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CHAPTER

Understanding Money and Financial Institutions

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THE FUTURE OF BUSINESS Gitman & McDaniel 6th Edition

Chapter 18 Copyright 2008 by South-Western, a division of Thomson Learning. All rights reserved

Prepared by Deborah Baker 1 Texas Christian University

Learning Goals
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What is money, what are its characteristics and functions, and what are the three parts of the U.S. money supply? How does the Federal Reserve manage the money supply? What are the key financial institutions, and what role do they play in the process of financial intermediation?

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Learning Goals
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How does the Federal Deposit Insurance Corporation (FDIC) protect depositors funds?
What role do U.S. banks play in the international marketplace? What trends are reshaping financial institutions?

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Show Me the Money


What is money, what are its characteristics and functions, and what are the three parts of the U.S. money supply?

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Show Me the Money

Money

Anything that is acceptable as payment for goods and services.

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Characteristics of Money

Scarcity Durability Portability Divisibility

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Functions of Money

Medium of Exchange Functions of Money Standard of Value Store of Value

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The U.S. Money Supply

Currency

Coins and paper money.


Travelers checks, cashiers checks, money orders.

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The U.S. Money Supply

Demand Deposits

Money in checking accounts. Can be withdrawn on demand.

Time Deposits

Deposits at a financial institution that pay interest. Cannot be withdrawn on demand.

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The U.S. Money Supply

M1

The total amount of readily available money in the system and includes currency and demand deposits.

M2

Describes the U.S. monetary supply. Includes all M1 monies plus time deposits and other money that are not immediately accessible.

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Concept Check
What is money, and what are its characteristics? What are the main functions of money? What are the three main components of the U.S. money supply? How do they relate to M1 and M2?

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The Federal Reserve System


How does the Federal Reserve manage the money supply?

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The Fed

Federal Reserve System

The central bank of the United States. It consists of 12 district banks, each located in a major U.S. city.

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Federal Reserve Districts and Banks

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The Federal Reserve Systems Responsibilities

Carrying out money policy Setting rules on credit Distributing currency Making check clearing easier

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Carrying Out Monetary Policy

Open Market Operations Tools Used by the Fed Reserve Requirements Discount Rate

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Carrying Out Monetary Policy


Open Market Operations Purchase or sale of U.S. government bonds.

Reserve Requirements

Cash amount for banks to hold.

Discount Rate

Interest rate charged by Fed to member banks.

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Setting Rules on Credit


Selective Credit Controls

Consumer credit rules

Margin requirements

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Concept Check
What are the four key functions of the Federal Reserve System? What three tools does the Federal Reserve System use to manage the money supply, and how does each affect economic activity?

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U.S. Financial Institutions


What are the key financial institutions, and what role do they play in the process of financial intermediation?

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Financial Intermediation

Financial Intermediation

The process in which financial institutions act as intermediaries between the suppliers and demanders of funds.

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Financial Intermediation Process

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Depository Financial Institutions

Commercial Banks

Thrift Institutions

Credit Unions

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Depository Financial Institutions


Services
Savings accounts Checking accounts Money market deposit accounts Certificates of deposit Consumer loans Business loans Money transfer Electronic funds transfer Automated teller machine Debit cards Smart cards Online banking

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Nondepository Financial Institutions


Insurance Companies

Pension Funds

Brokerage Firms

Finance Companies

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Concept Check
What is the financial intermediation process? Differentiate between the three types of depository financial institutions and the services they offer. What are the four main types of non-depository financial institutions?

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Insuring Bank Deposits


How does the Federal Deposit Insurance Corporation (FDIC) protect depositors funds?

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Insuring Bank Deposits


Federal Deposit Insurance Corporation
An independent, quasi-public corporation backed by the full faith and credit of the U.S. government that insures deposits in commercial banks and thrift institutions for up to a ceiling of $100,000 per account.

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The Major Deposit Insurance Funds

The Bank Insurance Fund (BIF)

The Savings Association Insurance Fund (SAIF)

The National Credit Union Share Insurance Fund

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The Role of the FDIC

Examines and supervises about 5,250 banks Insures about $3 trillion of deposits

Insures member banks in the Federal Reserve System

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FDIC Actions for Financially-Troubled Banks


Lend money to the bank Recommend bank merger

Require bank to use new management practices or replace its managers


Buy loans from the bank Provide extra equity capital Cover all deposits, even over $100,000

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Concept Check
What is the FDIC, and what are its responsibilities? What are the major deposit insurance funds? What can the FIDC do to help financially troubled banks?

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International Banking
What role do U.S. banks play in the international marketplace?

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International Banking
Foreign-currency exchange

Provide loans

Offer traderelated services

Fund overseas investments

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Difficulties with International Expansion

International banks subject to fewer regulations


Governments protect banks against foreign competition High-risk venture due to political and economic uncertainty

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Concept Check
What is the role of U.S. banks in international banking? What challenges do U.S. banks face in foreign markets?

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Trends in Financial Institutions


What trends are reshaping financial institutions?

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Trends in Financial Institutions


Regulatory and compliance issues The Ivy League Mom

New focus on money laundering

Return to branch banking

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Concept Check
What factors are creating a difficult economic environment for banks? Why are Ivy League moms such an attractive market segment to the financial services industry? What impact has terrorism had on the banking industry? What is the retail branch renaissance, and why is it so important to banks?

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