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Copyright 2005 Prentice- Hall, Inc. 18-1
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Copyright 2005 Prentice- Hall, Inc. 18-2
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Part Five: Part Five: UnderstandingUnderstanding Financial IssuesFinancial Issues
18.18. Understanding Money And Understanding Money And BankingBanking
19.19. Understanding Securities And Understanding Securities And InvestmentsInvestments
20.20. Understanding Financial And Understanding Financial And Risk ManagementRisk Management
18-3
ChapteChapte
rr 1818
Understanding Understanding Money & BankingMoney & Banking
Copyright 2005 Prentice- Hall, Inc. 18-4
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ess Chapter OutlineChapter Outline
What Is Money?What Is Money?The U.S. Financial SystemThe U.S. Financial SystemThe Federal Reserve SystemThe Federal Reserve SystemThe Changing Money & The Changing Money &
Banking SystemBanking SystemInternational Banking & FinanceInternational Banking & Finance
Copyright 2005 Prentice- Hall, Inc. 18-5
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CharacteristicsCharacteristicsOf MoneyOf Money
• PortabilityPortability
• DivisibilityDivisibility
• DurabilityDurability
• StabilityStability
Copyright 2005 Prentice- Hall, Inc. 18-6
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ess Functions Of MoneyFunctions Of Money
• Medium Of ExchangeMedium Of Exchange
• Store Of ValueStore Of Value
• Unit Of AccountUnit Of Account
Copyright 2005 Prentice- Hall, Inc. 18-7
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ess Money SupplyMoney Supply
• Spendable Money = M1Spendable Money = M1–CurrencyCurrency–ChecksChecks–Demand DepositsDemand Deposits
• Convertible Money = M2Convertible Money = M2–M1M1– Time DepositsTime Deposits–Money Market FundsMoney Market Funds–Savings DepositsSavings Deposits
Copyright 2005 Prentice- Hall, Inc. 18-8
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ess Money-Supply GrowthMoney-Supply Growth
Copyright 2005 Prentice- Hall, Inc. 18-9
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ess Credit CardsCredit Cards
• Not Part Of M1 Or M2Not Part Of M1 Or M2• Big BusinessBig Business–ConvenientConvenient–Profitable For Credit Card Profitable For Credit Card
CompaniesCompanies• Sources Of ProfitSources Of Profit–Cardholder = Annual Fees & Cardholder = Annual Fees &
InterestInterest–Merchant = 2-5% FeeMerchant = 2-5% Fee
Copyright 2005 Prentice- Hall, Inc. 18-10
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Projected ConsumerProjected ConsumerBill Payments (2005)Bill Payments (2005)
18% 11%
12%
26%33%
Credit Card
Debit Card
ElectronicTransfer
Cash
Check
Source: Wired, “The New Currency” April 2004, p. 59.
Total = $6.74 TrillionTotal = $6.74 Trillion
Copyright 2005 Prentice- Hall, Inc. 18-11
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ess U.S. Financial SystemU.S. Financial System
• IssuesIssues–Diversification/MergersDiversification/Mergers– Interest RatesInterest Rates
• Depository InstitutionsDepository Institutions–Commercial BanksCommercial Banks– ThriftsThrifts–Savings & LoansSavings & Loans–Mutual Savings BanksMutual Savings Banks–Credit UnionsCredit Unions
Copyright 2005 Prentice- Hall, Inc. 18-12
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ess The Prime Interest RateThe Prime Interest Rate
Copyright 2005 Prentice- Hall, Inc. 18-13
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Nondepository Nondepository InstitutionsInstitutions
• Pension FundsPension Funds
• Insurance CompaniesInsurance Companies
• Finance CompaniesFinance Companies
• Securities DealersSecurities Dealers
Copyright 2005 Prentice- Hall, Inc. 18-14
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SpecialSpecialFinancial ServicesFinancial Services
• Pension/Trust ServicesPension/Trust Services– Individual Retirement AccountsIndividual Retirement Accounts– Trust ServicesTrust Services
• International ServicesInternational Services– Currency ExchangeCurrency Exchange– Letters Of CreditLetters Of Credit– Banker’s AcceptancesBanker’s Acceptances
• Financial Advice/Brokerage ServicesFinancial Advice/Brokerage Services• Automated Teller MachinesAutomated Teller Machines• Electronic Funds TransferElectronic Funds Transfer
Copyright 2005 Prentice- Hall, Inc. 18-15
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WorldwideWorldwideATM LocationsATM Locations
31%
32%
4%8%
25%Asia
North America
Western Europe
Latin America
Other
Copyright 2005 Prentice- Hall, Inc. 18-16
