Chapter Eighteen. Learning Objectives

Transcription

1 Chapter Eighteen Understanding Money, Banking, and Credit Learning Objectives 1. Identify the functions and characteristics of money. 2. Summarize how the Federal Reserve System regulates the money supply. 3. Describe the organizations involved in the banking industry. 4. Identify the services provided by financial institutions. 5. Understand how financial institutions are changing to meet the needs of domestic and international customers. 18 2

2 Learning Objectives (cont d) 6. Explain how deposit insurance protects customers. 7. Discuss the importance of credit and credit management Chapter 18 Outline What Is Money? The Functions of Money Important Characteristics of Money The Supply of Money: M1 and M2 The Federal Reserve System Regulation of Reserve Requirements Regulation of the Discount Rate Open Market Operations Other Fed Responsibilities The American Banking Industry Commercial Banks Other Financial Institutions Careers in the Banking Industry 18 4

3 Chapter 18 Outline Traditional Services Provided by Financial Institutions Checking Accounts Savings Accounts Short and Long Term Loans Credit Card and Debit Card Transactions Innovative Banking Services Recent Changes in the Banking Industry Online Banking and International Banking The FDIC, SAIF, BIF, and NCUA Effective Credit Management How Do You Get Money From a Bank or Lender? The Five Cs of Credit Management Checking Credit Information Sound Collection Procedures (cont d) 18 5 Barter system What Is Money? Money 18 6

4 The Functions of Money Medium of exchange Measure of value Store of value 18 7 Important Characteristics of Money Divisibility Portability Stability Durability Difficulty of counterfeiting 18 8

5 The Supply of Money: M 1 and M 2 Demand deposit Time deposit Two main measures of the supply of money M 1 Currency, demand deposits, and travelers checks M 2 M 1 plus savings accounts, certain money market securities and small denomination time deposits or certificates of deposit (CDs) of less than $100, The Federal Reserve System The central bank of the United States responsible for regulating the banking industry Controlled by a 7 member board of governors who are appointed by the president and confirmed by the Senate to serve 14 year terms Composed of 12 district banks and 25 branch banks District banks are owned by commercial banks that are members of the Federal Reserve system Main function is to regulate the nation s money supply by controlling bank reserves requirements, regulating the discount rate, and running open market operations 18 10

6 The Federal Reserve System (cont d) Regulation of reserve requirements Regulation of the discount rate Open market operations Other Fed responsibilities The American Banking Industry Commercial bank A profit making organization that accepts deposits, makes loans, and provides related services to its customers National bank State bank 18 12

7 The American Banking Industry (cont d) Other financial institutions Savings and loan associations (S&L) Credit unions Mutual savings banks Insurance companies Pension funds Brokerage firms Finance companies Investment banking firms Careers in Banking The 7 largest banks in the U.S. employ approx. 1,132,000 people The U.S. Department of Labor expects the number of people employed in banking to grow more slowly than other jobs in the economy between now and the year Traits of successful bankers Honesty Ability to interact with people Strong background in accounting Appreciation for the banking finance relationship Basic computer skills 18 14

8 Traditional Services Provided by Financial Institutions Checking accounts Check NOW account Savings accounts Passbook savings account Certificate of deposit (CD) Short and long term loans Line of credit Revolving credit agreement Collateral Traditional Services Provided by Financial Institutions (cont d) Credit card and debit card transactions Banks and other financial institutions charge merchants fees (a percentage of each credit card transaction) for handling the transactions for the merchant Banks impose monthly finance charges on the unpaid balances (essentially, a line of consumer credit) of cardholders Debit card a card that electronically subtracts the amount of a purchase from the cardholder s bank account at the moment the purchase is made 18 16

9 Recent Changes in the Banking Industry Financial Services Modernization Banking Act (1999) Anticipated changes More emphasis on evaluating the creditworthiness of loan applicants as a result of the recent financial crisis An increase in government regulation of the industry Recent Changes in the Banking Industry Anticipated changes (continued) A reduction in the number of banks, S&Ls, credit unions, and financial institutions because of consolidation and mergers Globalization of the banking industry The importance of customer service as a way to keep customers from switching to competitors Increased use of credit and debit cards and a decrease in the number of written checks Continued growth in online banking 18 18

10 Advantages Online Banking Convenience of electronic deposits Ability to obtain current account balances Convenience of transferring funds Ability to pay bills Convenience of seeing which checks have cleared Easy access to current interest rates Simplified loan application procedures For banks lower processing costs Disadvantages Not being able to discuss financial matters with a personal banker Online Banking (cont d) Electronic funds transfer (EFT) system A means of performing financial transactions through a computer terminal or telephone hookup Changing how banks do business Automated teller machines (ATMs) Automated clearinghouses (ACHs) Point of sale terminals 18 20

11 International Banking Popular methods of paying for import and export ttransactionsti Letter of credit Banker s acceptance Currency exchange The FDIC, SAIF, BIF, NCUA Federal Deposit Insurance Corporation (FDIC) FDIC reorganized into the Banking Insurance Fund (BIF) and Savings Association Insurance Fund (SAIF) FDIC provides deposit insurance of $100,000 per account All Federal Reserve System member banks must belong to the FDIC; nonmembers and S&Ls may join if they qualify National Credit Union Association (NCUA) 18 22

