1. Part 6 Financing the Enterprise © 2015 McGraw-Hill Education.

2. CHAPTER 14 Accounting and Financial Statements CHAPTER 15 Money and the Financial System CHAPTER 16 Financial Management and Securities Markets 15-2

3. Learning Objectives LO 15-1Define money, its functions, and its characteristics. LO 15-2Describe various types of money. LO 15-3Specify how the Federal Reserve Board manages the money supply and regulates the American banking system. LO 15-4Compare and contrast commercial banks, savings and loan associations, credit unions, and mutual savings banks. LO 15-5Distinguish among nonbanking institutions such as insurance companies, pension funds, mutual funds, and finance companies. LO 15-6Investigate the challenges ahead for the banking industry. 15-3

4. Money in the Financial System 15-4  Fiat money is a paper money not readily convertible to a precious metal such as gold  Gained full acceptance during the Great Depression in the 1930s  In the U.S., paper money is really a government “note” or promise, worth the value specified on the note Finance The study of money; how it’s made, how it’s lost, and how it’s managed Money (Currency) Anything generally accepted in exchange for goods and services

5. Functions of Money 15-5 Medium of exchange Trading one good or service for another of similar value Inefficient because not always divisible and can be complicated in multiple- party transactions Before fiat money, the trade of goods and services was accomplished through bartering

6. Functions of Money 15-6 Money serves as a common standard or yardstick of the value of goods and services Measure of Value Money serves as a way to accumulate wealth (buying power) until it is needed The value of stored money is directly dependent on the health of the economy Store of Value

7. Characteristics of Money 15-7 To be used as a medium of exchange, money must have: Acceptability Divisibility Portability Stability Durability Difficult to counterfeit

8. 15-8 The U.S. government redesigns currency in order to stay ahead of counterfeiters and protect the public DID YOU KNOW? Around 75 percent of counterfeit currency is found and destroyed before it ever reaches the public

9. Costs to Produce Pennies and Nickels 15-9

10. Types of Money 15-10 Checking Account (Demand Deposit) Money stored in an account at a bank or other institution that can be withdrawn without advance notice Savings Accounts (Time Deposits) Accounts with funds that usually cannot be withdrawn without advance notice Paper Money and Coins

11. A Check 15-11

12. Types of Money 15-12 Money Market Accounts Accounts that offer higher interest rates than standard bank rates but with greater restrictions Certificates of Deposit (CDs) Savings accounts that guarantee a depositor a set interest rate over a specified interval as long as the funds are not withdrawn before the end of the period—six months or one year for example

13. Types of Money 15-13  Popular substitute for cash payments because of their convenience, easy access to credit, and acceptance by merchants around the world  Credit CARD (Card Accountability Responsibility and Disclosure) Act was passed into law in 2009 Credit CARD (Card Accountability Responsibility and Disclosure) Act  To regulate the practices of credit card companies that were coming under attack by consumers  Important to all companies and cardholders Credit Cards Means of access to preapproved lines of credit granted by a bank or finance company

14. Types of Money 15-14 Debit Card A card that looks like a credit card but works like a check Using it results in a direct, immediate, electronic payment from the cardholder’s checking account to a merchant or third party Traveler’s Checks, Money Orders, and Cashier’s Checks Common forms of “near” money Guaranteed as cash

15. The American Financial System 15-15 Guardian of the American financial system Independent agency of the federal government Established in 1913 to regulate the nation’s banking and financial industry Federal Reserve Board (The Fed)

16. The Federal Reserve System 15-16 Controls the money supply with monetary policy Regulates financial institutions Manages regional and national check-clearing procedures Supervises the federal deposit insurance of commercial banks in the Federal Reserve system Four Major Function s

17. Monetary Policy 15-17 The means by which the Fed controls the amount of money available in the economy Aims to keep supply and demand in balance to avoid inflation/deflation Monetary Policy

18. Mobile Money Transfer (M-PESA) 15-18  In developing economies, the financial infrastructure is not well supported.  Many people in these areas have had to travel many hours by foot or train to retrieve their money for everyday purchases such as food.  M-PESA was created to alleviate this problem. M-PESA  It uses mobile phones, which have become widespread in developing economies, to make money transfers.  All that is required of the user is their national ID or passport information, and they can send or receive money within a matter of minutes.

19. Fed Tools for Regulating the Money Supply 15-19

20. Federal Reserve 15-20 One of the roles of the Federal Reserve is to use its policies to keep money flowing Money is the lifeblood of the economy If banks become too protective of their funds and stop lending money, the economy can grind to a halt

21. Four Main Monetary Policy Tools 15-21 1. Open Market Operations Decisions to buy or sell U.S. Treasury bill in the open market Buying securities increases money in supply and vice versa 2. Reserve Requirements Percentage of deposits a bank must hold in reserve Has a strong effect on the economy and not used often 3. Discount Rates Rate of interest the Fed charges to loan money to banking institutions Lowering discount rate encourages borrowing and expands money supply and vice versa 4. Credit Controls Authority to establish and enforce credit rules

