1. Chapter Sixteen Understanding Money, Banking, and Credit

2. Copyright © Cengage Learning. All rights reserved. Learning Objectives 1.Identify the functions and characteristics of money. 2.Summarize how the Federal Reserve System regulates the money supply. 3.Describe the organizations involved in the banking industry. 4.Identify the services provided by financial institutions. 5.Understand how financial institutions are changing to meet the needs of domestic and international customers. 18 | 2

3. Copyright © Cengage Learning. All rights reserved. Learning Objectives (cont’d) 6.Explain how deposit insurance protects customers. 7.Discuss the importance of credit and credit management. 18 | 3

4. Chapter 16 Outline –What Is Money? The Functions of Money Important Characteristics of Money The Supply of Money: M1 and M2 –The Federal Reserve System Regulation of Reserve Requirements Regulation of the Discount Rate Open-Market Operations Other Fed Responsibilities –The American Banking Industry Commercial Banks Other Financial Institutions Careers in the Banking Industry Copyright © Cengage Learning. All rights reserved.18 | 4

5. Chapter 16 Outline –Traditional Services Provided by Financial Institutions Checking Accounts Savings Accounts Short- and Long-Term Loans Credit Card and Debit Card Transactions –Innovative Banking Services Recent Changes in the Banking Industry Online Banking and International Banking –The FDIC, SAIF, BIF, and NCUA –Effective Credit Management How Do You Get Money From a Bank or Lender? The Five Cs of Credit Management Checking Credit Information Sound Collection Procedures Copyright © Cengage Learning. All rights reserved.18 | 5 (cont’d)

6. Copyright © Cengage Learning. All rights reserved. What Is Money? Barter system Money 18 | 6

7. Copyright © Cengage Learning. All rights reserved. The Functions of Money Medium of exchange Measure of value Store of value 18 | 7

8. Copyright © Cengage Learning. All rights reserved. Important Characteristics of Money Divisibility Portability Stability Durability Difficulty of counterfeiting 18 | 8

9. Copyright © Cengage Learning. All rights reserved. The Supply of Money: M 1 and M 2 Demand deposit Time deposit Two main measures of the supply of money –M 1 Currency, demand deposits, and travelers checks –M 2 M 1 plus savings accounts, certain money- market securities and small-denomination time deposits or certificates of deposit (CDs) of less than $100,000 18 | 9

10. Copyright © Cengage Learning. All rights reserved. The Federal Reserve System The central bank of the United States responsible for regulating the banking industry –Controlled by a 7-member board of governors who are appointed by the president and confirmed by the Senate to serve 14-year terms –Composed of 12 district banks and 25 branch banks –District banks are owned by commercial banks that are members of the Federal Reserve system –Main function is to regulate the nation’s money supply by controlling bank reserves requirements, regulating the discount rate, and running open-market operations 18 | 10

11. Copyright © Cengage Learning. All rights reserved. The Federal Reserve System (cont’d) Regulation of reserve requirements Regulation of the discount rate Open-market operations Other Fed responsibilities 18 | 11

12. Copyright © Cengage Learning. All rights reserved. The American Banking Industry Commercial bank –A profit-making organization that accepts deposits, makes loans, and provides related services to its customers –National bank –State bank 18 | 12

13. Copyright © Cengage Learning. All rights reserved. The American Banking Industry (cont’d) Other financial institutions –Savings and loan associations (S&L) –Credit unions –Mutual savings banks –Insurance companies –Pension funds –Brokerage firms –Finance companies –Investment banking firms 18 | 13

14. Copyright © Cengage Learning. All rights reserved. Careers in Banking The 7 largest banks in the U.S. employ approx. 1,132,000 people The U.S. Department of Labor expects the number of people employed in banking to grow more slowly than other jobs in the economy between now and the year 2012. Traits of successful bankers –Honesty –Ability to interact with people –Strong background in accounting –Appreciation for the banking-finance relationship –Basic computer skills 18 | 14