12 How Do You Get Money from a Bank or Lender? For individuals Shop around for low interest rates, but you have a better chance at an institution where you already have an account Fill out a loan application Describe how you will use the money and how you will repay it Prepare for an interview If rejected, ask the loan officer why For businesses Develop a relationship with your banker Apply for a preapproved line of credit or revolving credit agreement even if you do not need the money Supply financial statements and tax documents Prepare a convincing cover letter Effective Credit Management Credit The five Cs of credit management Character Capacity Capital Collateral Conditions 18 24

13 Effective Credit Management (cont d) Checking credit information Credit information sources regarding g businesses Credit information concerning individuals Fair Credit Reporting Act Effective Credit Management (cont d) Sound collection procedures Firm Fair, allowing for compromise Not harassing Techniques Subtle reminders Telephone calls Personal visits Legal action 18 26

14 Figure 18.1 The Consumer Price Index and the Purchasing Power of the Consumer Dollar (Base Period: = 100) 248 The Consumer Price Index and the Purchasing Power of the Consumer Dollar (Base Period: = 100) 1982 $ Base period $1.01 Consumer price index Purchasing power of the dollar 1984 $ (June) $0.56 $0.54 $0.53 $0.51 $0.49 $0.48 $ Source: The U.S. Bureau of Labor Statistics website, September 30, X_18_ch18_p indd 248 3/6/09 9:42:54 PM

15 Figure 18.2 The Supply of Money 249 The Supply of Money Certain securities and smalldenomination time deposits ($6,323.4 billion) M 1 = $1,389.3 billion M 2 = $7,712.7 billion Currency and demand deposits ($1,389.3 billion) Source: The Federal Reserve website, accessed September 30, X_18_ch18_p indd 249 3/6/09 9:42:54 PM

16 Figure 18.3 Federal Reserve System 250 Federal Reserve System Seattle San Francisco Los Angeles Portland 12 Alaska Salt Lake City Helena 10 Denver El Paso 9 11 San Antonio Minneapolis Omaha Kansas City Oklahoma City Dallas Houston Little Rock Chicago St. Louis 8 7 Memphis Cincinnati Louisville Birmingham New Orleans Cleveland Detroit 4 Pittsburgh 6 Buffalo 5 3 Charlotte 2 Jacksonville Miami Nashville Atlanta 1 Boston New York Philadelphia Baltimore Washington Richmond 12 Boundaries of Federal Reserve districts Boundaries of Federal Reserve branch territories Hawaii Board of Governors of the Federal Reserve System Federal Reserve Bank cities Federal Reserve branch cities Source: 91st Annual Report, 2004, The Federal Reserve Board website, accessed October 4, X_18_ch18_p indd 250 3/6/09 9:42:54 PM

17 Table 18.1 Methods Used by the Federal Reserve System to Control the Money Supply and the Economy 251 Methods Used by the Federal Reserve System to Control the Money Supply and the Economy Method Used Immediate Result End Result Regulating Reserve Requirement 1. Fed increases reserve requirement 2. Fed decreases reserve requirement Regulating the Discount Rate 1. Fed increases the discount rate 2. Fed decreases the discount rate Open-Market Operations 1. Fed sells government securities 2. Fed buys government securities Less money for banks to lend to customers reduction in overall money supply More money for banks to lend to customers increase in overall money supply Less money for banks to lend to customers reduction to overall money supply More money for banks to lend to customers increase in overall money supply Reduction in overall money supply Increase in overall money supply Economic slowdown Increased economic activity Economic slowdown Increased economic activity Economic slowdown Increased economic activity 3768X_18_ch18_p indd 251 3/6/09 9:42:54 PM

18 Table 18.2 The Seven Largest U.S. Banks, Ranked by Total Revenues 252 The Seven Largest U.S. Banks, Ranked by Total Revenues Rank Company Revenues ($ millions) Profits ($ millions) Number of Employees 1 Citigroup $159,229.0 $ 3, ,500 2 Bank of America Corp. 119, , ,718 3 JPMorgan Chase & Co. 116, , ,667 4 Wachovia Corp. 55, , ,890 5 Wells Fargo 53, , ,800 6 U.S. Bancorp 20, , ,277 7 Capital One Financial 18, , ,000 Source: The Fortune website, accessed September 30, X_18_ch18_p indd 252 3/6/09 9:42:54 PM

19 Figure 18.4 Banking Services Can Be Divided into Three Broad Categories: Traditional Services, Electronic Services, and International Services 253 Banking Services Divided into Three Broad Categories TRADITIONAL ELECTRONIC INTERNATIONAL Checking Savings Loans Credit and debit cards Financial advice Payroll service Certified checks Trust services Safe-deposit boxes Automatic teller machines Electronic transfer of funds Automated clearinghouses Point-of-sale terminals Electronic check conversion Letter of credit Banker s acceptance Currency exchange 3768X_18_ch18_p indd 253 3/6/09 9:42:54 PM

