CHAPTER 15 Money and the Financial System

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CHAPTER 14 Accounting and Financial Statements

Financing theFinancing theEnterpriseEnterprise

CHAPTER 16 Financial Management and Securities Markets

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FinanceFinanceFinanceFinance

The study of money—how it’s made, how it’s lost and how it’s managed

Money

Anything generally accepted in exchange for goods and services

Many materials have been used as money

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Functions of MoneyFunctions of MoneyFunctions of MoneyFunctions of Money

Medium of exchange• Accepted as payment for products and resources

• Bartering: Trading one good or service for another of similar value

Inefficient because not always divisible and can be complicated in multiple-party transactions

Measure of value• Single standard for assigning and comparing values of

products and resources

Store of value• Means of retaining and accumulating wealth

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Characteristics of MoneyCharacteristics of MoneyCharacteristics of MoneyCharacteristics of Money

Acceptability

Divisibility

Portability

Stability

Durability

Difficulty to counterfeit

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Types of MoneyTypes of MoneyTypes of MoneyTypes of Money

Paper Money and Coins

Checking Account (Demand Deposit): Money stored in an account at a bank that can be withdrawn without advance notice

• Checks serve as a more secure substitute for cash

Savings Account (Time Deposit): Accounts with funds that usually cannot be withdrawn without advance notice

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Types of MoneyTypes of MoneyTypes of MoneyTypes of Money

Money Market Account

Higher interest rates than standard bank rates with greater restrictions

Certificates of Deposit (CDs)

Savings accounts that guarantee a set interest rate over a period of time providing funds are not withdrawn before maturity

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Types of MoneyTypes of MoneyTypes of MoneyTypes of Money

Credit Cards

Means of access to preapproved lines of credit granted by a bank or a finance company

Credit card companies have been the subject of criticism and scrutiny

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Types of MoneyTypes of MoneyTypes of MoneyTypes of Money

Debit Card

A card that looks like a credit card but works like a check

A direct electronic payment from the cardholder’s checking account

Traveler’s Checks, Money Orders, Cashier’s Checks

Other common forms of “near” money

Guaranteed as cash

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The FedThe FedThe FedThe Fed

Four major functions:

1.Controls the money supply with monetary policy

2.Regulates financial institutions

3.Manages regional and national check-clearing procedures

4.Supervises the federal deposit insurance of commercial banks in the Federal Reserve system

In Indonesia these functions are done by Bank Indonesia

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Monetary PoliciesMonetary PoliciesMonetary PoliciesMonetary Policies

Monetary Policy

The means by which the Fed controls the amount of money available in the economy

Aims to keep supply and demand in balance to avoid inflation/deflation

In Indonesia these functions are done by Bank Indonesia

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Four Main Monetary Policy Tools Four Main Monetary Policy Tools Four Main Monetary Policy Tools Four Main Monetary Policy Tools

1. Open Market Operations: Decisions to buy or sell U.S. Treasury bills in the open market

Buying securities increases money in supply and vice versa

2. Reserve Requirements: Percentage of deposits a bank must hold in reserve

Has a strong effect on the economy and not used often

3. Discount Rate: Rate of interest the Fed charges to loan money to banking institutions

Lowering discount rate encourages borrowing and expands money supply and vice versa

4. Credit Controls: Authority to establish and enforce credit rules

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Other Regulatory Functions Other Regulatory Functions of the Fedof the Fed

Other Regulatory Functions Other Regulatory Functions of the Fedof the Fed

Regulating member banks

Establishes and enforces banking rules that affect monetary policy and competition

Has authority to approve bank mergers

Check clearing

National check processing through check clearinghouses

Depository insurance

Supervises the federal insurance funds that protect the deposits in member banking institutions

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Banking InstitutionsBanking InstitutionsBanking InstitutionsBanking Institutions

Commercial Banks

Largest and oldest of all financial institutions, relying mainly on checking and savings accounts

Loan to businesses and individuals

Savings and Loan Associations (S&Ls– also called “thrifts”)

Primarily offer savings accounts and make long-term loans for residential mortgages

Most have merged with commercial banks

New hybrid bank institutions perform multiple functions

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Banking InstitutionsBanking InstitutionsBanking InstitutionsBanking Institutions

Credit Unions

Financial institutions owned and controlled by depositors

Usually having a common employer, profession, trade group, or religion

Mutual Savings Banks

Similar to S&Ls, but owned by depositors

Found mostly in New England

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Insurance for BanksInsurance for BanksInsurance for BanksInsurance for Banks

Federal Deposit Insurance Corporation (FDIC)

Insures personal accounts up to $250,000

In Indonesia: LPSNational Credit Union Association (NCUA)

Regulates and charters credit unions

Insures deposits through its National Credit Union Insurance Fund

Similar to the FDIC

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Non-Banking InstitutionsNon-Banking InstitutionsNon-Banking InstitutionsNon-Banking Institutions

Diversified Firms: Traditionally non-financial firms that have expanded into the financial field

Insurance Companies: Businesses that protect their clients against losses from specified risks

Pension Funds: Managed investment pools to provide retirement income for members

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Non-Banking InstitutionsNon-Banking InstitutionsNon-Banking InstitutionsNon-Banking Institutions

Mutual Fund: Investment company that pools investor money and invests in large numbers of diversified securities

Brokerage Firm: Buy and sell securities for clients and provide other services

Investment Bank: Underwrites new issues of securities for corporations, states and municipalities needed to raise money in capital markets

Finance Companies: Businesses that offer short-term loans at substantially higher interest rates than banks

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Electronic BankingElectronic BankingElectronic BankingElectronic Banking

ETF: Electronic funds transfer

ATM: Automated teller machines

ACHs: Automated clearinghouses

Online Banking: Bank at home or anywhere/anytime (Increasing the range of services)

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Future of BankingFuture of BankingFuture of BankingFuture of Banking

Advances in technology are challenging and changing the banking industry

Trend toward larger banks, even in the wake of 2008-2010 financial crisis• Uncertain whether the crisis will continue

Future of the banking industry will be shaped by federal government action• Oversight and regulations to prevent future financial

meltdowns

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