Chapter 15 Money and the Financial System





Chapter Outline:

  1. Define money, its functions, and its characteristics.
    1. Finance – study of money: how it’s made; how it’s lost, and why.
    2. Functions of money
      1. Serves as a medium of exchange
      2. Serves as a measure of value
      3. Serves as a store of value
    3. Characteristics of money
      1. Acceptability
      2. Divisibility
      3. Portability
      4. Stability
      5. Durability
      6. Difficulty to counterfeit

  2. Describe various types of money
    1. Types of money
      1. Paper money and coins are the most visible
      2. Checking account (demand deposit)
      3. Near money
        1. Savings account
          1. Funds that usually cannot be withdrawn without advance notice (also known as a time deposit)
        2. Money market accounts
          1. Higher interest rates but with greater restrictions
        3. Certificates of deposit
          1. Savings account that guarantee a depositor a set interest rate over a specified interval of time
        4. Credit cards
        5. Debit card
        6. Traveler’s checks

  3. Specify how the Federal Reserve board manages the money supply and regulates the American banking system.
    1. Federal Reserve Board – established by Congress is 1913.
      1. Independent government agency responsible for regulating the banking and financial industry.
    2. Fed has 4 major responsibilities:
      1. To control supply of money (monetary policy)
        1. Open market operations
          1. Buying and selling of U.S. Treasury bills and other investments in the pen market
        2. Reserve requirements
          1. Percentage of deposits that banks must hold in reserve
        3. Discount rate
          1. Interest rate the Fed charges for money it lends
        4. Credit controls
          1. Authority to establish and enforce credit rules for financial institutions and some private investors.
      2. To regulate banks and other financial institutions
      3. To manage regional and national checking account procedures, or check clearing
      4. To supervise the federal deposit insurance programs of banks belonging to the Federal Reserve System.

  4. Compare and contrast commercial banks, savings and loan associations, credit unions, and mutual savings banks
    1. Commercial Banks
      1. Oldest of all financial institutions rely on checking and savings accounts as major source of funds for loans
    2. Savings and loan associations (S&L’s)
      1. Primarily offer savings accounts and make long-term loans for residential mortgages
    3. Credit Unions
      1. Owned and controlled by its depositors, usually who have common employer profession or trade group
    4. Mutual Savings banks
      1. Similar to savings and loans except owned by depositors.
    5. Federal Deposit Insurance Corporation (FDIC)
      1. Insures individual accounts up to $100,000
    6. National Credit Union Association (NCUA)
      1. Regulates and charters credit unions and insures deposits through its National credit Union Insurance Fund.

  5. Distinguish among nonbanking institutions such as insurance companies, pension funds, mutual funds, and finance companies.
    1. Nonbank financial institutions offer some financial services but do not accept deposits.
    2. Insurance companies are businesses that protect their clients against financial losses from certain specified risks:
      1. Death, accident, theft, etc
    3. Pension funds – managed investment pools set aside by individuals, corporations, unions, and some nonprofit organizations to provide retirement income for members.
    4. Mutual Fund – pools individual investor dollars and invests them in large numbers of well-diversified securities.
    5. Brokerage firms – buy and sell stocks, bonds, and other securities for their customers and provide other financial services.
    6. Finance companies – businesses that offer short-term loans at substantially higher rates of interest than banks.

  6. Investigate the challenges ahead for the banking industry
    1. 2002 passage of the Gramm-Leach-Bliley Bill
    2. Banks are expected to continue their "urge to merge."
    3. Banks allowed to offer insurance, brokerage and investment banking services
    4. Banking will continue to become more international
    5. Dutch ABN-AMRO bank continuing to acquire banking assets in the U.S.
    6. Recent trend toward ever-bigger banks and other financial institutions.
    7. Natural "oligopoly"
    8. By 2020, financial services industry will be dominated by 10 or so internationally oriented "megabanks."