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Money, Financial Institutio ns, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
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Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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Page 1: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Money,

Financial Institutions,

and the Federal Reserve

Chapter 20

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

1. Explain what money is and what makes money useful.

2. Describe how the Federal Reserve controls the money supply.

3. Trace the history of banking and the Federal Reserve System.

4. Classify the various institutions in the U.S. banking system.

LEARNING GOALSChapter Twenty

20-2

Page 3: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

5. Briefly trace the causes of the banking crisis starting in 2008 and explain how the government protects your funds during such crises.

6. Describe how technology helps make banking more efficient.

7. Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund.

LEARNING GOALSChapter Twenty

20-3

Page 4: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Bernanke is a former Princeton economics professor.

• Former President George W. Bush appointed Bernanke Chairman of the Federal Reserve in 2006.

BEN BERNANKEFederal Reserve

Profile

• Almost every factor related to the economy is influenced by the decisions he makes.

20-4

Page 5: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

NAME that COMPANYChapter Twenty

This bank-like store in Austin, Texas, was designed to serve low-income clients who don’t have traditional bank accounts. Customers pay a one-time $10 fee that allows them to cash checks and put the money onto debit cards.

Name that company!

20-5

Page 6: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Money -- Anything people generally accept as payment for goods and services.

WHAT’S MONEY?What is Money?

• Barter -- The direct trading of goods or services for other goods or services.

LG1

20-6

Page 7: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Portability

• Divisibility

• Stability

• Durability

• Uniqueness

STANDARDS for a USEFUL FORM of MONEYLG1

What is Money?

20-7

Page 8: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Money Supply -- The amount of money the Federal Reserve makes available for people. The money supply is referred to as:

- M1 -- Money that can be accessed quickly (coins, paper money, travelers’ checks, etc.).

- M2 -- M1 + money that may take a little time to obtain (savings accounts, mutual funds, etc.).

- M3 -- M2 + big deposits like institutional money market funds.

The MONEY SUPPLYWhat is the Money Supply?

LG2

20-8

Page 9: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

NEW MONEYPaper Money Printed in 2010 (In $ Billions)

Source: Bloomberg Businessweek, December 20, 2010.

LG2

What is the Money Supply?

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Page 10: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

HOW LONG DOES PAPER MONEY LAST?

Source: Federal Reserve, www.federalreserve.gov, accessed September 2011.

LG2

What is the Money Supply?

20-10

Page 11: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

MONEY MILESTONESLG2

What is the Money Supply?

20-11

Page 12: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

MONEY FACTSWhat You Might Not Know About What’s in Your Wallet

Source: Fast Company, February 2011.

LG2

What is the Money Supply?

• In 2009, the U.S. printed 26,000,000 bills a day!

• Each penny costs 1.6¢ and each nickel costs 6¢ to make.

• The most-tracked bill on WheresGeorge.com has travelled over 7,600 miles in 4 years!

• 2/3 of all U.S. $100 bills are outside the U.S.

• 90% of paper money has traces of cocaine!

20-12

Page 13: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Falling dollar value: The amount of goods and services you can buy with a dollar decreases.

• Rising dollar value: The amount of goods and services you can buy with a dollar increases.

• What makes the dollar fall or rise is the position of the U.S. economy relative to other global economies.

EXCHANGING MONEY GLOBALLY

The Global Exchange of Money

LG2

20-13

Page 14: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

The IMPACT of a FALLING DOLLAR

• Overseas demand for U.S. products rise.

• A favorable exchange rate for U.S. companies increases profits in foreign markets.

LG2

The Global Exchange of Money

• U.S. tourism increases which is good for hotels, resorts, theme parks, and retailers that serve international travelers.

20-14

Page 15: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

1. The Board of Governors

2. The Federal Open Market Committee

3. 12 Federal Reserve Banks

4. 3 Advisory Councils

5. The member banks of the system

FIVE MAJOR PARTS of the FEDERAL RESERVE SYSTEM

Basics About the Federal Reserve

LG2

20-15

Page 16: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

The 12 FEDERAL RESERVE DISTRICT BANKSLG2

Basics About the Federal Reserve

20-16

Page 17: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• The Fed uses three basic tools:

1. Reserve Requirement -- A percentage of commercial banks’ checking and savings accounts they must keep in the bank or in non-interest-bearing deposits at the local Federal Reserve district bank.

2. Open-Market Operations -- The buying and selling of government bonds.

3. Discount Rate -- The interest rate the Fed charges for loans to member banks.

MANAGING the MONEY SUPPLYLG2

Basics About the Federal Reserve

20-17

Page 18: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

CHECK-CLEARING PROCESS THROUGH the FEDERAL RESERVELG2

The Federal Reserve’s Check-Clearing Role

20-18

Page 19: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• What is money?

• What are the five characteristics of useful money?

• What is the money supply, and why is it important?

• How does the Federal Reserve control the money supply?

• What are the major functions of the Federal Reserve? What other functions does it perform?

PROGRESS ASSESSMENTProgress Assessment

20-19

Page 20: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• A cash shortage problem in 1907 led to the creation of the Federal Reserve System.

The ESTABLISHMENT of the FEDERAL RESERVE SYSTEM

The History of Banking and the Need for the Fed

• Under the Federal Reserve Act of 1913, all federally chartered banks had to join the Federal Reserve.

LG3

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Page 21: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

LARGEST BANK FAILURESLG3

The History of Banking and the Need for the Fed

Source: http://www.FDIC.gov, accessed July 2011.

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Page 22: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Commercial banks

• Savings and loan associations

• Credit unions

• Nonbanks

The U.S. BANKING SYSTEMThe U.S. Banking System

LG4

20-22

Page 23: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Commercial Bank -- A profit-seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and uses those funds to make loans.

