Download Chapter 15

Ferrell Hirt Ferrell
A CHANGING WORLD
EIGHTH EDITION
FHF
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
part
Financing the
Enterprise
6
CHAPTER 14 Accounting and Financial Statements
CHAPTER 15 Money and the Financial System
CHAPTER 16 Financial Management and Securities Markets
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Finance
 The study of money—how it’s made, how it’s lost
and how it’s managed
Money
 Anything generally accepted in exchange for goods and
services
 Many materials have been used as money
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Functions of Money
 Medium of exchange
• Accepted as payment for products and resources
• Bartering: Trading one good or service for another
of similar value
 Inefficient because not always divisible and can be complicated in
multiple-party transactions
 Measure of value
• Single standard for assigning and comparing values of products and
resources
 Store of value
• Means of retaining and accumulating wealth
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Characteristics of Money
 Acceptability



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Divisibility
Portability
Stability
Durability
Difficulty to counterfeit
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Types of Money
 Paper Money and Coins
 Checking Account (Demand Deposit): Money stored
in an account at a bank that can be withdrawn without
advance notice
• Checks serve as a more secure substitute for cash
 Savings Account (Time Deposit): Accounts with funds that
usually cannot be withdrawn without advance notice
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Types of Money
Money Market Account
 Higher interest rates than standard bank rates with greater
restrictions
Certificates of Deposit (CDs)
 Savings accounts that guarantee a set interest rate over a period
of time providing funds are not withdrawn before maturity
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Types of Money
Credit Cards
 Means of access to preapproved lines of credit
granted by a bank or a finance company
 Credit card companies have been the subject of criticism and
scrutiny
 Credit CARD (Card Accountability Responsibility and
Disclosure) Act was passed into law in 2009
• Important for all card holders
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Types of Money
Debit Card
 A card that looks like a credit card but works like
a check
 A direct electronic payment from the cardholder’s checking
account
Traveler’s Checks, Money Orders, Cashier’s Checks
 Other common forms of “near” money
 Guaranteed as cash
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The U.S. Financial System
Federal Reserve Board (The Fed)
 Guardian of the American financial system
 Independent agency of the federal government
 Established in 1913 to regulate the nation’s banking and
financial industry
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The Federal Reserve System
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The Fed
Four major functions:
1.
2.
3.
4.
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
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Monetary Policies
Monetary Policy
 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
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Four Main Monetary Policy Tools
1. Open Market Operations: Decisions to buy
or sell U.S. Treasury bills 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 Rate: 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
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Other Regulatory Functions
of the Fed
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
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Tools for Regulating
the Money Supply
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2008-2010 Financial Crisis
The Fed used every tool in its arsenal
 Reduced discount rate to almost zero
 Increased money supply
 Bought and sold financial assets in nearly frozen markets
 Created liquidity for failing financial institutions that could not
sell their assets
 Guaranteed loans to improve credit markets
 All those moves did not guarantee a quick recovery
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Banking Institutions
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
New hybrid bank institutions perform multiple functions
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Banking Institutions
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
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Insurance for Banks
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
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Bank Failures
 Nearly 300 banks have failed since 2008;
hundreds more are at risk
• Washington Mutual
• Ameribank
• Indymac Bank
 Consumers’ money protected by FDIC
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Non-Banking Institutions
 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
…continued on next page
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Non-Banking Institutions
 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
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 One of the most important secondary home
mortgage lenders in the U.S.
• Created to relieve lenders of debt so they can lend
more money
 Provides many banks with capital
 Has experienced major accounting scandals
 Was placed in a conservatorship of the Federal Housing
Finance Authority
 Failure would have meant partial collapse of the house
mortgage market
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Electronic Banking
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ETF: Electronic funds transfer
ATM: Automated teller machines
ACHs: Automated clearinghouses
Online Banking: Bank at home or anywhere/anytime
(Increasing the range of services)
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Future of Banking
 Advances in technology are challenging and
changing the banking industry
 Trend toward larger banks, even in the wake of
2008-2010 financial crisis
• Uncertain whether the crisis will continue
 Future of the banking industry will be shaped by federal
government action
• Oversight and regulations to prevent future financial meltdowns
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