15-1 Business in a Changing World Chapter 15 Money and the Financial System McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc All rights 15-3 Chris Larsen, Founder and CEO, Prosper Prosper’s peer-to-peer lending is unique and appealing particularly for those with little collateral or credit history 15-4 Money in the Financial System Finance, defined: The study of money—how it’s made, how it’s lost, and how it’s managed 15-5 Money in the Financial System Money – anything generally accepted in exchange for goods and services 15-6 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 15-7 The Characteristics of Money • • • • • • Acceptability Divisibility Portability Stability Durability Difficulty to counterfeit 15-8 The Characteristics of Money The Life Expectancy of Paper Currency 15-9 The Characteristics of Money Skyrocketing copper, zinc, and nickel prices have led to some members of Congress to propose that pennies be made of steel as they were in WWII 15-10 The Federal Reserve System 15-22 Federal Reserve Board • Controls the money supply with monetary policy • Regulates financial institutions • Manages regional and national check-clearing procedures • Supervises the federal deposit insurance of commercial banks in the Federal Reserve system 15-23 Monetary Policies Open market operations – decisions to buy or sell U.S Treasury bills in the open market Reserve requirements – percentage of deposits a bank must hold in reserve Discount rate – rate of interest the Fed charges to loan money to banking institutions Credit controls – authority to establish and enforce credit rules 15-24 Fed Tools for Regulating the Money Supply 15-25 Banking Institutions Commercial banks – largest and oldest of all financial institutions, relying mainly on checking and savings accounts – loan to businesses and individuals 15-26 Banking Institutions Savings and Loan Associations (S&Ls)– financial institutions that primarily offer savings accounts and make long-term loans for residential mortgages also called “thrifts.” 15-27 Banking Institutions Credit unions financial institutions owned and controlled by depositors; usually having a common employer, profession, trade group or religion 15-28 Banking Institutions Mutual Savings Banks financial institutions similar to S&Ls, but owned by depositors 15-29 Going Green Metabolix – produces a bioplastic called Mirel that is biodegradable Set to begin large-scale production in 2009 but financing has been a serious issue 15-30 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 15-31 Non-Banking Institutions • • • • • • Insurance companies Pension funds Mutual fund Brokerage firms Non-financial firms Finance companies 15-32 Electronic Banking ETF Electronic funds transfer ATM Automated teller machines ACHs Automated clearinghouses Online banking – Bank at home or anywhere/anytime 15-33 ATM Facts 15-34 Should the Government Help? Should the government provide financial help to borrowers who can no longer afford to pay their mortgages? Source: Snapshots, USA Today, March 20, 2008, p B1 15-35 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 15-36 ... 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 15-7 The Characteristics... relying mainly on checking and savings accounts – loan to businesses and individuals 15-26 Banking Institutions Savings and Loan Associations (S&Ls)– financial institutions that primarily offer savings... in an account at a bank that can be withdrawn without advance notice 15-11 Types of Money Savings account (time deposit) – accounts with funds that usually can’t be withdrawn without advance notice