Chapter Twenty Money Financial Institutions and the Federal

* Chapter Twenty * Money, Financial Institutions, and the Federal Reserve Mc. Graw-Hill/Irwin Copyright © 2010 by the Mc. Graw-Hill Companies, Inc. All rights reserved.

BEN BERNANKE Federal Reserve * Profile * • A former economics professor at Princeton. • Former President George W. Bush appointed him Chairman of the Federal Reserve in 2006. • Almost every factor related to the economy is influenced by the choices he makes. 20 -2

WHAT’S MONEY? *What is Money? LG 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 -3

STANDARDS for a USEFUL FORM of MONEY *What is Money? LG 1 * • Portability • Divisibility • Stability • Durability • Uniqueness 20 -4

The MONEY SUPPLY *What is the Money Supply? * LG 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 -5

HOW LONG DOES PAPER MONEY LAST? *What is the 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. Money Supply? LG 2 * 20 -6

MONEY MILESTONES *What is the Money Supply? LG 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 (Wembly) Source: Conde Nast Portfolio * 20 -7

*The Global EXCHANGING MONEY GLOBALLY Exchange of Money * LG 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 -8

The IMPACT of a FALLING DOLLAR *The Global Exchange of Money LG 2 * • Overseas demand for U. S. products rise. • A favorable exchange rate for U. S. companies earning profits in foreign markets is provided. • U. S. tourism increases which is good for hotels, resorts, theme parks, and retailers that serve international travelers. 20 -9

FIVE MAJOR PARTS of the FEDERAL RESERVE SYSTEM *Basics About the Federal Reserve LG 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 -10

The 12 FEDERAL RESERVE DISTRICT BANKS *Basics About the Federal Reserve LG 2 * 20 -11

MANAGING the MONEY SUPPLY *Basics About the Federal Reserve LG 2 * • The Fed uses three basic tools: 1. Reserve Requirement -- A percentage of commercial banks’ checking and savings accounts they must keep in the bank or in non-interest-bearing deposits at the local Federal Reserve district bank. 2. Open-Market Operations -- The buying and selling of government bonds. 3. Discount Rate -- The interest rate the Fed charges for loans to member banks. 20 -12

PROGRESS ASSESSMENT * Progress Assessment * • What’s money? • What are the five characteristics of useful money? • What’s 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 -13

*Basics About CHECK-CLEARING PROCESS THROUGH the FEDERAL RESERVE the Federal Reserve LG 2 * 20 -14

The ESTABLISHMENT of the FEDERAL RESERVE SYSTEM * The History of Banking and the Need for the Fed LG 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 -15

LARGEST BANK FAILURES * The History of Banking and the Need for the Fed LG 3 Bank Year Assets Washington Mutual Bank 2008 $307 Billion Continental Illinois NB&T 1984 $67 Billion First Republic Bank Corp 1986 $49 Billion American Savings & Loan Assn 1988 $45 Billion Indy. Mac Bank 2008 $32 Billion * 20 -16

The U. S. BANKING SYSTEM *The U. S. Banking System LG 4 * • Commercial banks • Savings and loan associations • Credit unions • Nonbanks 20 -17

COMMERCIAL BANKS *Commercial Banks LG 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 -18

COMMERICAL BANKS’ SERVICES * Services Provided by Commercial Banks LG 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 -19

* WHAT to TELL the TELLER Making Ethical Decisions * • 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 -20

SAVINGS and LOAN ASSOCIATIONS *Savings and Loan Associations LG 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 -21

CREDIT UNIONS * Credit Unions LG 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 -22

NONBANKS *Other Financial Institutions LG 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 -23

WHAT ATTRACTS CUSTOMERS to ONLINE BANKING *Other Financial Institutions LG 4 * • Free identity theft protection • Free credit score monitoring • Personal financial management • Instant messaging service • Bank’s blog Source: www. comscore. com. 20 -24

PROGRESS ASSESSMENT * Progress Assessment * • Why did the U. S. need a Federal Reserve Bank? • What’s the difference between a bank, a savings and loan association, and a credit union? • What’s a consumer finance company? 20 -25

HOW the BANKING CRISIS AFFECTED SMALL BUSINESS * Spotlight on Small Business * • The tightening of loan money led small businesses to seek alternative sources of funds. • Angel investors can be a source of funds for some firms, especially high-growth firms in technology or biotech. • Peer-to-peer lending is an alternative source of capital. 20 -26

PROTECTING DEPOSITORS’ MONEY *Protecting Your Funds * LG 5 • The Federal Deposit Insurance Corporation (FDIC) -- An independent agency of the U. S. government that insures bank deposits up to $100, 000 ($250, 000 until December 2013). • The Savings Association Insurance Fund (SAIF) -- Insures holders of accounts in savings and loan associations. • The National Credit Union Administration (NCUA) -- Provides up to $100, 000 coverage per individual depositor per institution. 20 -27

The BANKING CRISIS GOES GLOBAL * * Reaching Beyond Our Borders • The banking crisis of 2008 -2009 wasn’t limited to the U. S. , even high growth nations felt the pinch. • The International Monetary Fund (IMF) has received requests from countries like Pakistan, Ukraine, Hungary, Turkey, and Bahrain. • Many nations are wondering where future funds will come from. 20 -28

TECHNOLOGICAL ADVANCEMENTS in BANKING * Using Technology to Make Banking More Efficient * LG 6 • Electronic Funds Transfer System -- Messages about a transaction are sent from one computer to another so firms can transfer funds quickly and more economically. • Debit Card -- Serves the same function as a check; it withdrawals funds from a checking account. 20 -29

SMART CARDS * Using Technology to Make Banking More Efficient LG 6 * • Smart Card -- A combination of a credit card, debit card, phone card, driver’s license, and more. 20 -30

MAKING TRANSACTIONS in OTHER COUNTRIES * International Banking and Banking Services * LG 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 -31

LEADING INSTITUTIONS in INTERNATIONAL BANKING * International Banking and Banking Services * LG 7 • World Bank -- Lends most of its money to lessdeveloped 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 185 countries are a part of the IMF. 20 -32

PROGRESS ASSESSMENT * Progress Assessment * • What are some of the causes for the banking crisis of 2008 -2009? • What’s the role of the FDIC? • How does a debit card differ from a credit card? • What’s the World Bank and what does it do? • What’s the IMF and what does it do? 20 -33