CH 11, Section 3: Federal Reserve System aka “The Fed” The US’ central bank “owned” by member banks Controlled by the federal government – President appoints.

CH 11, Section 3:

• Federal Reserve System• aka “The Fed”• The US’ central bank• “owned” by member banks• Controlled by the federal government– President appoints• Board of governors• Chairman of the Fed

– Congress approves

Central bank

• a bank that can lend to other banks in times of need.

• National banks required to join• State-chartered banks may opt to join.• Since banks pay to join, they become owners

of the Federal Reserve System.

Federal Reserve notes

• paper currency used by the national system.• Has replaced all other forms of paper

currency.– Inconvertible fiat money, since 1934

Run on the bank

• a rush by panicked depositors to withdraw their funds from a bank before it fails

Bank holiday

• brief period where government required banks to close.

• In 1933, was done to give Congress time to pass emergency legislation reorganizing the banks.– Banks would have to prove that they could

operate effectively and safely or they could not open• Restore public confidence• Took a long time to end the public fear.

Commercial bank

• handle business and commerce interests.• Demand deposit accounts (DDAs)• Checking accounts• Funds may be removed easily by check or ATM

Thrift institution

• separate financial institution• Investor accounts• Now allow DDAs

Mutual Savings Bank

• (MSB) depositor-owned financial organization• Benefits only its depositors.• Savings bank• Many MSBs sold stock and lost their exclusive

member-only benefit status.

NOW Account

• negotiable order of withdrawal.• Checking account that pays interest.• More popular since 1980.

Savings and Loan Association

• (S&L) depository institution that invests the majority of its depositors funds in home mortgages.

• Mortgage payments and interest sustain depositors’ accounts.

Credit union

• non-profit service cooperative• Owned by and operated for the members• Members usually in the same company or

type of work.• Lower fees and interest rates for members• Easier financing

Share draft account

• Interest-earning checking account• Compete with NOW accounts.

Deregulation

• to remove or relax government restrictions on business.

• 1980s• 1. max interest rate on savings accounts

phased out• 2. NOW accounts allowed nation-wide.• 3. all depository institutions could borrow

from Fed in time of need.

creditor

• a person or institution to whom money is owed.

• A lender, direct or indirect

Chapter 12 Financial Markets Section 1 :

• Saving • abstinence of spending, not spending• Savings • dollars that become available when people

abstain from spending (do not consume)

Financial system

• a network of savers, investors, money managing institutions that work to transfer savings to investors.

Certificate of deposit

• a receipt showing that an investor has made a loan to a bank—or a government or corporate bond.

• Considered a savings

Financial assets

• claims on the property and income of a borrower.

Financial intermediaries

• financial institutions that lend the funds that investors save to borrowers

Nonbank financial institution

• nondepository institutions that channel savings to borrowers.– Life insurance companies– Pension funds– Real estate investment trusts

Finance company

• a firm that specializes in making loans directly to consumers

• Buys installment contracts from merchants who sell goods on credit.– Merchants sell credit accounts of debtors to the

finance companies.

Bill consolidation loan

• consumers use this loan to pay off all other debts– Debtor now pays one loan at one interest rate– Advice: do NOT use your other credit sources

after you do this…..

premium

• the installment price one pays for insurance– Monthly, quarterly, annually

• Insurance companies store so much money from these accounts and often loan money to others.

Mutual fund

• a company sells stock in itself to investors• Invests funds in stocks and bonds of other

companies.• Used by investors as they would use ordinary

stock.– Most funds have expert managers so risk is low.– EX. General Motors would use a mutual fund to

raise money to buy stock in Ford and Coca Cola, etc..

Net asset value

• (NAV) the value of the mutual fund divided by the number of shares issued by the mutual fund.

• = market value of the mutual fund share.

Pension

• a regular payment made for income security of the investor

• Collected after investor– Works a number of years in a career– Reaches a certain age– Suffers an injury (disability)

Pension fund

• an annuity fund set up to collect investor income and disburse pension payments.

• Run by private firms and various levels of government.

• Payments are stored money– Pension funds invest these huge amounts of

money in stocks and bonds• Private companies make profit doing this• Government insures a large money pool to pay

pensions

Real estate investment trust

• (REIT) a company organized to make loans to construction companies that build homes.

• Note: An indicator used to measure the growth of the economy.

Assessments: Checking for Understanding

• 1 Why was the federal reserve system created?

• To give the country a central bank that could lend to other banks in time of need

Assessment

• 3 Explain why the National Banking System was created

• To bring the state banks under control and to help finance the US Civil War

Assessment

• 4 Explain why deposit insurance developed in the 1930s.

• To strengthen banking and insure deposits

Assessment

• 5 Identify three depository institutions.• Savings banks• Savings and loan associations• Credit unions

Assessment

• 6 Describe four factors contributing to the S&L crisis.

• Deregulation• High interest rates• Inadequate financial reserves• fraud

Assessments: Checking for Understanding

• 1 Describe the difference between saving and savings.

• Saving is not spending• Savings are dollars left over after you buy your

necessities and not spent on other goods and services.

Image, p. 301

• What is the purpose of the Federal Deposit Insurance Corporation?

• To ensure customer deposits in the event of a bank failure.

• Current emergency legislation until 2014 = $250,000

• Jan. 1, 2014 = $100,000

Image, p. 302

• What can you infer about the ratio of state banks to national banks?

• At present, there are almost 2/3s as many state banks as there are national banks

Images, p. 315

• What do lenders receive in return for their funds?• Financial assets—claims on the property/income of

borrowers• New term for the current financial disaster:• Toxic assets: • claims on property/income of borrowers that will

probably go bankrupt or into foreclosure– Means anyone owning these assets will take a large loss or

not get any of the debts back.

Quick Write

• Why do you think we began policies of deregulation in the 1980s? Do you think we should return to more regulatory policies?