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Transcript of 14 Money and Banking McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All...
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14
Money and Banking
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Functions of Money
• Medium of exchange
• Used to buy/sell goods
• Unit of account
• Goods valued in dollars
• Store of value
• Hold some wealth in money form
• Money is liquid
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Money Definition M1
• M1
• Currency
• Checkable deposits
• Institutions offering checkable deposits
• Commercial banks
• Savings and loan associations
• Mutual savings banks
• Credit unions
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Money Definition M2
• M2
•M1 plus near-monies
• Savings deposits including money market deposit accounts (MMDA)
• Small-denominated time deposits
• Money market mutual funds (MMMF)
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Money Definitions
January 2010
Source: Federal Reserve System
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What “Backs” the Money Supply?
• Guaranteed by government’s ability to keep value stable
• Money as debt
• Why is money valuable?
• Acceptability
• Legal tender
• Relative scarcity
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What “Backs” the Money Supply?
• Prices affect purchasing power of money
• Hyperinflation renders money unacceptable
• Stabilizing money’s purchasing power• Intelligent management of the money
supply – monetary policy• Appropriate fiscal policy
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Federal Reserve - Banking System
• Historical background
• Board of Governors
• 12 Federal Reserve Banks
• Serve as the central bank
• Quasi-public banks
• Banker’s bank
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Federal Reserve – Banking System
Commercial BanksThrift Institutions
(Savings and Loan Associations,Mutual Savings Banks,
Credit Unions)
The Public(Households and
Businesses)
12 Federal Reserve Banks
Board of Governors
Federal Open Market Committee
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Federal Reserve – Banking System
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The 12 Federal Reserve Banks
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Federal Reserve – Banking System
• Federal Open Market Committee
• Aids Board of Governors in setting monetary policy
• Conducts open market operations
• Commercial banks and thrifts
• 6,800 commercial banks
• 8,700 thrifts
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Federal Reserve Functions
• Issue currency
• Set reserve requirements
• Lend money to banks
• Collect checks
• Act as a fiscal agent for U.S. government
• Supervise banks
• Control the money supply
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Federal Reserve Independence
• Established by Congress as an independent agency
• Protects the Fed from political pressures
• Enables the Fed to take actions to increase interest rates in order to stem inflation as needed
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Financial Institutions
World’s 12 Largest Financial Institutions, 2009
Royal Bank of Scotland (UK)Barclays (UK)
Deutsche Bank (Germany)BNP Paribas (France)HSBC Holdings (UK)
JPMorgan Chase (US)Credit Agricole (France)
Citigroup (US)Mitsubishi UFJ (Japan)
UBS (Switzerland)ING Group (Netherlands)
Bank of America (US)
0 1.5 2.5 3.5
Source: Forbes Global 2000, http://www.forbes.com
Assets (Trillions of U.S. Dollars)
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The Financial Crisis of 2007 and 2008
• Mortgage Default Crisis
• Many causes
• Government programs that encouraged home ownership
• Declining real estate values
• Bad incentives provided by mortgage-backed bonds
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The Financial Crisis of 2007 and 2008
• Securitization- the process of slicing up and bundling groups of loans into new securities
• As loans defaulted, the system collapsed
• “Underwater” homeowners abandoned homes and mortgages
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The Financial Crisis of 2007 and 2008
• Failures and near-failures of financial firms
• Countrywide: second largest lender
• Washington Mutual: largest lender
• Wachovia
• Other firms came close
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The Financial Crisis of 2007 and 2008
• Troubled Asset Relief Program (TARP)• Allocated $700 billion to make
emergency loans
• Saved several institutions from failure
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The Financial Crisis of 2007 and 2008
• The Fed’s lender-of-last-resort activities
• Primary Dealer Credit Facility
• Term Securities Lending Facility
• Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
• Commercial Paper Funding Facility
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The Financial Crisis of 2007 and 2008
• Money Market Investor Funding Facility
• Term Asset-Backed Securities Loan Facility
• Interest Payments on Reserves
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Post-Crisis U.S. Financial Services
• Major Categories of Financial Institutions• Commercial Banks
• Thrifts
• Insurance Companies
• Mutual Fund Companies
• Pension Funds
• Securities Firms
• Investment BanksLO7 14-21
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Institution Description Examples
Commercial Banks State and national banks that provide checking and savings accounts and make loans
JP Morgan Chase, Bank of America, Citibank, Wells Fargo
Thrifts Savings and loan associations, mutual savings banks, credit unions that offer checking and savings accounts and make loans
Charter One, New York Community Bank
Insurance Companies
Firms that offer policies through which individuals pay premiums to insure against lose
Prudential, New York Life, Northwestern Mutual, Hartford
Mutual Fund Companies
Firms that pool customer deposits to purchase stocks or bonds
Fidelity, Vanguard, Putnam, Janus, T Rowe Price
Pension Funds Institutions that collect savings from workers throughout their working years and then invest the funds to pay retirement benefits
TIAA-CREF, Teamsters’ Union, CalPERs
Securities Firms Firms that offer security advice and buy and sell stocks and bonds for clients
Merrill Lynch, Smith Barney, Charles Schwab
Investment Banks Firms that help corporations and governments raise money by selling stocks and bonds
Goldman Sachs, Morgan Stanley, Deutsche Bank, Nomura Securities
Major Categories of Financial Institutions
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Post-Crisis U.S. Financial Services
• Wall Street Reform and Consumer Protection Act• Passed to help prevent many of the
practices that led to the crisis
• Critics say it adds heavy regulatory costs
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Electronic Banking
• Electronic-based payment systems have pushed aside currency and checks• Credit/debit cards
• Fedwire transfers
• ACH transactions
• Electronic money
• Stored-value cards
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