21-1 mcgraw-hill/irwin understanding business, 7/e © 2005 the mcgraw-hill companies, inc., all...
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McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.21-1McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Nickels Nickels
McHughMcHugh
McHughMcHugh
Nickels Cover
McGraw-Hill/IrwinUnderstanding Business, 7/e
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Understanding Business, 7/e
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Chapter
21212121 Understanding Understanding Money and Money and Financial Financial
InstitutionsInstitutions
21-2
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Why Money?Why Money?Economy Depends On ItEconomy Depends On It
Money vs. BarterMoney vs. Barter
Unit of ValueUnit of Value
Electronic CashElectronic Cash
EuroEuro
Control of Money SupplyControl of Money Supply
Global Exchange- Rise/Fall of Global Exchange- Rise/Fall of Dollar & U.S. EconomyDollar & U.S. Economy
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Characteristics of Characteristics of a Good Money Systema Good Money System
PortabilityPortability
DivisibilityDivisibility
StabilityStability
DurabilityDurability
UniquenessUniqueness
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Life Span of CurrencyLife Span of Currency
0 2 4 6 8 10
One Dollar Bill
Five Dollar Bill
Ten Dollar Bill
Twenty Dollar Bill
Fifty Dollar Bill
Hundred Dollar Bill
YearsSource: Bureau of Engraving and PrintingSource: Bureau of Engraving and Printing
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The Money SupplyThe Money Supply
CurrencCurrencyy
DemanDemand d
DepositDepositss
== TotalTotalM1M1
++Time Time
Deposits & Deposits & Money Money Market Market Accts.Accts.
Total Total M2 *SA M2 *SA
*SA = Seasonally Adjusted*SA = Seasonally Adjusted
++ ==
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Amount of $ inAmount of $ in Circulation per Person Circulation per Person
$1,295
$944
$895
$714
$698
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400
Mizuho Holdings, Japan
Citigroup, USA
Deutsche Bank, Germany
J.P. Morgan Chase, USA
UBS, Switzerland
Source: New Designs for Your Money, U.S. Dept. of Treasury
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Federal Reserve StructureFederal Reserve Structure
Board of Governors7 Members
Board of Governors7 Members
Advisory Councils3 Members
Federal Open Market Committee12 Members
Federal Reserve Banks12 Regional Banks
Member Banks
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Regional Reserve BanksRegional Reserve Banks
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Federal ReserveFederal Reserve• Buys/Sells Foreign Buys/Sells Foreign
CurrencyCurrency
• Regulates CreditRegulates Credit
• Supervises BanksSupervises Banks
• Collects Data on Money Collects Data on Money Supply/Economic ActivitiesSupply/Economic Activities
• Processes ChecksProcesses Checks
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Monetary PolicyMonetary Policy
• Reserve Reserve
RequirementRequirement
–Tight/IncreaseTight/Increase
–Loose/DecreaseLoose/Decrease
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Prime Interest andPrime Interest and Federal Discount RatesFederal Discount Rates
0
2
4
6
8
10
12
14
16
18
1950 1960 1970 1980 1990 2000 2003
FederalDiscount Rate
Prime InterestRate
Source: Federal Reserve of New York
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Federal Reserve SystemFederal Reserve System
• HistoryHistory– Land BanksLand Banks– Central BankCentral Bank– Great Great
DepressionDepression
• StructureStructure
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Fed Regulates Money SupplyFed Regulates Money Supply
Increase Money SupplyIncrease Money SupplyReduce Discount RateReduce Discount Rate
Buy Government BondsBuy Government Bonds
Set Credit ControlsSet Credit Controls
ExpandExpand
Reduce Money Reduce Money SupplySupply
Increase Discount RateIncrease Discount Rate
Sell Government BondsSell Government Bonds
Set Credit ControlsSet Credit Controls
Slow Slow DownDown
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American Banking SystemAmerican Banking System
• DepositoryDepository– Commercial BanksCommercial Banks– Savings and Loan Savings and Loan
Associations/ThriftsAssociations/Thrifts– Credit UnionsCredit Unions
• Non-depositoryNon-depository– Life Insurance CompaniesLife Insurance Companies– Pension FundsPension Funds– Brokerage FirmsBrokerage Firms– Finance CompaniesFinance Companies
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Services Available at Services Available at Most Commercial BanksMost Commercial Banks
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Regulation ofRegulation of Financial InstitutionsFinancial Institutions
- Federal Reserve BoardFederal Reserve Board
- FDICFDIC
- SAIF(FSLIC)SAIF(FSLIC)
- NCUANCUA
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Future of BankingFuture of Banking
• Repeal of Glass-Repeal of Glass-Steagall (1933)Steagall (1933)
• Gramm-Leach-Bliley Gramm-Leach-Bliley (1999)(1999)
• One-Stop ShoppingOne-Stop Shopping
• Ethical Ethical Issues/ScandalsIssues/Scandals
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Electronic BankingElectronic Banking Trends in the U.S.Trends in the U.S.
• InternetInternet
• Electronic Funds Electronic Funds Transfers (EFTs)Transfers (EFTs)
• Check ConversionCheck Conversion
• Debit Card- Debit Card- TeenagersTeenagers
• Smart CardSmart Card
• Automatic TransfersAutomatic Transfers
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Number of HouseholdsNumber of Households That Bank OnlineThat Bank Online
0
5
10
15
20
25
30
1999 2000 2002 2003
In MillionsIn Millions
Source: USA Today, “Snapshots”
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Safe Online BankingSafe Online Banking• Verify Bank Uses Encryption Verify Bank Uses Encryption
TechnologyTechnology
• Bank Has Liability GuaranteeBank Has Liability Guarantee
• Pick Random PIN Code- Pick Random PIN Code- Letters & NumbersLetters & Numbers
• Regularly Scan For Regularly Scan For Unauthorized TransactionsUnauthorized Transactions
• Use Anti-Virus Software & Use Anti-Virus Software & FirewallFirewall
Source: Parade Magazine, May 18, 2003
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International Banking International Banking
• Eurodollar & Currency Eurodollar & Currency ExchangeExchange
• Letter of CreditLetter of Credit
• Banker’s AcceptanceBanker’s Acceptance• World BankWorld Bank
• IMFIMF
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World’s Largest BanksWorld’s Largest Banks
Source: USA Today, “Snapshots”
$1,295
$944
$895
$714
$698
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400
Mizuho Holdings, Japan
Citigroup, USA
Deutsche Bank, Germany
J.P. Morgan Chase, USA
UBS, Switzerland
In BillionsIn Billions