Chapter 20 Money, Financial Institutions, and the Federal Reserve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc All rights reserved Chapter Twenty LEARNING GOALS Explain what money is and what makes money useful Describe how the Federal Reserve controls the money supply Trace the history of banking and the Federal Reserve System Classify the various institutions in the U.S. banking system. 20-2 Chapter Twenty LEARNING GOALS Briefly trace the causes of the banking crisis starting in 2008 and explain how the government protects your funds during such crises Describe how technology helps make banking more efficient Evaluate the role and importance of international banking, the World Bank, and the International Monetary Fund 20-3 Profile BEN BERNANKE Federal Reserve • Bernanke is a former Princeton economics professor • Former President George W. Bush appointed Bernanke Chairman of the Federal Reserve in 2006 • Almost every factor related to the economy is influenced by the decisions he makes 20-4 Chapter Twenty NAME that COMPANY This banklike store in Austin, Texas, was designed to serve lowincome clients who don’t have traditional bank accounts. Customers pay a onetime $10 fee that allows them to cash checks and put the money onto debit cards Name that company! 20-5 What is Money? WHAT’S MONEY? LG1 • Money Anything people generally accept as payment for goods and services • Barter The direct trading of goods or services for other goods or services. 20-6 What is Money? LG1 STANDARDS for a USEFUL FORM of MONEY • Portability • Divisibility • Stability • Durability • Uniqueness 20-7 What is the Money Supply? The MONEY SUPPLY LG2 • 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 20-8 What is the Money Supply? LG2 NEW MONEY Paper Money Printed in 2010 (In $ Billions) Source: Bloomberg Businessweek, December 20, 2010. 20-9 What is the Money Supply? LG2 HOW LONG DOES PAPER MONEY LAST? Source: Federal Reserve, www.federalreserve.gov, accessed September 2011 20-10 BANKING on SOCIAL MEDIA (Social Media in Business) • 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 20-25 WHAT to TELL the TELLER (Making Ethical Decisions) • 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? 20-26 Savings and Loan Associations LG4 SAVINGS and LOAN ASSOCIATIONS • 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 20-27 Credit Unions CREDIT UNIONS LG4 • Credit Unions Nonprofit, memberowned financial cooperatives that offer the full variety of banking services to their members • As nonprofits, credit unions enjoy an exemption from federal income taxes 20-28 Other Financial Institutions NONBANKS LG4 • Nonbanks Financial institutions that accept no deposits, but offer many of the services provided by regular banks. Nonbanks include: - Life insurance companies - Pension funds - Brokerage firms - Commercial finance companies - Corporate financial services 20-29 The RISE of the NONBANK (Spotlight on Small Business) • AboutẳofAmericanhouseholdsdonthavea bankaccount. MangoStoreisabankưlikefacilityinAustin, Texas.Clientspayaoneưtime$10feethatlets themcashasmanychecksastheywantby puttingthemoneyontodebitcards Mangohopesitscustomerswillincreasetheir earningpowerandremaincustomersovertime. 20-30 Other Financial Institutions LG4 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. 20-31 Progress Assessment PROGRESS ASSESSMENT • 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? 20-32 Protecting Your Funds LG5 PROTECTING DEPOSITORS’ MONEY • 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 20-33 Using Technology to Make Banking More Efficient LG6 TECHNOLOGICAL ADVANCEMENTS in BANKING • 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 20-34 Using Technology to Make Banking More Efficient SMART CARDS LG6 • Smart Card A combination of a credit card, debit card, phone card, driver’s license, and more 20-35 International Banking and Banking Services LG7 MAKING TRANSACTIONS in OTHER COUNTRIES • 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) 20-36 The World Bank and the International Monetary Fund LG7 LEADING INSTITUTIONS in INTERNATIONAL BANKING • World Bank Lends most of its money to lessdeveloped 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 20-37 NEW ISSUES FACING the WORLD BANK and the IMF (Reaching Beyond Our Borders) • 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. 20-38 Progress Assessment PROGRESS ASSESSMENT • 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? 20-39 ... 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 ... Classify the various institutions in the U.S. banking system. 20-2 Chapter Twenty LEARNING GOALS Briefly trace the causes of the banking crisis starting in 2008 and explain how the government protects your funds during such crises... factor related to the economy is influenced by the decisions he makes 20-4 Chapter Twenty NAME that COMPANY This banklike store in Austin, Texas, was designed to serve lowincome clients who don’t have traditional bank accounts. Customers pay