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CommercialCommercialBanking Regulation Banking Regulation
• Federal Reserve Federal Reserve SystemSystem
• Federal Deposit Federal Deposit Insurance CorporationInsurance Corporation
• Other State & Federal Other State & Federal AgenciesAgencies
Copyright 2005 Prentice- Hall, Inc. 18-17
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How BanksHow BanksCreate MoneyCreate Money
Copyright 2005 Prentice- Hall, Inc. 18-18
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Federal Deposit Federal Deposit Insurance CorporationInsurance Corporation
• Insures Insures MemberMember Banks Banks Deposits To $100,000/AccountDeposits To $100,000/Account
• 1941 – 1980 Examined1941 – 1980 Examined–Bank PracticesBank Practices–AccountsAccounts
• Banks Deregulated- Depository Banks Deregulated- Depository Institutions Deregulation & Institutions Deregulation & Monetary Control Act Of 1980Monetary Control Act Of 1980
Copyright 2005 Prentice- Hall, Inc. 18-19
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Structure OfStructure OfFederal Reserve SystemFederal Reserve System
Board Of GovernorsBoard Of Governors
Reserve Banks (12)Reserve Banks (12)
Member BanksMember Banks
Copyright 2005 Prentice- Hall, Inc. 18-20
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ess Functions Of The FedFunctions Of The Fed
• Government’s BankGovernment’s Bank
• Banker’s BankBanker’s Bank
• Check ClearingCheck Clearing
• Controls Money Controls Money
Supply- Monetary PolicySupply- Monetary Policy
Copyright 2005 Prentice- Hall, Inc. 18-21
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Check ClearingCheck ClearingBy Hand (1940s)By Hand (1940s)
Source: Federal Reserve Bank of Atlanta, http://www.frbatlanta.org/invoke.cfm?objectid=83FD414A-9AF0-11D5-898400508BB89A83&method=display_body
Copyright 2005 Prentice- Hall, Inc. 18-22
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ess Clearing A CheckClearing A Check
Copyright 2005 Prentice- Hall, Inc. 18-23
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ess Tools Of The FedTools Of The Fed
• Reserve RequirementsReserve Requirements
• Discount RateDiscount Rate
• Open-Market Open-Market
OperationsOperations
• Selective Credit Selective Credit
ControlsControls
Copyright 2005 Prentice- Hall, Inc. 18-24
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Dual Prime Rate & Dual Prime Rate & Federal Discount RateFederal Discount Rate
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1950 1960 1970 1980 1990 2000
Dual Prime Rate
Federal DiscountRate
Source: Federal Reserve Bank of St. Louis, http://research.stlouisfed.org
On 12/31 Of On 12/31 Of That YearThat Year
20042004
Copyright 2005 Prentice- Hall, Inc. 18-25
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Dual Prime Rate & Dual Prime Rate & Federal Discount RateFederal Discount Rate
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%
10.0%
1995
1997
1999
2001
2003
Dual Prime Rate
Federal DiscountRate
Source: Federal Reserve Bank of St. Louis, http://research.stlouisfed.org
On 12/31 Of On 12/31 Of That YearThat Year
20042004
Copyright 2005 Prentice- Hall, Inc. 18-26
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InterstateInterstateBanking (1995)Banking (1995)
• Bank Holding Companies Can Bank Holding Companies Can Acquire Subsidiaries In Any StateAcquire Subsidiaries In Any State
• No Company Can Control More No Company Can Control More Than 10% Of Insured’s DepositsThan 10% Of Insured’s Deposits
• No Bank Can Control More Than No Bank Can Control More Than 30% Of State’s Deposits30% Of State’s Deposits
• Banks Can Provide Transactions Banks Can Provide Transactions For Affiliates For Affiliates
• Banks Can Convert Affiliates To Banks Can Convert Affiliates To Branches (1997)Branches (1997)
Copyright 2005 Prentice- Hall, Inc. 18-27
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ess Electronic TechnologyElectronic Technology
• Debit Cards/Point-Of-Sale Debit Cards/Point-Of-Sale TerminalsTerminals
• Smart CardSmart Card
• E-CashE-Cash
Copyright 2005 Prentice- Hall, Inc. 18-28
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ess International BankingInternational Banking
• Government Influences Government Influences Exchange RatesExchange Rates
• International PaymentsInternational Payments
• International Banking StructureInternational Banking Structure–World BankWorld Bank
– International Monetary FundInternational Monetary Fund
Copyright 2005 Prentice- Hall, Inc. 18-29
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InternationalInternationalPayments ProcessPayments Process
