Business Copyright 2005 Prentice- Hall, Inc. 18-1

Business Copyright 2005 Prentice- Hall, Inc Part Five: Understanding Financial Issues 18.Understanding Money And Banking 19.Understanding Securities And Investments 20.Understanding Financial And Risk Management

18-3 Chapter 18 Understanding Money & Banking

Business Copyright 2005 Prentice- Hall, Inc Chapter Outline What Is Money? What Is Money? The U.S. Financial System The U.S. Financial System The Federal Reserve System The Federal Reserve System The Changing Money & Banking System The Changing Money & Banking System International Banking & Finance International Banking & Finance

Business Copyright 2005 Prentice- Hall, Inc Characteristics Of Money PortabilityPortability DivisibilityDivisibility DurabilityDurability StabilityStability

Business Copyright 2005 Prentice- Hall, Inc Functions Of Money Medium Of ExchangeMedium Of Exchange Store Of ValueStore Of Value Unit Of AccountUnit Of Account

Business Copyright 2005 Prentice- Hall, Inc Money Supply Spendable Money = M1Spendable Money = M1 –Currency –Checks –Demand Deposits Convertible Money = M2Convertible Money = M2 –M1 –Time Deposits –Money Market Funds –Savings Deposits

Business Copyright 2005 Prentice- Hall, Inc Money-Supply Growth

Business Copyright 2005 Prentice- Hall, Inc Credit Cards Not Part Of M1 Or M2Not Part Of M1 Or M2 Big BusinessBig Business –Convenient –Profitable For Credit Card Companies Sources Of ProfitSources Of Profit –Cardholder = Annual Fees & Interest –Merchant = 2-5% Fee

Business Copyright 2005 Prentice- Hall, Inc Projected Consumer Bill Payments (2005) Source: Wired, “The New Currency” April 2004, p. 59. Total = $6.74 Trillion

Business Copyright 2005 Prentice- Hall, Inc U.S. Financial System IssuesIssues –Diversification/Mergers –Interest Rates Depository InstitutionsDepository Institutions –Commercial Banks –Thrifts –Savings & Loans –Mutual Savings Banks –Credit Unions

Business Copyright 2005 Prentice- Hall, Inc The Prime Interest Rate

Business Copyright 2005 Prentice- Hall, Inc Nondepository Institutions Pension FundsPension Funds Insurance CompaniesInsurance Companies Finance CompaniesFinance Companies Securities DealersSecurities Dealers

Business Copyright 2005 Prentice- Hall, Inc Special Financial Services Pension/Trust ServicesPension/Trust Services –Individual Retirement Accounts –Trust Services International ServicesInternational Services –Currency Exchange –Letters Of Credit –Banker’s Acceptances Financial Advice/Brokerage ServicesFinancial Advice/Brokerage Services Automated Teller MachinesAutomated Teller Machines Electronic Funds TransferElectronic Funds Transfer

Business Copyright 2005 Prentice- Hall, Inc Worldwide ATM Locations

Business Copyright 2005 Prentice- Hall, Inc Commercial Banking Regulation Federal Reserve SystemFederal Reserve System Federal Deposit Insurance CorporationFederal Deposit Insurance Corporation Other State & Federal AgenciesOther State & Federal Agencies

Business Copyright 2005 Prentice- Hall, Inc How Banks Create Money

Business Copyright 2005 Prentice- Hall, Inc Federal Deposit Insurance Corporation Insures Member Banks Deposits To $100,000/AccountInsures Member Banks Deposits To $100,000/Account 1941 – 1980 Examined1941 – 1980 Examined –Bank Practices –Accounts Banks Deregulated- Depository Institutions Deregulation & Monetary Control Act Of 1980Banks Deregulated- Depository Institutions Deregulation & Monetary Control Act Of 1980

Business Copyright 2005 Prentice- Hall, Inc Structure Of Federal Reserve System Board Of Governors Reserve Banks (12) Member Banks

Business Copyright 2005 Prentice- Hall, Inc Functions Of The Fed Government’s BankGovernment’s Bank Banker’s BankBanker’s Bank Check ClearingCheck Clearing Controls Money Supply- Monetary PolicyControls Money Supply- Monetary Policy

Business Copyright 2005 Prentice- Hall, Inc Check Clearing By Hand (1940s) Source: Federal Reserve Bank of Atlanta, BB89A83&method=display_body

Business Copyright 2005 Prentice- Hall, Inc Clearing A Check

Business Copyright 2005 Prentice- Hall, Inc Tools Of The Fed Reserve RequirementsReserve Requirements Discount RateDiscount Rate Open-Market OperationsOpen-Market Operations Selective Credit ControlsSelective Credit Controls

Business Copyright 2005 Prentice- Hall, Inc Dual Prime Rate & Federal Discount Rate Source: Federal Reserve Bank of St. Louis, On 12/31 Of That Year 2004

Business Copyright 2005 Prentice- Hall, Inc Dual Prime Rate & Federal Discount Rate Source: Federal Reserve Bank of St. Louis, On 12/31 Of That Year 2004

Business Copyright 2005 Prentice- Hall, Inc Interstate Banking (1995) Bank Holding Companies Can Acquire Subsidiaries In Any StateBank Holding Companies Can Acquire Subsidiaries In Any State No Company Can Control More Than 10% Of Insured’s DepositsNo Company Can Control More Than 10% Of Insured’s Deposits No Bank Can Control More Than 30% Of State’s DepositsNo Bank Can Control More Than 30% Of State’s Deposits Banks Can Provide Transactions For AffiliatesBanks Can Provide Transactions For Affiliates Banks Can Convert Affiliates To Branches (1997)Banks Can Convert Affiliates To Branches (1997)

Business Copyright 2005 Prentice- Hall, Inc Electronic Technology Debit Cards/Point-Of-Sale TerminalsDebit Cards/Point-Of-Sale Terminals Smart CardSmart Card E-CashE-Cash

Business Copyright 2005 Prentice- Hall, Inc International Banking Government Influences Exchange RatesGovernment Influences Exchange Rates International PaymentsInternational Payments International Banking StructureInternational Banking Structure –World Bank –International Monetary Fund

Business Copyright 2005 Prentice- Hall, Inc International Payments Process