Money, Banking, and Financial Institutions

Money, Banking, and Financial Institutions

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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
LO1
14-2

Money Definition M1
• M1 • Currency • Checkable deposits • Institutions offering checkable deposits • Commercial banks • Savings and loan associations • Mutual savings banks • Credit unions
LO2
14-3

1

6/25/2014

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)

LO2

14-4

Money Definitions

LO2

14-5

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
LO3
14-6

2

6/25/2014

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

LO3

14-7

Federal Reserve – Banking System
• Historical background • Board of Governors • 12 Federal Reserve Banks • Serve as the central bank • Quasi-public banks • Banker’s bank

LO4

14-8

Federal Reserve – Banking System
Board of Governors
Federal Open Market Committee

12 Federal Reserve Banks

Commercial Banks

Thrift Institutions (Savings and Loan Associations, Mutual Savings Banks, Credit Unions)

The Public (Households and Businesses)

 

Federal Reserve – Banking System
• Federal Open Market Committee • Aids Board of Governors in setting monetary policy • Conducts open market operations • Commercial banks and thrifts • 6,000 commercial banks • 8,500 thrifts
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

 

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
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 mortgagebacked bonds

 

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

 
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

 
The Financial Crisis of 2007 and 2008
• Troubled Asset Relief Program (TARP) • Allocated $700 billion to make emergency loans • Saved several institutions from failure

 

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

 

The Financial Crisis of 2007 and 2008
• Money Market Investor Funding Facility • Term Asset-Backed Securities Loan Facility • Interest Payments on Reserves
Post-Crisis U.S. Financial Services
• Major Categories of Financial Institutions • Commercial Banks • Thrifts • Insurance Companies • Mutual Fund Companies • Pension Funds • Securities Firms • Investment Banks
LO8
State and national banks that provide checking and savings accounts and make loans Savings and loan associations, mutual savings banks, credit unions that offer checking and savings accounts and make loans Firms that offer policies through which individuals pay premiums to insure against lose Firms that pool customer deposits to purchase stocks or bonds Institutions that collect savings from workers throughout their working years and then invest the funds to pay retirement benefits Firms that offer security advice and buy and sell stocks and bonds for clients Firms that help corporations and governments raise money by selling stocks and bonds

Examples
JP Morgan Chase, Bank of America, Citibank, Wells Fargo Charter One, New York Community Bank Prudential, New York Life, Northwestern Mutual, Hartford Fidelity, Vanguard, Putnam, Janus, T Rowe Price TIAA-CREF, Teamsters’ Union, CalPERs Merrill Lynch, Smith Barney, Charles Schwab Goldman Sachs, Morgan Stanley, Deutsche Bank, Nomura Securities

Thrifts

Insurance Companies Mutual Fund Companies Pension Funds

Securities Firms

Investment Banks

 

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

 
Wall Street Reform and Consumer Protection Act of 2010 Decision made not to criminally prosecute HSBC bank because of economic effect

 

 
University of Phoenix. (n.d). Career services. Retrieved from http://www.phoenix.edu/career-services.html

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