20 Figure 18.A Chapter Outline Chapter 18 Outline Understanding Money, Banking, and Credit What Is Money? The Functions of Money Important Characteristics of Money The Supply of Money: M 1 and M 2 The Federal Reserve System Regulation of Reserve Requirements Regulation of the Discount Rate Open-Market Operations Other Fed Responsibilities The American Banking Industry Commercial Banks Other Financial Institutions Careers in the Banking Industry Traditional Services Provided by Financial Institutions Checking Accounts Savings Accounts Short- and Long-Term Loans Credit Card and Debit Card Transactions Innovative Banking Services Recent Changes in the Banking Industry Online Banking and International Banking The FDIC, SAIF, BIF, and NCUA Effective Credit Management How Do You Get Money From a Bank or Lender? The Five Cs of Credit Management Checking Credit Information Sound Collection Procedures X_18_ch18_p indd 254 3/6/09 9:42:54 PM

21 Figure 18.B Class Exercise Class Exercise Assume that you are a bank officer and must approve loan applications. 1. How would you judge an applicant s character? 2. Why is capacity important? 3. What does the term capital mean? 4. How important is collateral for a short-term loan? A long-term loan? 5. What kinds of conditions could affect an applicant s ability to repay a loan? X_18_ch18_p indd 255 3/6/09 9:42:54 PM

22 Figure 18.C Debate Issue Debate Issue 256 Should accounts in financial institutions be insured? YES Deposit insurance encourages people to put money in financial institutions. Depositors should not be held responsible for the poor decisions made by managers of financial institutions. Insurance through the FDIC and NCUA makes economic sense because each financial institution pays only a small insurance premium. NO Deposit insurance gives financial institutions an unfair advantage when compared with other firms that compete for the investor s dollar. Depositors should evaluate a bank, S&L, or credit union just like they would any other investment opportunity. If financial institutions did not have to pay insurance premiums, they could pay higher interest rates to depositors. 3768X_18_ch18_p indd 256 3/6/09 9:42:54 PM

23 Figure 18.D Chapter Quiz Chapter Quiz A is a single standard or yardstick used to assign and compare values of products, services, and resources. a. medium of exchange b. measure of value c. store of value d. measure of economy e. divisibility factor 2. Another term for a dollar amount deposited in a checking account is a a. time deposit. b. demand deposit. c. MI Account. d. barter account. e. medium of exchange account. 3. To increase the supply of money, the Federal Reserve a. increases the discount rate. b. decreases the reserve requirement. c. sells government securities. d. clears more checks. e. prints more money. 4. A bank chartered by the U.S. Comptroller of the Currency is referred to as a(n) a. demand institution. b. investment banking form. c. NCUA bank. d. national bank. e. state bank. 5. The term refers to a borrower s assets or net worth. a. capital b. character c. capacity d. collateral e. conditions 3768X_18_ch18_p indd 257 3/6/09 9:42:54 PM

24 Figure 18.E The Three Functions of Money 258 Functions of Money MEDIUM OF EXCHANGE Accepted as payment for products, services, and resources MEASURE OF VALUE Single standard for assigning and comparing values of products, services, and resources STORE OF VALUE Means of retaining and accumulating wealth 3768X_18_ch18_p indd 258 3/6/09 9:42:54 PM

25 Figure 18.F The Five Characteristics of Money 259 The Five Characteristics of Money Divisibility Portability Stability of value Durability Difficulty of counterfeiting 3768X_18_ch18_p indd 259 3/6/09 9:42:55 PM

26 Figure 18.G A Letter of Credit and Banker s Acceptance 260 The Difference Between a Letter of Credit and a Banker s Acceptance LETTER OF CREDIT A legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time. (Note: With a letter of credit, certain conditions may be specified before payment is made.) BANKER S ACCEPTANCE A written order for a bank to pay a third party a stated amount of money on a specific date. (Note: With a banker s acceptance, no conditions are specified. It is simply an order to pay without strings attached.) 3768X_18_ch18_p indd 260 3/6/09 9:42:55 PM

27 Figure 18.H Suggestions That May Be Helpful When Applying for a Loan 261 Suggestions That May Be Helpful When Applying for a Loan 1. Although it may pay to shop around for lower interest rates, you generally have a better chance of obtaining a loan at a financial institution where you have an account. 2. Obtain a loan application and complete it at home. 3. Be prepared to describe how you will use the money and how the loan will be repaid. 4. Prepare for the interview with the loan officer. 5. If your loan is rejected, try to analyze what went wrong. 3768X_18_ch18_p indd 261 3/6/09 9:42:55 PM

28 Figure 18.I The Five Cs of Credit Management The Five Cs of Credit Management 262 CHARACTER The borrower s attitude toward his or her credit obligations CAPACITY The borrower s financial ability to meet credit obligations CAPITAL As used here, the borrower s assets or net worth COLLATERAL Real estate or property that can be pledged to secure a loan CONDITIONS General economic conditions that can affect a borrower s ability to repay a loan or other credit obligation 3768X_18_ch18_p indd 262 3/6/09 9:42:55 PM