • Store of value • Hold some wealth in money form • Money is liquid LO 1 31 —

Money Definition LO 1 M 2 • Currency • Checkable deposits • Institutions offering checkable depositsMoney Definition LO 1 M 2 • Currency • Checkable deposits • Institutions offering checkable deposits • Commercial banks • Savings and loan associations • Mutual savings banks Credit unions • M 1 plus near-monies • Savings deposits including money market deposit accounts (MMDA) • Small-denominated time deposits • Money market mutual funds (MMMF) 31 —

What “Backs” the Money Supply?  • Guaranteed by government’s ability to keep value stable •What “Backs” the Money Supply? • Guaranteed by government’s ability to keep value stable • Money as debt • Why is money valuable? • Acceptability • Legal tender • Relative scarcity LO 2 31 —

What “Backs” the Money Supply?  • Prices affect purchasing power of money • Hyperinflation rendersWhat “Backs” the Money Supply? • Prices affect purchasing power of money • Hyperinflation renders money unacceptable • Stabilizing money’s purchasing power • Intelligent management of the money supply – monetary policy • Appropriate fiscal policy LO 2 31 —

Federal Reserve - Banking System • Historical background • Board of Governors • 12 Federal ReserveFederal Reserve — Banking System • Historical background • Board of Governors • 12 Federal Reserve Banks • Serve as the central bank • Quasi-public banks • Banker’s bank LO 3 31 —

Federal Reserve – Banking System Commercial Banks Thrift Institutions (Savings and Loan Associations, Mutual Savings Banks,Federal Reserve – Banking System Commercial Banks Thrift 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 LO 3 31 —

Federal Reserve – Banking System LO 3 The 12 Federal Reserve Banks 31 - 8 Federal Reserve – Banking System LO 3 The 12 Federal Reserve Banks 31 —

Federal Reserve – Banking System • Federal Open Market Committee • Aids Board of Governors inFederal 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 LO 3 31 —

Federal Reserve Functions • Issue currency • Set reserve requirements • Lend money to banks 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 supply LO 4 31 —

Federal Reserve Independence • Established by Congress as an independent agency • Protects the Fed fromFederal 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 LO 4 31 —

Financial Institutions World’s 12 Largest Financial Institutions, 2009 Royal Bank of Scotland (UK) Barclays (UK) DeutscheFinancial 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) LO 4 31 —

The Financial Crisis of 2007 and 2008 • Mortgage Default Crisis • Many causes • GovernmentThe 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 LO 5 31 —

The Financial Crisis of 2007 and 2008 • Securitization: the process of slicing up and bundlingThe 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 LO 5 31 —

The Financial Crisis of 2007 and 2008 • Failures and near-failures of financial firms • Countrywide: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 LO 5 31 —

The Financial Crisis of 2007 and 2008 • Troubled Asset Relief Program (TARP) • Allocated $700The Financial Crisis of 2007 and 2008 • Troubled Asset Relief Program (TARP) • Allocated $700 billion to make emergency loans • Saved several institutions from failure LO 6 31 —

The Financial Crisis of 2007 and 2008 • The Fed’s lender-of-last-resort activities • Primary Dealer CreditThe 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 LO 6 31 —

The Financial Crisis of 2007 and 2008 • Money Market Investor Funding Facility • Term Asset-BackedThe Financial Crisis of 2007 and 2008 • Money Market Investor Funding Facility • Term Asset-Backed Securities Loan Facility • Interest Payments on Reserves LO 6 31 —

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