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Financial Intermediaries and Financial Intermediaries and the Banking Systemthe Banking System
Chapter 4
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Financial IntermediariesFinancial Intermediaries
Specialized financial firms that facilitate the indirect transfer of funds from savers to borrowers by offering savings instruments and borrowing instruments
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Financial IntermediationFinancial Intermediation
The process by which financial intermediaries transform funds provided by savers into funds used by borrowers
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Benefits of IntermediariesBenefits of Intermediaries
Reduced costs Risk/diversification Funds divisibility/pooling Financial flexibility Related services
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Types of IntermediariesTypes of Intermediaries
Commercial banks Credit unions Thrift institutions Mutual funds Whole life insurance
companies Pension funds
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Safety (Risk) of Financial Safety (Risk) of Financial InstitutionsInstitutions
Banks, thrifts and credit unions insured by FDIC regulated by Federal Reserve
Insurance companies regulated by states
Pensions ERISA established PBGC
Mutual funds SEC
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Evolution of Banking Evolution of Banking SystemsSystems
Storage of valuables (gold & silver) Depository receipts Receipts could be traded Inventory could be lent out Only necessary to maintain enough
reserves to cover demand for withdrawal (fractional reserves)
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Fractional Reserve SystemFractional Reserve System
When the amount of reserves maintained by a financial institution to satisfy requests for withdrawals is less than 100 percent of total deposits
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Excess ReservesExcess Reserves
Reserves at a bank in excess of the amount required
Equal to the total reserves minus the required reserves
Available for lending an increase in reserves increases the money
supply
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Money SupplyMoney Supply
Maximum change in the money supply equals the excess reserves divided by the reserve requirement
Maximum Δ in MS =Excess reserves
Reserve requirements
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U. S. Banking SystemU. S. Banking System
Dual banking system bank chartering exists both at state and national
levels
Intrastate branching establishing branch banks within the same state
Interstate branching establishing branch banks in more than one state
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Bank Holding CompanyBank Holding Company
Corporation that owns controlling interest in one or more banks
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Central Banking - The Central Banking - The Federal Reserve SystemFederal Reserve System
Manages the monetary policy of the country
Decentralized network of regional, district banks
Supervised by the Board of Governors, appointed by the President
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Monetary Policy influence economic conditions (interest
rates) by managing the nations money supply
Responsibilities of the FedResponsibilities of the Fed
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Monetary PolicyMonetary Policy
Open Market Operations buy and sell Treasury securities to expand
or contract the nation’s money supply Primary Dealer
– has established relationship with the Federal Reserve to buy and sell government securities
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Monetary PolicyMonetary Policy
Reserve requirements Discount rate
charged by the Fed for loans it makes to banks to meet temporary shortages in required reserves
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Responsibilities of the Fed Responsibilities of the Fed (continued)(continued)
Monetary Policy Regulate and supervise financial
institutions operating in the United States
Check clearing operations provided by its payment system
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U. S. Banking TrendsU. S. Banking Trends
Deregulation Large financial service corporations Overlapping of products available
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International BankingInternational Banking
Other countries have fewer financial institutions, but with more branches
Foreign banks are allowed to engage in non-banking business activities
Most of the world’s largest banks are not U. S. banks
Edge Act International Banking Facilities (IBFs)
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End of Chapter 4End of Chapter 4
Financial Intermediaries and the Banking System