15

chapter

Business Essentials, 8th EditionEbert/Griffin

Money and Banking

Instructor Lecture

PowerPointsPowerPoint Presentation prepared by Carol Vollmer Pope Alverno College

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

After reading this chapter, you should be able to:1. Define money and identify the different forms that

it takes in the nation’s money supply.2. Describe the different kinds of financial institutions

that comprise the U.S. financial system and explain the services they offer.

3. Explain how financial institutions create money and describe the means by which they are regulated.

L E A R N I N G O B J E C T I V E SL E A R N I N G O B J E C T I V E S

15-2Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

After reading this chapter, you should be able to:

4. Discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply.1. Identify three important ways in which the

money and banking system is changing.2. Discuss some of the institutions and activities in

international banking and finance.

L E A R N I N G O B J E C T I V E S (cont.)L E A R N I N G O B J E C T I V E S (cont.)

15-3Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

What’s in It for Me?

By understanding this chapter’s discussion of money and banking, you’ll benefit in the following way:

• The chapter explains what money is, where it comes from, how the supply of money grows, how it is created and controlled, and the kinds of services available to money users from the financial services industry.

15-4Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

The Characteristics of Money

• Money must have:– Portability

– Divisibility

– Durability

– Stability

15-5Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

The Functions of Money

Medium of ExchangeMedium of ExchangeMedium of ExchangeMedium of Exchange

Store of ValueStore of ValueStore of ValueStore of Value

Measure of WorthMeasure of WorthMeasure of WorthMeasure of Worth

15-6Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

The Money Supply

• M1: Spendable Money Supply– Currency (paper money and coins)– Checks– Checking accounts—demand deposits in banks

• M2: M1 + Convertible Money Supply– Time deposits– Money market mutual funds– Savings accounts

15-7Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

FIGURE 15.1 Money Supply Growth

15-8Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

The U.S. Financial System

• Financial Institutions– Commercial Banks

• Companies that accept deposits that they use to make loans, earn profits, pay interest to depositors, and pay dividends to owners

– Savings and Loan Associations (S&Ls)• Accept deposits, make loans, and are owned by investors

– Mutual Savings Banks• All depositors are owners of the bank, so all profits are

divided proportionately among depositors via dividends

– Credit Unions• A nonprofit, cooperative financial institution owned and run

by its members; promotes thrift

15-9Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

The U.S. Financial System (cont.)

• Non-Deposit Institutions– Unlike commercial banks, inflowing funds are

intended for purposes other than earning interest for depositors

• Pension funds• Insurance companies• Finance companies• Securities investment dealers

15-10Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

FIGURE 15.2 The Prime Rate

15-11Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Special Financial Services

• Individual Retirement Accounts (IRAs)

• Trust Services

• International Services– Currency exchange

– Letters of credit

– Banker’s acceptance

• Financial Advice and Brokerage Services

• Electronic Funds Transfer (EFT)

• Automated Teller Machines (ATMs)

15-12Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

FIGURE 15.3 Global Dispersion of ATMs

15-13Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

FIGURE 15.4 How Banks Create Money

15-14Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Regulation of the Banking System

• Federal Deposit Insurance Corporation (FDIC)– Preserves confidence by supervising banks and insuring

deposits in banks and thrift institutions– Commercial banks pay fees for membership in the FDIC– Guarantees the safety of all deposits of every account

owner up to the current maximum of $250,000– Maintains the right to examine the activities and accounts

of all member banks

15-15Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

The Federal Reserve System

• The Fed: The Nation’s Central Bank– Structure

• Board of governors

• Reserve banks

• Open market committee

• Member banks

• Other depository institutions

15-16Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

FIGURE 15.5 The Twelve Federal Reserve Districts

15-17Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

The Federal Reserve System (cont.)

– Functions• Banking for the government

• Banking for banks

• Controlling the money supply• Controlling inflation

15-18Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Controlling the Money Supply

• Monetary Policy– The Fed manages the nation’s economic growth

by managing money supply and interest rates

• Tools of the Fed– Reserve requirements

– Discount rate controls

– Open market operations

– Selective credit controls

15-19Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

The Changing Money and Banking System

• Government Intervention– Government Emergency Investment– Assurances of Repayment

• Anti-Crime and Anti-Terrorism Regulations– Bank Secrecy Act (BSA)– U.S. Patriot Act

• Customer Identification Program (CIP)

15-20Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

The Impact of Electronic Technologies

• Check 21– Allows banks to present a substitute check for

payment instead of the original check

• Blink Credit Cards– A “contactless” payment system

• Debit Cards– Allow the transfer of money between accounts – Used with point-of-sale (POS) terminals

15-21Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

The Impact of Electronic Technologies (cont.)

• Smart Cards– Credit-card-size plastic cards with an embedded

computer chip that can be programmed with “electronic money”

• E-Cash– Money that moves via digital transmissions on

the Internet, outside the established network of banks, checks, and paper currency overseen by the Fed

15-22Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

International Banking and Finance• World Bank

– Provides a limited scope of financial services

• International Monetary Fund (IMF)– Promotes the stability of exchange rates

– Provides temporary, short-term loans to member countries

– Encourages members to cooperate on international monetary issues

– Encourages development of a system for international payments

15-23Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Key Terms

automated teller machine (ATM)banker’s acceptancecheckchecking account (demand deposit)commercial bankcredit unioncurrency (cash)

debit carddiscount ratecorporation (FDIC)e-cashelectronic funds transfer (EFT)Federal Deposit Insurance Federal Reserve System (the Fed)finance company

15-24Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Key Terms (cont.)

floatindividual retirement account (IRA)insurance companyInternational Monetary Fund (IMF)letter of creditM1M2M3

monetary policymoneymoney market mutual fundmutual savings bankopen-market operationspension fundpoint-of-sale (POS) terminalprime ratereserve requirement

15-25Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Key Terms (cont.)

revenue recognitionrevenuesSarbanes-Oxley Act of 2002 (Sarbox)savings and loan association (S&L)securities investment dealer (broker)selective credit controls

short-term solvency ratiosmart cardsolvency ratiostatement of cash flowstax servicestime deposittrust services World Bank

15-26Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

2715-27Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall