20-1

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1-1McGraw-Hill/IrwinUnderstanding Business, 8e © 2008 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Nickels McHugh McHughNickels McHugh McHugh

** Understanding Understanding Money,Money,

Financial Financial Institutions,Institutions,

and and the Federal the Federal

ReserveReserve

20

CH

AP

TE

R*

* *

20-2

***

Why Money?Why Money?

• Economy Depends On ItEconomy Depends On It

• Money vs. BarterMoney vs. Barter

• Unit of ValueUnit of Value

• Electronic CashElectronic Cash

• Money SupplyMoney Supply

• Global Exchange- Rise/Fall of Global Exchange- Rise/Fall of Dollar & U.S. EconomyDollar & U.S. Economy

20-3

***

Characteristics Of Characteristics Of A Good Money SystemA Good Money System

• PortabilityPortability

• DivisibilityDivisibility

• StabilityStability

• DurabilityDurability

• UniquenessUniqueness

20-4

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Cost of PenniesCost of Pennies

• The cost of manufacturing a penny is The cost of manufacturing a penny is worth more than 1-centworth more than 1-cent

• The Mint estimates it will cost 1.23 cents The Mint estimates it will cost 1.23 cents per pennyper penny

• The cost of producing a penny has risen The cost of producing a penny has risen 27% in the last year27% in the last year

• Added penny and nickel expenses will Added penny and nickel expenses will reduce the Mint’s profit this year by $45 reduce the Mint’s profit this year by $45 millionmillion

Source:www.usatoday.com, May 10, 2006Source:www.usatoday.com, May 10, 2006

20-5

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$ Bills and Coins$ Bills and Coins

Source: U.S. Department of Treasury, FY 2005 Performance and Accountability Report

Fiscal Year Total Current Production

0

5

10

15

FY2003 FY2004 FY2005

Bil

lio

ns o

f U

nit

s

Coins Bills

20-6

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The Money SupplyThe Money Supply

CurrencCurrencyy

DemanDemand d

DepositDepositss

== TotalTotalM1M1

++Time Time

Deposits & Deposits & Money Money Market Market Accts.Accts.

Total Total M2 *SA M2 *SA

*SA = Seasonally Adjusted*SA = Seasonally Adjusted

++ ==

20-7

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Life Span of CurrencyLife Span of Currency

0 2 4 6 8 10

One Dollar Bill

Five Dollar Bill

Ten Dollar Bill

Twenty Dollar Bill

Fifty Dollar Bill

Hundred Dollar Bill

Years

Source: Bureau of Engraving and PrintingSource: Bureau of Engraving and Printing

20-8

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Federal Reserve Federal Reserve StructureStructure

Board of Governors

Advisory Councils

Federal Reserve Banks

Federal Open Market Committee

Member Banks

20-9

***

Regional Reserve BanksRegional Reserve Banks

20-10

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Federal ReserveFederal Reserve

• Buys/Sells Foreign CurrencyBuys/Sells Foreign Currency

• Regulates CreditRegulates Credit

• Supervises BanksSupervises Banks

• Collects Data on Money Collects Data on Money Supply/Economic ActivitiesSupply/Economic Activities

• Processes ChecksProcesses Checks

20-11

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Monetary PolicyMonetary Policy

• Reserve Reserve

RequirementRequirement

•Tight/IncreaseTight/Increase

•Loose/DecreaseLoose/Decrease

20-12

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Fed Regulates Money SupplyFed Regulates Money Supply

Increase Money SupplyIncrease Money SupplyReduce Discount RateReduce Discount Rate

Buy Government BondsBuy Government Bonds

Set Credit ControlsSet Credit Controls

Slow DownSlow DownReduce Money SupplyReduce Money Supply

Increase Discount RateIncrease Discount Rate

Sell Government BondsSell Government Bonds

Set Credit ControlsSet Credit Controls

ExpandExpand

20-13

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Federal Reserve SystemFederal Reserve System

• HistoryHistory• Land BanksLand Banks

• Central BankCentral Bank

• Great Great DepressionDepression

• StructureStructure

20-14

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American Banking SystemAmerican Banking SystemDepositoryDepository

• Commercial BanksCommercial Banks

• Savings and Loan Savings and Loan Associations/ThriftsAssociations/Thrifts

• Credit UnionsCredit Unions

Non-depositoryNon-depository• Life Insurance Life Insurance

CompaniesCompanies

• Pension FundsPension Funds

• Brokerage FirmsBrokerage Firms

• Finance CompaniesFinance Companies

20-15

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United States’ United States’ Largest BanksLargest Banks

$1,082

$1,013

$706

$472

$403

$0 $200 $400 $600 $800 $1,000 $1,200

Bank of America Corp., N.C.

J.P. Morgan Chase and Co., N.Y.

Citigroup, N.Y.

Wachovia Corp., N.C.

Wells Fargo & Co., CA

Source: Infoplease.com

Assets In BillionsAssets In Billions

20-16

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Services Available at MostServices Available at Most Commercial BanksCommercial Banks

20-17

***

Thrift HighlightsThrift Highlights

Office of Thrift Supervision (OTS):Office of Thrift Supervision (OTS):• There are 854 thrifts supervised by OTSThere are 854 thrifts supervised by OTS

• In addition, OTS supervised 480 In addition, OTS supervised 480 company enterprises that owned 448 company enterprises that owned 448 thriftsthrifts

• Thrift industry controlled over $1.5 Thrift industry controlled over $1.5 trillion in total assets (2trillion in total assets (2ndnd Quarter of Quarter of 2006)2006)

Source: www.ots.treas.gov, August 23, 2006

20-18

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Number of Credit UnionsNumber of Credit Unions

Source:www.ncua.govSource:www.ncua.gov

Number of Credit Unions as of December 31

8,000 8,500 9,000 9,500 10,000 10,500

2001

2002

2003

2004

2005

Yea

r

Credit Unions

20-19

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Regulation ofRegulation of Financial InstitutionsFinancial Institutions

• Federal Reserve BoardFederal Reserve Board

• FDICFDIC

• SAIF(FSLIC)SAIF(FSLIC)

• NCUANCUA

20-20

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Future of BankingFuture of Banking

• Repeal of Glass-Steagall (1933)Repeal of Glass-Steagall (1933)

• Gramm-Leach-Bliley (1999)Gramm-Leach-Bliley (1999)

• One-Stop ShoppingOne-Stop Shopping

20-21

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Number of HouseholdsNumber of Households That Bank OnlineThat Bank Online

0

5

10

15

20

25

30

35

40

1999 2000 2002 2003 2004

In MillionsIn Millions

Source: USA Today, “Snapshots”, and CNNMoney.com

20-22

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Safe Online BankingSafe Online Banking

• Verify Bank Uses Verify Bank Uses Encryption TechnologyEncryption Technology

• Bank Has Liability Bank Has Liability GuaranteeGuarantee

• Pick Random PIN Code- Pick Random PIN Code- Letters & NumbersLetters & Numbers

• Regularly Scan For Regularly Scan For Unauthorized TransactionsUnauthorized Transactions

• Use Anti-Virus Software & Use Anti-Virus Software & FirewallFirewall

Source: Parade Magazine, May 18, 2003

20-23

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Electronic BankingElectronic Banking Trends in the U.S. Trends in the U.S.

• InternetInternet

• Electronic Funds Electronic Funds Transfers (EFTs)Transfers (EFTs)

• Check ConversionCheck Conversion

• Debit Card- TeenagersDebit Card- Teenagers

• Smart CardSmart Card

• Automatic TransfersAutomatic Transfers

20-24

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When Will The U.S. When Will The U.S. Become Cashless?Become Cashless?

0%

5%

10%

15%

20%

25%

20 Yrs orMore

10 - 19Yrs

Never 1 - 9 Yrs Lessthan a Yr

Source: New Designs for Your Money, U.S. Department of Treasury

20-25

***

International Banking International Banking

• Currency or Money Currency or Money ExchangeExchange

• Letter of CreditLetter of Credit

• Banker’s AcceptanceBanker’s Acceptance

• World BankWorld Bank

• IMFIMF

20-26

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World’s Largest BanksWorld’s Largest Banks

$1,295

$944

$895

$714

$698

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400

Mizuho Holdings, Japan

Citigroup, USA

Deutsche Bank, Germany

J.P. Morgan Chase, USA

UBS, Switzerland

Source: USA Today, “Snapshots”

In BillionsIn Billions