20-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All...
22
Chapter 20 Understandin g Money and Financial Institutions 20-1
-
Upload
miles-reed -
Category
Documents
-
view
215 -
download
1
Transcript of 20-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All...
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-1McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter
2020 Understanding Money and Financial
Institutions
20-1
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-2McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Federal Reserve
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-3McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Federal Reserve Structure
Board of Governors7 Members
Advisory Councils 3 Members
Banking Districts, Consumers & Mbr
Institutions
Federal Open Market Committee
Policy-making 12 Members
Federal Reserve Banks12 Regional Banks
Member Banks
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-4McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Regional Reserve Banks
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-5McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Federal Reserve
The Banker’s Bank• Holds the deposits of commercial banks and
makes loans to banks that need additional
funds
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-6McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Money Supply
Currency
Demand
Deposits
= TotalM1
+Time
Deposits & Money Market Accts.
Total M2+ =
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-7McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Money Supply
Why Do We Care?
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-8McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Control of the Money Supply
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-9McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Fed Regulates Money Supply
Increase / Reduce Money Supply
I. Reserve Requirement
II. Open Market Operations
III. Discount Rate
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-10McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
I. Reserve Requirement• Percentage of commercial
bank’s checking and
savings accounts that
must be physically kept in
this bank or as a non-
interest-bearing deposit at
the local Federal Reserve
district bank
• Most powerful tool
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-11McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
II. Open-Market Operations
• Involves buying and selling
of U.S. Government bonds
by the Fed with goal of
regulating money supply
• Most commonly used tool
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-12McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
III. Discount Rate• Interest rate that Fed charges
for loans to member banks
• Member banks borrow money
from the Fed and pass it on to
their customers – Prime Rate
• Fed also sets the rate that
banks charge each other –
Federal Funds Rate
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-13McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Fed Regulates Money Supply
Increase Money SupplyReduce Reserve Requirement
Buy Government Bonds
Decrease Discount Rate
Expand
Reduce Money SupplyIncrease Reserve Requirement
Sell Government Bonds
Increase Discount Rate
Slow Down
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-14McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
American Banking System
– Commercial Banks– Savings and Loan
Associations/Thrifts– Credit Unions
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-15McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Commercial Banks• Profit-making organizations
that receive deposits from
individuals and corporations
in the form of checking and
savings accounts and then
uses some of these funds to
make loans
• State or Federally Chartered
• Two types of customers:– Borrowers and Depositors
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-16McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Savings and Loans (S&Ls)• Accepts both savings and
checking deposits and
provides home mortgage
loans
• Often known as Thrift
Institutions
• Offered higher interest
rates to attract funds
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-17McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Credit Unions• Not-for-profit , member-
owned financial
cooperatives that offer
the full variety of banking
services to their members
• State or Federally
chartered
• Have exemption from
federal income taxes
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-18McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
American Banking System
• Non-Depository– Life Insurance Companies– Pension Funds– Brokerage Firms– Finance Companies
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-19McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
How the Government
Protects Your Funds
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-20McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
How the Government Protects Your Funds
- FDIC - $250,000/Account
- SAIF(FSLIC)- $250,000/Account
- NCUA- $250,000/Account
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-21McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
International Banking
Letter of Credit – Promise to pay seller
given amount if certain conditions met
McGraw-Hill/IrwinUnderstanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.20-22McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
International Banking • International Monetary Fund (IMF) • Established to assist in the smooth flow of
money among all nations• Monitors the monetary policies of member
nations to ensure a global monetary system that works best for all nations.
