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

2. Business Copyright 2005 Prentice- Hall, Inc. 18-2 Part Five: Understanding Financial Issues 18.Understanding Money And Banking 19.Understanding Securities And Investments 20.Understanding Financial And Risk Management

3. 18-3 Chapter 18 Understanding Money & Banking

4. Business Copyright 2005 Prentice- Hall, Inc. 18-4 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

5. Business Copyright 2005 Prentice- Hall, Inc. 18-5 Characteristics Of Money PortabilityPortability DivisibilityDivisibility DurabilityDurability StabilityStability

6. Business Copyright 2005 Prentice- Hall, Inc. 18-6 Functions Of Money Medium Of ExchangeMedium Of Exchange Store Of ValueStore Of Value Unit Of AccountUnit Of Account

7. Business Copyright 2005 Prentice- Hall, Inc. 18-7 Money Supply Spendable Money = M1Spendable Money = M1 –Currency –Checks –Demand Deposits Convertible Money = M2Convertible Money = M2 –M1 –Time Deposits –Money Market Funds –Savings Deposits

8. Business Copyright 2005 Prentice- Hall, Inc. 18-8 Money-Supply Growth

9. Business Copyright 2005 Prentice- Hall, Inc. 18-9 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

10. Business Copyright 2005 Prentice- Hall, Inc. 18-10 Projected Consumer Bill Payments (2005) Source: Wired, “The New Currency” April 2004, p. 59. Total = $6.74 Trillion

11. Business Copyright 2005 Prentice- Hall, Inc. 18-11 U.S. Financial System IssuesIssues –Diversification/Mergers –Interest Rates Depository InstitutionsDepository Institutions –Commercial Banks –Thrifts –Savings & Loans –Mutual Savings Banks –Credit Unions

12. Business Copyright 2005 Prentice- Hall, Inc. 18-12 The Prime Interest Rate

13. Business Copyright 2005 Prentice- Hall, Inc. 18-13 Nondepository Institutions Pension FundsPension Funds Insurance CompaniesInsurance Companies Finance CompaniesFinance Companies Securities DealersSecurities Dealers

14. Business Copyright 2005 Prentice- Hall, Inc. 18-14 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

15. Business Copyright 2005 Prentice- Hall, Inc. 18-15 Worldwide ATM Locations

16. Business Copyright 2005 Prentice- Hall, Inc. 18-16 Commercial Banking Regulation Federal Reserve SystemFederal Reserve System Federal Deposit Insurance CorporationFederal Deposit Insurance Corporation Other State & Federal AgenciesOther State & Federal Agencies

17. Business Copyright 2005 Prentice- Hall, Inc. 18-17 How Banks Create Money

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

19. Business Copyright 2005 Prentice- Hall, Inc. 18-19 Structure Of Federal Reserve System Board Of Governors Reserve Banks (12) Member Banks

20. Business Copyright 2005 Prentice- Hall, Inc. 18-20 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

21. Business Copyright 2005 Prentice- Hall, Inc. 18-21 Check Clearing By Hand (1940s) Source: Federal Reserve Bank of Atlanta, http://www.frbatlanta.org/invoke.cfm?objectid=83FD414A-9AF0-11D5- 898400508BB89A83&method=display_body

22. Business Copyright 2005 Prentice- Hall, Inc. 18-22 Clearing A Check

23. Business Copyright 2005 Prentice- Hall, Inc. 18-23 Tools Of The Fed Reserve RequirementsReserve Requirements Discount RateDiscount Rate Open-Market OperationsOpen-Market Operations Selective Credit ControlsSelective Credit Controls

24. Business Copyright 2005 Prentice- Hall, Inc. 18-24 Dual Prime Rate & Federal Discount Rate Source: Federal Reserve Bank of St. Louis, http://research.stlouisfed.org On 12/31 Of That Year 2004

25. Business Copyright 2005 Prentice- Hall, Inc. 18-25 Dual Prime Rate & Federal Discount Rate Source: Federal Reserve Bank of St. Louis, http://research.stlouisfed.org On 12/31 Of That Year 2004

26. Business Copyright 2005 Prentice- Hall, Inc. 18-26 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)

27. Business Copyright 2005 Prentice- Hall, Inc. 18-27 Electronic Technology Debit Cards/Point-Of-Sale TerminalsDebit Cards/Point-Of-Sale Terminals Smart CardSmart Card E-CashE-Cash

28. Business Copyright 2005 Prentice- Hall, Inc. 18-28 International Banking Government Influences Exchange RatesGovernment Influences Exchange Rates International PaymentsInternational Payments International Banking StructureInternational Banking Structure –World Bank –International Monetary Fund

29. Business Copyright 2005 Prentice- Hall, Inc. 18-29 International Payments Process