21-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. NickelsMcHughMcHugh Nickels Cover

21-2 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 2121 Understanding Money and Financial Institutions 21-2

21-3 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Why Money? Economy Depends On It Money vs. Barter Unit of Value Electronic Cash Euro Control of Money Supply Global Exchange- Rise/Fall of Dollar & U.S. Economy

21-4 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Characteristics of a Good Money System  Portability  Divisibility  Stability  Durability  Uniqueness

21-5 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Life Span of Currency Source: Bureau of Engraving and Printing

21-6 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Money Supply Currency Demand Deposits = Total M1 + Time Deposits & Money Market Accts. Total M2 *SA *SA = Seasonally Adjusted + =

21-7 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Amount of $ in Circulation per Person Source: New Designs for Your Money, U.S. Dept. of Treasury

21-8 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Federal Reserve Structure Board of Governors 7 Members Advisory Councils 3 Members Federal Open Market Committee 12 Members Federal Reserve Banks 12 Regional Banks Member Banks

21-9 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Regional Reserve Banks

21-10 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Federal Reserve Buys/Sells Foreign CurrencyBuys/Sells Foreign Currency Regulates CreditRegulates Credit Supervises BanksSupervises Banks Collects Data on Money Supply/Economic ActivitiesCollects Data on Money Supply/Economic Activities Processes ChecksProcesses Checks

21-11 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Monetary Policy Reserve RequirementReserve Requirement –Tight/Increase –Loose/Decrease

21-12 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Prime Interest and Federal Discount Rates Source: Federal Reserve of New York

21-13 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Federal Reserve System HistoryHistory –Land Banks –Central Bank –Great Depression StructureStructure

21-14 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Fed Regulates Money Supply Increase Money Supply Reduce Discount Rate Buy Government Bonds Set Credit Controls Expand Reduce Money Supply Increase Discount Rate Sell Government Bonds Set Credit Controls Slow Down

21-15 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. American Banking System DepositoryDepository –Commercial Banks –Savings and Loan Associations/Thrifts –Credit Unions Non-depositoryNon-depository –Life Insurance Companies –Pension Funds –Brokerage Firms –Finance Companies

21-16 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Services Available at Most Commercial Banks

21-17 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Regulation of Financial Institutions - Federal Reserve Board - FDIC - SAIF(FSLIC) - NCUA

21-18 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Future of Banking Repeal of Glass- Steagall (1933)Repeal of Glass- Steagall (1933) Gramm-Leach-Bliley (1999)Gramm-Leach-Bliley (1999) One-Stop ShoppingOne-Stop Shopping Ethical Issues/ScandalsEthical Issues/Scandals

21-19 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Electronic Banking Trends in the U.S. InternetInternet Electronic Funds Transfers (EFTs)Electronic Funds Transfers (EFTs) Check ConversionCheck Conversion Debit Card- TeenagersDebit Card- Teenagers Smart CardSmart Card Automatic TransfersAutomatic Transfers

21-20 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Number of Households That Bank Online In Millions Source: USA Today, “Snapshots”

21-21 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Safe Online Banking Verify Bank Uses Encryption TechnologyVerify Bank Uses Encryption Technology Bank Has Liability GuaranteeBank Has Liability Guarantee Pick Random PIN Code- Letters & NumbersPick Random PIN Code- Letters & Numbers Regularly Scan For Unauthorized TransactionsRegularly Scan For Unauthorized Transactions Use Anti-Virus Software & FirewallUse Anti-Virus Software & Firewall Source: Parade Magazine, May 18, 2003

21-22 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. International Banking Eurodollar & Currency ExchangeEurodollar & Currency Exchange Letter of CreditLetter of Credit Banker’s AcceptanceBanker’s Acceptance World BankWorld Bank IMFIMF

21-23 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. World’s Largest Banks Source: USA Today, “Snapshots” In Billions