CHAPTER 15 Money and the Financial System FHF 15-2 CHAPTER 14 Accounting and Financial Statements Financing the Financing the Enterprise Enterprise CHAPTER 16 Financial Management and Securities Markets
Jan 09, 2016
CHAPTER 15 Money and the Financial System
FHF
15-2
CHAPTER 14 Accounting and Financial Statements
Financing theFinancing theEnterpriseEnterprise
CHAPTER 16 Financial Management and Securities Markets
FHF
FinanceFinanceFinanceFinance
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
15-3
FHF
Functions of MoneyFunctions of MoneyFunctions of MoneyFunctions 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
15-4
FHF
Characteristics of MoneyCharacteristics of MoneyCharacteristics of MoneyCharacteristics of Money
Acceptability
Divisibility
Portability
Stability
Durability
Difficulty to counterfeit
15-5
FHF
Types of MoneyTypes of MoneyTypes of MoneyTypes 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Checking Account (Demand Deposit): Money stored in an account at a bank that can be withdrawn without advance notice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Savings Account (Time Deposit): Accounts with funds that usually cannot be withdrawn without advance notice
15-6
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FHF
Types of MoneyTypes of MoneyTypes of MoneyTypes 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Savings accounts that guarantee a set interest rate over a period of time providing funds are not withdrawn before maturity
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FHF
Types of MoneyTypes of MoneyTypes of MoneyTypes 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
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FHF
Types of MoneyTypes of MoneyTypes of MoneyTypes 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
15-9
FHF
The FedThe FedThe FedThe Fed
Four major functions:
1.Controls the money supply with monetary policy
2.Regulates financial institutions
3.Manages regional and national check-clearing procedures
4.Supervises the federal deposit insurance of commercial banks in the Federal Reserve system
In Indonesia these functions are done by Bank Indonesia
15-11
FHF
Monetary PoliciesMonetary PoliciesMonetary PoliciesMonetary 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
In Indonesia these functions are done by Bank Indonesia
15-12
FHF
Four Main Monetary Policy Tools Four Main Monetary Policy Tools Four Main Monetary Policy Tools 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
15-13
FHF
Other Regulatory Functions Other Regulatory Functions of the Fedof the Fed
Other Regulatory Functions Other Regulatory Functions of the Fedof 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
15-14
FHF
Banking InstitutionsBanking InstitutionsBanking InstitutionsBanking 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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FHF
Banking InstitutionsBanking InstitutionsBanking InstitutionsBanking 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
15-16
FHF
Insurance for BanksInsurance for BanksInsurance for BanksInsurance for Banks
Federal Deposit Insurance Corporation (FDIC)
Insures personal accounts up to $250,000
In Indonesia: LPSNational Credit Union Association (NCUA)
Regulates and charters credit unions
Insures deposits through its National Credit Union Insurance Fund
Similar to the FDIC
15-17
FHF
Non-Banking InstitutionsNon-Banking InstitutionsNon-Banking InstitutionsNon-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
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FHF
Non-Banking InstitutionsNon-Banking InstitutionsNon-Banking InstitutionsNon-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
15-19
FHF
Electronic BankingElectronic BankingElectronic BankingElectronic Banking
ETF: Electronic funds transfer
ATM: Automated teller machines
ACHs: Automated clearinghouses
Online Banking: Bank at home or anywhere/anytime (Increasing the range of services)
15-20
FHF
Future of BankingFuture of BankingFuture of BankingFuture 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
15-21