22. Other Regulatory Functions of the Fed 15-22 Regulating Member Banks Establishes and enforces banking rules that affect monetary policy and competition Has authority to approve bank mergers Check Clearing National check processing through check clearinghouses Depository Insurance Supervises the federal insurance funds that protect the deposits in member banking institutions

23. Banking Institutions 15-23 Commercial Banks Largest and oldest of all financial institutions, relying mainly on checking and savings accounts Loan to businesses and individuals Savings and Loan Associations (S&Ls—also called “thrifts”) Primarily offer savings accounts and make long-term loans for residential mortgages Most have merged with commercial banks

24. Banking Institutions 15-24 Credit Unions Financial institutions owned and controlled by depositors Usually having a common employer, profession, trade group, or religion Mutual Savings Banks Similar to S&Ls, but owned by depositors Found mostly in New England  New hybrid bank institutions perform multiple functions

25. Insurance for Banks 15-25 Federal Deposit Insurance Corporation (FDIC) Insures personal accounts up to $250,000 National Credit Union Association (NCUA) Regulates and charters credit unions Insures deposits through its National Credit Union Insurance Fund Similar to the FDIC

26. Bank Failures 15-26 More than 380 banks have failed between 2009 - 2011 Consumers’ money protected by FDIC Bank Failures

27. 15-27 JPMorgan Chase is the second largest commercial bank in the United States behind Bank of America

28. Is the World Bank Serious about Sustainability? 15-28 The World Bank raises money through donations, bond sales, and shareholder supportWorld Bank The money is used to provide loans and other financial assistance to developing countries Realizing that funding certain projects could negatively affect the environment the World Bank adopted policies to assess the sustainability of proposed projects The World Bank must juggle both the human and environmental impacts when determining which projects to fund The World Bank has taken steps to curb climate change and support renewable energy

29. Nonbanking Institutions 15-29 Diversified Firms Traditionally non-financial firms that have expanded into the financial field Insurance Companies Businesses that protect their clients against losses from specified risks Pension Funds Managed investment pools to provide retirement income for members

30. Nonbanking Institutions 15-30 Mutual Fund Investment company that pools investor money and invests in large numbers of diversified securities Brokerage Firm Buy and sell securities for clients and provide other services Investment Bank Underwrites new issues of securities for corporations, states and municipalities needed to raise money in capital markets Finance Companies Businesses that offer short-term loans at substantially higher interest rates than banks

31. Hedge Funds 15-31 Hedge fundsHedge funds are large pools of money that are managed and used to invest in activities that promise a high return on investment High minimum initial investment requirement Only the wealthy are able to be involved Similar to mutual funds except hedge fund investments can be high risk Increases the chances of a higher return on investment Main point of contributing to a hedge fund

32. 15-32 State Farm InsuranceState Farm Insurance allows users to input their information on its website to receive an auto insurance quote quickly and conveniently

33. Electronic Banking 15-33 Electronic Funds Transfer (EFT) Any movement of funds by means of an electronic terminal, telephone, computer, or magnetic tape Automated Teller Machines (ATM) The most familiar form of electronic banking, which dispenses cash, accepts deposits, and allows balance inquiries and cash transfers from one account to another

34. Electronic Banking 15-34 Automated Clearinghouses (ACHs) A system that permits payments such as deposits or withdrawals to be made to and from a bank account by magnetic computer tape Online Banking Bank at home or anywhere/anytime 62% of adults list Internet banking as their preferred banking method

35. Cost of Borrowing Poses a Threat to Brazilian Consumers 15-35  The Brazilian economy has been booming in recent years, creating a growing middle class and consumers are spending and using credit like never before  The central bank of Brazil has increased interest rates  Credit cards have an annual interest rate of 238% on average, whereas the cost of borrowing for personal loans is 85% for retailers and 47% for banks  Higher interest rate tend to deter spending  Inflation in Brazil has risen significantly, which in turn increases the cost of borrowing

36. 15-36 However, hackers have stolen millions from banking customers by tricking them into visiting websites and downloading malicious software that gives the hackers access to their passwords Computers and handheld devices have made online banking extremely convenient

37. Future of Banking 15-37  Advances in technology are challenging and changing the banking industry  During 2007-2008, the financial markets collapsed under the weight of declining housing prices, subprime mortgages (mortgages with low-quality borrowers) and risky securities backed by these subprime mortgages  Future of the structure of the banking system is in the hands of the U.S. Congress  Dodd-Frank Wall Street Reform and Consumer Protection Act – Intent of the act is to eliminate the ability of banks to create this type of problem in the future

38. Mobile Money Transfer (M-PESA) 15-38  In developing economies, the financial infrastructure is not well supported.  Many people in these areas have had to travel many hours by foot or train to retrieve their money for everyday purchases such as food.  M-PESA was created to alleviate this problem. M-PESA  It uses mobile phones, which have become widespread in developing economies, to make money transfers.  All that is required of the user is their national ID or passport information, and they can send or receive money within a matter of minutes.

39. Discussion ? What are the six characteristics of money? Explain how the U.S. dollar has those six characteristics. ? Discuss the four economic goals the Federal Reserve must try to achieve with its monetary policy. 15-39