CHAPTER 20 Money Financial Institutions and the Federal

CHAPTER 20 Money, Financial Institutions, and the Federal Reserve Mc. Graw-Hill/Irwin Copyright © 2015 by the Mc. Graw-Hill Companies, Inc. All rights reserved.

LEARNING OBJECTIVES 1. Explain what money is and what makes money useful. 2. Describe how the Federal Reserve controls the money supply. 3. Trace the history of banking and the Federal Reserve System. 4. Classify the various institutions in the U. S. banking system. 20 -2

LEARNING OBJECTIVES 5. Briefly trace the causes of the banking crisis, and explain how the government protects your funds during such crises. 6. Describe how technology helps make banking more efficient. 7. Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund. 20 -3

JANET YELLEN Federal Reserve • The first female chair of the Federal Reserve. • Earned her doctorate in economics from Yale and was appointed to the Federal Reserve Board of Governors by President Clinton. • Almost every factor related to the economy is influenced by the decisions she makes. 20 -4

NAME that COMPANY This company recently opened an online store using a new form of money. Name that company and what currency it uses! 20 -5

WHAT’S MONEY? LO 20 -1 • Money -- Anything people generally accept as payment for goods and services. • Barter -- The direct trading of goods or services for other goods or services. 20 -6

STANDARDS for a USEFUL FORM of MONEY LO 20 -1 • Portability • Divisibility • Stability • Durability • Uniqueness 20 -7

The BITCOIN is in the MAIL • Bitcoin is a digital currency created in 2008. • It is attractive to many users because there is no central regulating authority. • Transactions are between only two people without middlemen. • This, however, makes valuing Bitcoin difficult. 20 -8

The MONEY SUPPLY LO 20 -2 • Money Supply -- The amount of money the Federal Reserve makes available for people. The money supply is referred to as: - M 1 -- Money that can be accessed quickly (coins, paper money, travelers’ checks, etc. ). - M 2 -- M 1 + money that may take a little time to obtain (savings accounts, mutual funds, etc. ). - M 3 -- M 2 + big deposits like institutional money market funds. 20 -9

NEW MONEY LO 20 -2 Paper Money Printed in 2010 (In $ Billions) Source: Bloomberg Businessweek, www. businessweek. com, accessed November 2014. 20 -10

HOW LONG DOES PAPER MONEY LAST? Bill How Long it Lasts $1 21 Months $5 16 Months $10 18 Months $20 24 Months $50 55 Months $100 89 Months Source: Federal Reserve, www. federalreserve. gov, accessed November 2014. LO 20 -2 20 -11

MONEY MILESTONES LO 20 -2 Year Milestone 1956 Congress set the minimum wage at $1 an hour 1960 $10 million presidential campaign by candidate Richard Nixon 1985 $100, 000 bottle of wine sold at auction at Christie’s 1995 $1 million cost for a 30 -second commercial during Super Bowl XXIX 2001 $10 movie ticket in New York 2004 $100 million Picasso painting sold at Sotheby’s 2007 $1 billion stadium built in London (Wembley) 20 -12

MONEY FACTS LO 20 -2 What You Might Not Know About What’s in Your Wallet • In 2009, the U. S. printed 26, 000 bills a day! • Each penny costs 1. 6¢ and each nickel costs 6¢ to make. • The most-tracked bill on Wheres. George. com has travelled over 4, 100 miles in 3 years! • 2/3 of all U. S. $100 bills are outside the U. S. • 90% of paper money has traces of cocaine! Source: Fast Company, wwww. fastcompany. com, accessed November 2014. 20 -13

EXCHANGING MONEY GLOBALLY LO 20 -2 • Falling dollar value: The amount of goods and services you can buy with a dollar decreases. • Rising dollar value: The amount of goods and services you can buy with a dollar increases. • What makes the dollar fall or rise is the position of the U. S. economy relative to other global economies. 20 -14

The IMPACT of a FALLING DOLLAR LO 20 -2 • Overseas demand for U. S. products rise. • A favorable exchange rate for U. S. companies increases profits in foreign markets. • U. S. tourism increases which is good for hotels, resorts, theme parks, and retailers that serve international travelers. 20 -15

FIVE MAJOR PARTS of the FEDERAL RESERVE SYSTEM LO 20 -2 1. The Board of Governors 2. The Federal Open Market Committee 3. 12 Federal Reserve Banks 4. 3 Advisory Councils 5. The member banks of the system 20 -16

The 12 FEDERAL RESERVE DISTRICT BANKS LO 20 -2 20 -17

MANAGING the MONEY SUPPLY LO 20 -2 20 -18

CHECK-CLEARING PROCESS THROUGH the FEDERAL RESERVE LO 20 -2 20 -19

TEST PREP • What is money? • What are the five characteristics of useful money? • What is Bitcoin? • What is the money supply, and why is it important? • How does the Federal Reserve control the money supply? • What are the major functions of the Federal Reserve? What other functions does it perform? 20 -20

The ESTABLISHMENT of the FEDERAL RESERVE SYSTEM LO 20 -3 • A cash shortage problem in 1907 led to the creation of the Federal Reserve System. • Under the Federal Reserve Act of 1913, all federally chartered banks had to join the Federal Reserve. 20 -21

