Understanding Money and Financial Institutions CHAPTER 15 The Future of Business The Essentials 4 th Edition Gitman & McDaniel Prepared by Deborah Baker © Steve Gottlieb / Stock Connection / Jupiterimages Chapter 15 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved

2 Learning Goals CHAPTER 15 1 What is money, what are its characteristics and functions, and what are the three parts of the U.S. money supply? 2 How does the Federal Reserve manage the money supply? 3 What are the key financial institutions, and what role do they play in the process of financial intermediation?

3 Learning Goals (continued) CHAPTER 15 4How 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?

4 1 What is money, what are its characteristics and functions, and what are the three parts of the U.S. money supply? 1 Show Me the Money

5 money Anything that is acceptable as payment for goods and services. 1 Show Me the Money

6 Characteristics of Money Divisibility Portability Durability Scarcity 1

7 Functions of Money 1 Store of Value Standard of Value Medium of Exchange © AP Images / U.S. Mint

8 currency Coins and paper money. Travelers’ checks, cashier’s checks, money orders. 1 The U.S. Money Supply

9 Time Deposits Demand Deposits Deposits at a financial institution that pay interest. Cannot be withdrawn on demand. Money in checking accounts. Can be withdrawn on demand. Money in checking accounts. Can be withdrawn on demand. 1 The U.S. Money Supply

10 1 The U.S. Money Supply M2 M1 Describes the U.S. monetary supply. Includes all M1 monies plus time deposits and other money that are not immediately accessible. Describes the U.S. monetary supply. Includes all M1 monies plus time deposits and other money that are not immediately accessible. The total amount of readily available money in the system and includes currency and demand deposits.

11 CONCEPT check 1 What is money, and what are its characteristics? What are the main functions of money? What are the three main components of the U.S. money supply? How do they relate to M1 and M2?

12 2 How does the Federal Reserve manage the money supply? 2 The Federal Reserve System

13 The Fed 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

14 Federal Reserve Responsibilities 2 Making check clearing easier Distributing currency Setting rules on credit Carrying out money policy

15 Discount Rate Reserve Requirements Open Market Operations Interest rate charged by Fed to member banks. Cash amount for banks to hold. Purchase or sale of U.S. government bonds. Carrying Out Monetary Policy 2

16 2 Selective Credit Controls Margin requirements Consumer credit rules Setting Rules on Credit

17 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

18 3 What are the key financial institutions, and what role do they play in the process of financial intermediation? 3 U.S. Financial Institutions

19 Financial Intermediation financial intermediation The process in which financial institutions act as intermediaries between the suppliers and demanders of funds. 3

20 Depository Financial Institutions  Savings accounts  Checking accounts  Money market deposit accounts  Certificates of deposit  Consumer loans  Business loans  Money transfer  Electronic funds transfer  Automated teller machine  Debit cards  Smart cards  Online banking Services Exhibit

21 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

22 4 How does the Federal Deposit Insurance Corporation (FDIC) protect depositors’ funds? 4 Insuring Bank Deposits

23 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. Insuring Bank Deposits 4

24 The Major Deposit Insurance Funds 4  The Bank Insurance Fund (BIF)  The Savings Association Insurance Fund (SAIF)  The National Credit Union Share Insurance Fund

25 Role of the FDIC 4  Examines and supervises about 5,250 banks  Insures about $3 trillion of deposits  Insures member banks in the Federal Reserve System

26 4  Lend money to the bank  Recommend bank merger  Require bank to use new management practices or replace its managers  Buy loans from the bank  Provide extra equity capital  Cover all deposits, even over $100,000 FDIC Actions for Financially-Troubled Banks

27 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

28 5 What role do U.S. banks play in the international marketplace? 5 International Banking

29 Offer trade- related services Provide loans Foreign-currency exchange Foreign-currency exchange Fund overseas investments 5 International Banking © Sipa via AP Images

30 5 Difficulties with International Expansion  International banks subject to fewer regulations  Governments protect banks against foreign competition  High-risk venture due to political and economic uncertainty

31 CONCEPT check What is the role of U.S. banks in international banking? What challenges do U.S. banks face in foreign markets? 5

32 6 What trends are reshaping financial institutions? 6 Trends in Financial Institutions

33 Top 10 Banking Trends in Exhibit Source: “Top 10 Banking Industry Trends in 2007,” from January 25, Copyright © 2007 by Aite Group LLC. All rights reserved. Reproduced by permission. Top 10 Banking Industry Trends in 2007 Consumer Protection Issues Greater Focus on Business Banking Banking-Lite for the Unbanked and Underbanked Wholesale Banking Extends its Reach Web-Based Technology for Training Greater Bank and Branch Specialization New Sources of Fee-Based Revenues New Small- Business Initiatives Business Process Outsourcing for the Masses Private Labeling

34 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 (P2P) lending networks play in microlending? What impact has terrorism had on the banking industry? How do banks fight money laundering? 6