CHAPTER 15 © Steve Gottlieb / Stock Connection / Jupiterimages Understanding Money and Financial Institutions The Future of Business The Essentials 4 th Edition Gitman & Mc. Daniel Chapter 15 Copyright © 2009 by South-Western, a division of Cengage Learning. All rights reserved Prepared by 1 Deborah Baker
1 What is money, what are its characteristics and functions, and what are three parts of the U. S. money supply? 2 How does the Federal Reserve manage the money supply? CHAPTER 15 Learning Goals 3 What are the key financial institutions, and what role do they play in the process of financial intermediation? 2
4 How does the Federal Deposit Insurance Corporation (FDIC) protect depositors’ funds? 5 What role do U. S. banks play in the international marketplace? 6 What trends are reshaping financial institutions? CHAPTER 15 Learning Goals (continued) 3
Show Me the Money 1 1 What is money, what are its characteristics and functions, and what are three parts of the U. S. money supply? 4
Show Me the Money money Anything that is acceptable as payment for goods and services. 1 5
Characteristics of Money Scarcity Durability Portability Divisibility 1 6
Functions of Money © AP Images / U. S. Mint Medium of Exchange 1 Standard of Value Store of Value 7
The U. S. Money Supply currency Coins and paper money. Travelers’ checks, cashier’s checks, money orders. 1 8
The U. S. Money Supply Demand Deposits Time Deposits 1 Money in checking accounts. Can be withdrawn on demand. Deposits at a financial institution that pay interest. Cannot be withdrawn on demand. 9
The U. S. Money Supply M 1 M 2 1 The total amount of readily available money in the system and includes currency and demand deposits. Describes the U. S. monetary supply. Includes all M 1 monies plus time deposits and other money that are not immediately accessible. 10
CONCEPT check What is money, and what are its characteristics? What are the main functions of money? What are three main components of the U. S. money supply? How do they relate to M 1 and M 2? 1 11
The Federal Reserve System 2 2 How does the Federal Reserve manage the money supply? 12
The Federal Reserve System The central bank of the United States. It consists of 12 district banks, each located in a major U. S. city. 2 13
Federal Reserve Responsibilities Carrying out money policy Setting rules on credit Distributing currency Making check clearing easier 2 14
Carrying Out Monetary Policy Open Market Operations Reserve Requirements Cash amount for banks to hold. Discount Rate 2 Purchase or sale of U. S. government bonds. Interest rate charged by Fed to member banks. 15
Setting Rules on Credit Selective Credit Controls Consumer credit rules 2 Margin requirements 16
CONCEPT check What are the four key functions of the Federal Reserve System? What three tools does the Federal Reserve System use to manage the money supply, and how does each affect economic activity? 2 17
U. S. Financial Institutions 3 3 What are the key financial institutions, and what role do they play in the process of financial intermediation? 18
Financial Intermediation financial intermediation The process in which financial institutions act as intermediaries between the suppliers and demanders of funds. 3 19
Depository Financial Institutions Services § Savings accounts § Money transfer § Checking accounts § Electronic funds transfer § Money market deposit accounts § Automated teller machine § Certificates of deposit § Smart cards § Consumer loans § Online banking § Debit cards § Business loans 3 Exhibit 15. 9 20
CONCEPT check 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 nondepository financial institutions? 3 21
Insuring Bank Deposits 4 4 How does the Federal Deposit Insurance Corporation (FDIC) protect depositors’ funds? 22
Insuring Bank Deposits Federal Deposit Insurance Corporation (FDIC) An independent, quasi-public corporation backed by the full faith and credit of the U. S. government that insures deposits in commercial banks and thrift institutions for up to a ceiling of $100, 000 per account. 4 23
The Major Deposit Insurance Funds § The Bank Insurance Fund (BIF) § The Savings Association Insurance Fund (SAIF) § The National Credit Union Share Insurance Fund 4 24
Role of the FDIC § § Insures about $3 trillion of deposits § 4 Examines and supervises about 5, 250 banks Insures member banks in the Federal Reserve System 25
FDIC Actions for Financially-Troubled Banks § § Recommend bank merger § Require bank to use new management practices or replace its managers § Buy loans from the bank § Provide extra equity capital § 4 Lend money to the bank Cover all deposits, even over $100, 000 26
CONCEPT check What is the FDIC, and what are its responsibilities? What are the major deposit insurance funds? What can the FIDC do to help financially troubled banks? 4 27
International Banking 5 5 What role do U. S. banks play in the international marketplace? 28
International Banking © Sipa via AP Images Provide loans Foreign-currency exchange Offer traderelated services Fund overseas investments 5 29
Difficulties with International Expansion § § Governments protect banks against foreign competition § 5 International banks subject to fewer regulations High-risk venture due to political and economic uncertainty 30
CONCEPT check What is the role of U. S. banks in international banking? What challenges do U. S. banks face in foreign markets? 5 31
Trends in Financial Institutions 6 6 What trends are reshaping financial institutions? 32
Top 10 Banking Trends in 2007 Consumer Protection Issues New Sources of Fee-Based Revenues New Small. Business Initiatives Wholesale Banking Extends its Reach 6 Greater Focus on Business Banking-Lite for the Unbanked and Underbanked Business Process Outsourcing for the Masses Top 10 Banking Industry Trends in 2007 Private Labeling Web-Based Technology for Training Greater Bank and Branch Specialization Exhibit 15. 11 Source: “Top 10 Banking Industry Trends in 2007, ” from http: //www. aitegroup. com, January 25, 2007. Copyright © 2007 by Aite Group LLC. All rights reserved. Reproduced by permission. 33
CONCEPT check What factors are creating direct banking opportunities for banks? What will likely drive further growth in mobile banking? How are remote deposit capture (RDC) and automated clearing houses (ACHs) changing the nature of business transactions? What is microlending? What role do microfinance institutions and peer-to-peer (P 2 P) lending networks play in microlending? What impact has terrorism had on the banking industry? How do banks fight money laundering? 6 34
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