LARGEST BANK FAILURES Bank Year Assets Washington Mutual Bank 2008 $307 Billion Continental Illinois NB&T 1984 $67 Billion First Republic Bank Corp 1986 $49 Billion Indy. Mac Bank 2008 $32 Billion American Savings & Loan Assn 1988 $30 Billion Colonial Bank 2009 $25 Billion Source: FDIC. gov, accessed November 2014. LO 20 -3 20 -22

The U. S. BANKING SYSTEM LO 20 -4 • Commercial banks • Savings and loan associations • Credit unions • Nonbanks 20 -23

COMMERCIAL BANKS LO 20 -4 • Commercial Bank -- A profit-seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and uses those funds to make loans. • A commercial bank has two types of customers: 1. Depositors 2. Borrowers 20 -24

COMMERICAL BANKS’ SERVICES LO 20 -4 • Demand Deposit -- The technical name for a checking account; money is available on demand from the depositor. • Time Deposit -- A savings account; a bank can require a prior notice before you make a withdrawal. • Certificate of Deposit -- A savings account that earns interest, to be delivered on the certificate’s maturity date. 20 -25

WOULD YOU TELL the TELLER? • The bank teller mistakenly gives you $320 instead of the $300 you asked for. • You bring the error to her attention, but she disagrees she miscounted the money. • You wonder whether to just keep the extra $20 even though you know her accounts will not balance at the end of the day. • What are your alternatives? What do you do? 20 -26

SAVINGS and LOAN ASSOCIATIONS LO 20 -4 • Savings and Loan Associations (S&Ls) -- A financial institution that accepts both savings and checking deposits and provides home mortgage loans. • Often known as thrift institutions because their original purpose was to promote customer thrift and home ownership. 20 -27

CREDIT UNIONS LO 20 -4 • Credit Unions -Nonprofit, member-owned financial cooperatives that offer the full variety of banking services to their members. • As nonprofits, credit unions enjoy an exemption from federal income taxes. 20 -28

NONBANKS LO 20 -4 • Nonbanks -- Financial institutions that accept no deposits, but offer many of the services provided by regular banks. Nonbanks include: - Life insurance companies - Pension funds - Brokerage firms - Commercial finance companies - Corporate financial services 20 -29

TAKING a BITE OUT of the SHARKS • Dealstruck is a new type of alternative, nonbank lender. • It uses a peer-to-peer model where wealthy investors provide capital for the loans. • Interest rates range from 8 to 24% for loans up to $250, 000 and can stretch for a period of three years. 20 -30

WHAT ATTRACTS CUSTOMERS to ONLINE BANKING LO 20 -4 • Free identity theft protection • Free credit score monitoring • Personal financial management • Instant messaging service • Bank’s blog Source: com. Score, www. comscore. com, accessed November 2014. 20 -31

TEST PREP • Why did the U. S. need a Federal Reserve Bank? • What is the difference between a bank, a savings and loan association, and a credit union? • What is a consumer finance company? 20 -32

The BANKING CRISIS LO 20 -5 • Almost 5 million households suffered through housing foreclosures since 2007. • Since the banks owned the mortgages, their profits declined. • This led to a banking crisis and the government had to help the banks out. • Assigning blame to only one agency is not possible, but it had to be fixed. 20 -33

PROTECTING DEPOSITORS’ MONEY LO 20 -5 • The Federal Deposit Insurance Corporation (FDIC) -- An independent agency of the U. S. government that insures bank deposits up to $250, 000. • The Savings Association Insurance Fund (SAIF) -- Insures holders of accounts in savings and loan associations. • The National Credit Union Administration (NCUA) -- Provides up to $250, 000 coverage per individual depositor per institution. 20 -34

TECHNOLOGICAL ADVANCEMENTS in BANKING LO 20 -6 • Electronic Funds Transfer System -- Messages about a transaction are sent from one computer to another so funds can be transferred quickly and more economically. • Debit Card -- Serves the same function as a check; it withdrawals funds from a checking account. 20 -35

SMART CARDS LO 20 -6 • Smart Card -- A combination of a credit card, debit card, phone card, driver’s license, and more. 20 -36

MAKING TRANSACTIONS in OTHER COUNTRIES LO 20 -7 • Letter of Credit -- A promise by the bank to pay the seller a given amount if certain conditions are met. • Banker’s Acceptance -- A promise the bank will pay some specified amount at a particular time. • Money exchange allows companies to go to a bank and exchange currencies to use in a particular country (i. e. dollars for euros). 20 -37

LEADING INSTITUTIONS in INTERNATIONAL BANKING LO 20 -7 • World Bank -- Lends most of its money to less-developed nations to improve their productivity and help raise standards of living and quality of life. • International Monetary Fund (IMF) -- Fosters cooperative monetary policies that stabilize the exchange of one national currency for another. About 188 countries are a part of the IMF. 20 -38

NEW DAY, NEW ISSUES ACROSS the GLOBE • The IMF and the World Bank are both trying to come up with answers to the global issues that have become very serious. • Christine Lagarde, managing director of the IMF, fears the financial crisis did lasting harm to the potential pace of growth in many global economies. • The IMF and World Bank are both trying to solve key global issues before there is another serious crisis. 20 -39

TEST PREP • What are some of the causes for the banking crisis? • What is the role of the FDIC? • How does a debit card differ from a credit card? • What is the World Bank and what does it do? • What is the IMF and what does it do? 20 -40