Money in the Financial System

3. Finance The study of money-- how it’s made, how it’s lost, and why Money Anything generally accepted in exchange for goods and services Money in the Financial System

4. The Functions of Money • Medium of exchange • Accepted as payment for products and resources • Measure of value • Single standard for assigning and comparing values of products and resources • Store of value • Means of retaining and accumulating wealth

5. The Characteristics of Money • Acceptability • Divisibility • Portability • Stability • Durability • Difficulty to counterfeit

6. The Life Expectancy of Paper Currency Did You Know? Experts estimate that more than $130 million in counterfeit U.S. bills is circulating around the world.

7. Types of Money • Checking account • Savings account • Money market account • Certificate of deposit • Credit card • Debit card • Traveler’s check • Money order • Cashier’s check

8. A Check

9. Facts About Checks • About 13 million US households do not have checking accounts. • 180 million checks are cashed annually in 3,700 check-cashing stores for a value of $55 billion. • 85% of checks cashed are payroll checks and the average check is about $300.

10. Facts About Credit Cards • MasterCard and Visa are the 2 major credit cards. • American Express is the dominant travel & entertainment credit card. • Americans hold over $675 billion in credit card debt.

11. Facts About Debit Cards • A debit card looks like a credit card but works like a check. • A debit card gives a direct, immediate electronic payment to a merchant from the cardholder’s checking account. • They lack credit, offer no “grace period,” and provide no paper trail of transactions.

12. The American Financial System • The Federal Reserve System • An independent agency of the federal government established in 1913 to regulate the nation’s banking and financial industry • Banking Institutions • Businesses whose objective is to earn money by managing, safeguarding, and lending money to others

13. The Federal Reserve System

14. The Functions of the Federal Reserve Board • To control the money supply with monetary policy • To regulate financial institutions • To manage regional and national check-clearing procedures • To supervise the federal deposit insurance of commercial banks in the Federal Reserve system

15. The Federal Reserve’s Monetary Policies • Open market operations • Reserve requirements • Discount rate • Credit controls

16. Fed Tools for Regulatingthe Money Supply

17. Banking Institutions • Commercial banks • Savings and loan associations • Credit unions • Mutual savings banks

18. Insurance for Banking Institutions • Federal Deposit Insurance Corporation (FDIC) • Insures personal accounts up to a maximum of $100,000 • National Credit Union Association (NCUA) • Regulates and charters credit unions and insures their deposits through its National Credit Union Insurance Fund

19. Non-Banking Institutions • Insurance companies • Pension funds • Mutual fund • Brokerage firms • Non-financial firms • Finance companies

20. Leading Diversified Financial Services Firms

21. Electronic Banking • ETF • Electronic funds transfer • ATM • Automated teller machines • ACHs • Automated clearinghouses • Online banking

22. ATM Facts • The top 5 ATM owners are Bank of America, Wells Fargo, E-Trade Bank, American Express, and Bank One. • The average ATM withdrawal is $60. • ATM customers spend 20-25% more than non-ATM customers. • 60% of Americans ages 25-34 use ATMs 8 times a month. • The most popular day for ATM usage is Friday. Source: “ATM Fact Sheet,” Press Room: ATMfacts 2001, September 18,2001.

23. Challenge and Change in the Commercial Banking Industry • Some commercial banks made poor managerial decisions in the early 1980s, resulting in several failures. • Gramm-Leach-Bliley Bill • Banks were allowed to offer insurance, brokerage, and investment banking services.

24. Solve the Dilemma • List the various types of U.S. financial institutions and the primary functions of each. • What services of each financial institution is Hill’s new company likely to need? • Which single financial institution is likely to best meet Hill’s small company’s needs now?

25. Explore Your Career Options • In what industries are economists likely to be asked to provide economic projections?

26. Additional Discussion Questions and Exercises • Look at Figure 15.3 in your textbook and determine in which of the 12 Federal Reserve Districts you are located. • What is the nearest Federal Reserve bank city or Federal Reserve branch city? • What is meant by a demand deposit?

27. Additional Discussion Questions and Exercises • Why have credit cards become a popular substitute for money? • What are the advantages of automated teller machines (ATMs) for customers? For banks?

28. Chapter 14 Quiz • Most paper currency is lightweight; the weight of money applies to which characteristic of money? • Durability • Stability • Divisibility • Portability • The percentage of deposits that a banking institution must hold in reserve, either in the bank itself or in a Federal Reserve Bank, and not loan to businesses or individuals is the: • Discount rate • Reserve requirement • M1 • Depository insurance

29. Chapter 14 Quiz • The largest of all banking institutions in the United States are: • savings and loan associations • commercial banks • credit unions • mutual savings banks • The failure of the savings and loan associations and the problems in some commercial banks were caused primarily by: • high government taxes on banking institutions • bad real estate loans • failure of students to repay college loans • electronic funds transfer

30. Multiple Choice Questions about the Video • Bank One first began operations in: • 1863 • 1983 • 1871 • 2004 • The merger of Bank One and J.P. Morgan Chase created the ______ largest bank in the United States in 2004. • first • second • third • fourth