15. Copyright © Cengage Learning. All rights reserved. Traditional Services Provided by Financial Institutions Checking accounts –Check –NOW account Savings accounts –Passbook savings account –Certificate of deposit (CD) Short- and long-term loans –Line of credit –Revolving credit agreement –Collateral 18 | 15

16. Copyright © Cengage Learning. All rights reserved. Traditional Services Provided by Financial Institutions (cont’d) Credit card and debit card transactions –Banks and other financial institutions charge merchants fees (a percentage of each credit card transaction) for handling the transactions for the merchant –Banks impose monthly finance charges on the unpaid balances (essentially, a line of consumer credit) of cardholders –Debit card—a card that electronically subtracts the amount of a purchase from the cardholder’s bank account at the moment the purchase is made 18 | 16

17. Copyright © Cengage Learning. All rights reserved. Recent Changes in the Banking Industry Financial Services Modernization Banking Act (1999 ) Anticipated changes –More emphasis on evaluating the creditworthiness of loan applicants as a result of the recent financial crisis –An increase in government regulation of the industry 18 | 17

18. Copyright © Cengage Learning. All rights reserved. Recent Changes in the Banking Industry Anticipated changes (continued) –A reduction in the number of banks, S&Ls, credit unions, and financial institutions because of consolidation and mergers –Globalization of the banking industry –The importance of customer service as a way to keep customers from switching to competitors –Increased use of credit and debit cards and a decrease in the number of written checks –Continued growth in online banking 18 | 18

19. Copyright © Cengage Learning. All rights reserved. Online Banking Advantages –Convenience of electronic deposits –Ability to obtain current account balances –Convenience of transferring funds –Ability to pay bills –Convenience of seeing which checks have cleared –Easy access to current interest rates –Simplified loan application procedures –For banks—lower processing costs Disadvantages –Not being able to discuss financial matters with a personal banker 18 | 19

20. Copyright © Cengage Learning. All rights reserved. Online Banking (cont’d) Electronic funds transfer (EFT) system –A means of performing financial transactions through a computer terminal or telephone hookup –Changing how banks do business Automated teller machines (ATMs) Automated clearinghouses (ACHs) Point-of-sale terminals 18 | 20

21. Copyright © Cengage Learning. All rights reserved. International Banking Popular methods of paying for import and export transactions –Letter of credit –Banker’s acceptance Currency exchange 18 | 21

22. Copyright © Cengage Learning. All rights reserved. The FDIC, SAIF, BIF, NCUA Federal Deposit Insurance Corporation (FDIC) FDIC reorganized into the Banking Insurance Fund (BIF) and Savings Association Insurance Fund (SAIF) FDIC provides deposit insurance of $100,000 per account All Federal Reserve System member banks must belong to the FDIC; nonmembers and S&Ls may join if they qualify National Credit Union Association (NCUA) 18 | 22

23. Copyright © Cengage Learning. All rights reserved. How Do You Get Money from a Bank or Lender? For individuals –Shop around for low interest rates, but you have a better chance at an institution where you already have an account –Fill out a loan application –Describe how you will use the money and how you will repay it –Prepare for an interview –If rejected, ask the loan officer why For businesses –Develop a relationship with your banker –Apply for a preapproved line of credit or revolving credit agreement even if you do not need the money –Supply financial statements and tax documents –Prepare a convincing cover letter 18 | 23

24. Copyright © Cengage Learning. All rights reserved. Effective Credit Management Credit The five Cs of credit management –Character –Capacity –Capital –Collateral –Conditions 18 | 24

25. Copyright © Cengage Learning. All rights reserved. Effective Credit Management (cont’d) Checking credit information –Credit information sources regarding businesses –Credit information concerning individuals –Fair Credit Reporting Act 18 | 25

26. Copyright © Cengage Learning. All rights reserved. Effective Credit Management (cont’d) Sound collection procedures –Firm –Fair, allowing for compromise –Not harassing Techniques –Subtle reminders –Telephone calls –Personal visits –Legal action 18 | 26