Download Money, Banking, and Financial Markets 2e

Chapter 2
Banking in the
New Cyberworld
PowerPoint Presentation by Charlie Cook
Copyright © 2004 South-Western. All rights reserved.
Fundamental Issues
1. What is the difference between stored-value
cards and smart cards?
2. Is digital cash less secure than physical
cash?
3. What are the rationales for regulating
cyberbanking?
4. Does e-money matter for monetary policy?
Copyright © 2004 South-Western. All rights reserved.
2–2
Stored-Value and Debit-Card Systems
• Closed stored-value system:
 An e-money system in which consumers use cards
containing prestored funds to buy specific goods
and services offered by a single issuer of the cards.
• Open stored-value system:
 An e-money system in which consumers buy goods
and services using cards containing prestored
funds that are offered by multiple card issuers and
accepted by multiple retailers.
Copyright © 2004 South-Western. All rights reserved.
2–3
Card Systems (cont’d)
• Debit card:
 A plastic card that allows the bearer to transfer
funds to a merchant’s account, provided that the
bearer authorizes the transfer by providing
personal identification.
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2–4
A Debit-Card System
Figure 2–1
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2–5
Smart Cards
• Smart card:
 A card containing a microprocessor that permits
storage of funds via security programming, that can
communicate with other computers, and that does
not require online authorization for funds transfer to
occur.
• Open smart-card system:
 An e-money system in which consumers use smart
cards with embedded microprocessors, which may
be issued by a number of institutions, to purchase
goods and services offered by multiple retailers.
Copyright © 2004 South-Western. All rights reserved.
2–6
Digital Cash
• Digital cash:
 Funds contained on computer software, in the form
of secure algorithms, that is stored on microchips
and other computer devices.
• Payment intermediary:
 An institution that facilitates the transfer of funds
between buyer and seller during the course of any
purchase of goods, services, or financial assets.
Copyright © 2004 South-Western. All rights reserved.
2–7
Digital Encryption and Electronic Payment Security
Figure 2–2
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2–8
Digital
counterfeiting
The Security
of
Digital Cash
Malfunctioning
money
Swiping digital cash
offline and online
Could e-money
“catch a cold”?
Copyright © 2004 South-Western. All rights reserved.
2–9
Bank Fraud:
An Old Problem with a New Face
• Banknotes:
 Privately issued paper currency.
• Free-banking laws:
 Laws in force in many U.S. states between 1837
and 1861 that allowed anyone to obtain a charter
authorizing banking operations.
Copyright © 2004 South-Western. All rights reserved.
2–10
States with
Free-Banking
Laws,
1837–1860
aMichigan
prohibited free
banking in 1840 and allowed
it again in 1857. bAccording
to Rockoff, very little free
banking was done under the
laws in these states.
SOURCE: Reprinted from A.J.Rolnick and
W.E.Weber, “Inherent Instability in Banking: The
Free Banking Experience,” Cato Journal 5
(Winter 1986). Their source was Hugh Rockoff,
The Free Banking Era: A Re-Examination (New
York: Arno Press,1975).
Copyright © 2004 South-Western. All rights reserved.
Table 2–2
2–11
Bank Regulation Goals
• Maintaining depository institution liquidity.
 Illiquidity: A situation in which a banking institution
lacks the cash assets required to meet requests for
depositor withdrawals.
• Assuring bank solvency by limiting failures.
 Insolvency: A situation in which the value of a
bank’s assets falls below the value of its liabilities.
• Promoting an efficient financial system.
• Protecting consumers.
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2–12
The Composition of
the Quantity of
Money in 1861
Figure 2–3
The Composition of
the Quantity of
Money in 1866
SOURCE: Richard H.Timberlake, Monetary Policy in the United States: An
Intellectual and Institutional History (Chicago:University of Chicago Press,1993).
Copyright © 2004 South-Western. All rights reserved.
Figure 2–4
2–13
Notes and Deposits at State and National Banks,
1860–1868
SOURCE: Richard H.Timberlake, Monetary Policy in the United States: An
Intellectual and Institutional History (Chicago:University of Chicago Press,1993).
Copyright © 2004 South-Western. All rights reserved.
Figure 2–5
2–14
Total U.S.Debit-Card Transactions
SOURCE: : Bank for International Settlements and authors’ estimates.
Copyright © 2004 South-Western. All rights reserved.
Figure 2–6
2–15