• A commercial bank has two types of customers:

1. Depositors

2. Borrowers

COMMERCIAL BANKSCommercial Banks

LG4

20-23

Page 24: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Demand Deposit -- The technical name for a checking account; money is available on demand from the depositor.

• Time Deposit -- A savings account; a bank can require a prior notice before you make a withdrawal.

• Certificate of Deposit -- A savings account that earns interest, to be delivered on the certificate’s maturity date.

COMMERICAL BANKS’ SERVICES

Services Provided by Commercial Banks

LG4

20-24

Page 25: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Banks are using the Internet and social media to communicate with Gen Y customers.

• Today 29 million Bank of America customers use online banking.

• 6.5 million customers use smartphones for mobile banking.

• Banks are following other companies leads and embracing social media.

BANKING on SOCIAL MEDIA(Social Media in Business)

20-25

Page 26: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• The bank teller mistakenly gives you $320 instead of the $300 you asked for.

• You bring the error to her attention, but she disagrees she miscounted the money.

• You wonder whether to just keep the extra $20 even though you know her accounts will not balance at the end of the day.

• What are your alternatives? What do you do?

WHAT to TELL the TELLER(Making Ethical Decisions)

20-26

Page 27: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Savings and Loan Associations (S&Ls) -- A financial institution that accepts both savings and checking deposits and provides home mortgage loans.

• Often known as thrift institutions because their original purpose was to promote customer thrift and home ownership.

SAVINGS and LOAN ASSOCIATIONS

Savings and Loan Associations

LG4

20-27

Page 28: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Credit Unions -- Nonprofit, member-owned financial cooperatives that offer the full variety of banking services to their members.

CREDIT UNIONSCredit Unions

• As nonprofits, credit unions enjoy an exemption from federal income taxes.

LG4

20-28

Page 29: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Nonbanks -- Financial institutions that accept no deposits, but offer many of the services provided by regular banks. Nonbanks include:

NONBANKSOther Financial Institutions

LG4

- Life insurance companies

- Pension funds

- Brokerage firms

- Commercial finance companies

- Corporate financial services

20-29

Page 30: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• About ¼ of American households don’t have a bank account.

• Mango Store is a bank-like facility in Austin, Texas. Clients pay a one-time $10 fee that lets them cash as many checks as they want by putting the money onto debit cards.

• Mango hopes its customers will increase their earning power and remain customers over time.

The RISE of the NONBANK(Spotlight on Small Business)

20-30

Page 31: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

WHAT ATTRACTS CUSTOMERS to ONLINE BANKING

• Free identity theft protection

• Free credit score monitoring

• Personal financial management

• Instant messaging service

• Bank’s blog

Source: comScore, www.comscore.com, accessed September 2010.

LG4

Other Financial Institutions

20-31

Page 32: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Why did the U.S. need a Federal Reserve Bank?

• What is the difference between a bank, a savings and loan association, and a credit union?

• What is a consumer finance company?

PROGRESS ASSESSMENTProgress Assessment

20-32

Page 33: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• The Federal Deposit Insurance Corporation (FDIC) -- An independent agency of the U.S. government that insures bank deposits up to $250,000.

• The Savings Association Insurance Fund (SAIF) -- Insures holders of accounts in savings and loan associations.

• The National Credit Union Administration (NCUA) -- Provides up to $250,000 coverage per individual depositor per institution.

PROTECTING DEPOSITORS’ MONEY

Protecting Your Funds

LG5

20-33

Page 34: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Electronic Funds Transfer System -- Messages about a transaction are sent from one computer to another so funds can be transferred quickly and more economically.

• Debit Card -- Serves the same function as a check; it withdrawals funds from a checking account.

TECHNOLOGICAL ADVANCEMENTS in BANKING

Using Technology to Make Banking More Efficient

LG6

20-34

Page 35: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Smart Card -- A combination of a credit card, debit card, phone card, driver’s license, and more.

SMART CARDSLG6

Using Technology to Make Banking More Efficient

20-35

Page 36: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• Letter of Credit -- A promise by the bank to pay the seller a given amount if certain conditions are met.

• Banker’s Acceptance -- A promise the bank will pay some specified amount at a particular time.

• Money exchange allows companies to go to a bank and exchange currencies to use in a particular country (i.e. dollars for euros).

MAKING TRANSACTIONS in OTHER COUNTRIES

International Banking and Banking Services

LG7

20-36

Page 37: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• World Bank -- Lends most of its money to less-developed nations to improve their productivity and help raise standards of living and quality of life.

• International Monetary Fund (IMF) -- Fosters cooperative monetary policies that stabilize the exchange of one national currency for another. About 185 countries are a part of the IMF.

LEADING INSTITUTIONS in INTERNATIONAL BANKINGLG7

The World Bank and the International Monetary Fund

20-37

Page 38: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• A debt crisis in Europe; Japan trying to recover from its earthquake and tsunami; major disruptions in the Middle East; China and Brazil are having problems with high inflation; and rising food prices are happening all over the planet.

• Poorer nations are having a particularly hard time because of the high food prices.

• The IMF and the World Bank are both trying to come up with answers to the global issues that have become very serious.

NEW ISSUES FACING the WORLD BANK and the IMF

(Reaching Beyond Our Borders)

20-38

Page 39: Money, Financial Institutions, and the Federal Reserve Chapter 20 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

• What are some of the causes for the banking crisis beginning in 2008?

• What is the role of the FDIC?

• How does a debit card differ from a credit card?

• What is the World Bank and what does it do?

• What is the IMF and what does it do?

PROGRESS ASSESSMENTProgress Assessment

20-39