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

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.

20-2
Chapter
Twenty
LEARNING GOALS

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.

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 bank-like store in Austin, Texas, was designed

to serve low-income clients who dont 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
What is
Money? WHATS 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? STANDARDS for a
LG1 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? NEW MONEY
LG2 Paper Money Printed in 2010 (In $ Billions)

Source: Bloomberg Businessweek, December 20, 2010.

20-9
What is the
Money
Supply?
HOW LONG DOES
LG2 PAPER MONEY LAST?

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

20-10
What is the
Money
Supply? MONEY MILESTONES
LG2

20-11
What is the
Money
Supply? MONEY FACTS
What You Might Not Know About Whats in Your Wallet
LG2

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!

Source: Fast Company, February 2011.
20-12
The Global
Exchange of
Money
EXCHANGING MONEY GLOBALLY
LG2

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.

20-13
The Global
Exchange of
Money
The IMPACT of a
LG2 FALLING DOLLAR
Overseas demand for U.S. products rise.

A favorable exchange rate for U.S. companies

increases profits in foreign markets.

U.S. tourism increases

which is good for hotels,
resorts, theme parks,
and retailers that serve
international travelers.

20-14
Basics About
the Federal
Reserve
FIVE MAJOR PARTS of the
LG2 FEDERAL RESERVE SYSTEM

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
20-15
Basics About
the Federal
Reserve
The 12 FEDERAL RESERVE
LG2 DISTRICT BANKS

20-16
Basics About
the Federal
Reserve
MANAGING the MONEY SUPPLY
LG2

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.

20-17
The Federal
Reserves
Check-Clearing
Role
CHECK-CLEARING PROCESS
LG2 THROUGH the FEDERAL RESERVE

20-18
Progress
Assessment PROGRESS ASSESSMENT

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?
20-19
The History of
Banking and the
Need for the
The ESTABLISHMENT of the
Fed
LG3
FEDERAL RESERVE SYSTEM

A cash shortage problem in 1907 led to the

creation of the Federal Reserve System.

Under the Federal

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

20-20
The History of
Banking and the
Need for the
Fed
LARGEST BANK FAILURES
LG3

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

20-21
The U.S.
Banking
System The U.S. BANKING SYSTEM
LG4

Commercial banks

Savings and loan

associations

Credit unions

Nonbanks

20-22
Commercial
Banks COMMERCIAL BANKS
LG4

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

20-23
Services

COMMERICAL BANKS
Provided by
Commercial
Banks
LG4 SERVICES

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 certificates
maturity date.

20-24
 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
SAVINGS and
LG4 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, member-owned
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 - Commercial finance
companies
- Pension funds
- Corporate financial
- Brokerage firms services

20-29
 The RISE of the NONBANK
(Spotlight on Small Business)

About of American households dont 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.

20-30
Other
Financial WHAT ATTRACTS CUSTOMERS
Institutions
LG4 to ONLINE BANKING
Free identity theft
protection
Free credit score
monitoring
Personal financial
management
Instant messaging service
Banks 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 PROTECTING
LG5 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
TECHNOLOGICAL
LG6 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, drivers license, and
more.

20-35
International
Banking and
Banking Services
MAKING TRANSACTIONS in
LG7 OTHER COUNTRIES

Letter of Credit -- A promise by the bank to pay the

seller a given amount if certain conditions are met.

Bankers 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 LEADING INSTITUTIONS in
INTERNATIONAL BANKING
Monetary Fund
LG7

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.
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