Chapter 12Money and Financial Institutions

Business Principles Fall 2009

Something to Think About…

• Think about how bartering, or trading goods and services, might work in your life.

Essential Questions

• What are some ways you currently use a bank?

• How might your dealings with a bank expand or change in the future?

• Why do you think it is important to use a bank?

Objectives

• Describe the functions and characteristics of money.

• Discuss three main functions of a bank.

• Compare and contrast three types of banks that are found in our economy.

• Explain the major functions of the Federal Reserve System in the U.S. Economy.

The Purpose of Money

• Money allows people and businesses to buy and sell goods around the world.

• Money is a standard of value and a means of exchange or payment.

• It can be anything people will accept as a payment.

The Purpose of Money

• Today we use coins, currency, checks, and debits cards.

• This is our monetary system.

• Goods and services are directly exchanged using money.

Functions of Money

• You want to go buy your favorite product, but you don’t have any money to buy it.

• What would you have to do in order to get that favorite product?

Functions of Money

• Money has three basic functions:– Medium of exchange: anything generally

accepted as a measure of value and of wealth

– Standard of Value: a way to measure the weight, amount, size, or value of something

– Store of Value: it holds its value over time and can be stored or saved

Characteristics of Money

• Must be stable in value

• Must be scarce

• Must be accepted

• Should be divisible into parts

• Has to be portable and durable

• Must be hard to counterfeit

The Functions of Banks

• Financial Institution is a firm that manages money.

• Banks are the main type of financial institution

• They offer a variety of financial services

Storing Money

• Storing money means to place or leave it for preservation or later use.

• Bank account is used to keep a record of the amount of money that has been deposited or withdrawn from a bank

Bank Accounts

• Checking Account– Short term storage– Banks charge a fee

• Saving Account– Long term storage– It earns more interest

Transferring Money

• Banks use checks and electronic funds transfers to move money.

• Checks transfer money from one party to another

• EFT allows money to transfer from one bank to another through a network– Direct Deposit

Lending Money

• The money you deposit in a bank make it possible for the bank to lend to other customers

• Customers must pay interest on the money they borrow from banks

• Most banks require some form of collateral

Types of Loans

• Mortgage Loan– Used to buy real estate

• Commercial Loan– Made to businesses

• Individual Loan– Made to individuals

• Line of Credit– Lend money to be used at any time

Other Financial Services

• Many banks provide advice on managing and investing money.

• You can also store valuable items, jewelry and birth certificates, in a safe-deposit box.

• Banks offer debit and credit cards

• They also have a trust department that manages money

Exit Ticket

• What is a major advantage of using money over bartering in buying goods and services?

• What are the characteristics that money must have?

• What are the four types of loans that a bank makes?

• Why do you think it is important to use a bank?

Financial Institutions

• Banks operate on state, national, and international levels

• There are strict rules to start a bank

• The owner must apply for a charter from the government

Financial Institutions

• The three main types of banks are:

– Commercial banks– Savings and loan associations– Credit unions

Commercial Banks

• These makeup the majority of banks in the United States.

• Offer wide range of banking services, checking, savings, loans, and financial advice

• Called full-service banks

Commercial Banks

• Serve individual and businesses

• They charge more interest on money they lend than the money they pay on savings accounts to earn a PROFIT.

Savings and Loan Associations

• Financial institutions that hold customers’ funds in interest-bearing accounts and invest mainly in mortgage loans

• Originally, their purpose was to encourage people to save money and make it easier to buy a home

Savings and Loan Associations

• In the 1980s, about 20% of savings and loan associations failed

• New regulations were passed allowing them to charge higher interest rates and offer more services.

Credit Unions

• Not-for-profit banks set up by organizations for their customers to use.

• Credit unions offer credit cards, checking accounts, low-interest loans, and high interest savings accounts

Other Financial Institutions• Mortgage Companies

– Provide loans for buying a home or business

• Finance Companies– Short-term loans to businesses and consumers

• Insurance Companies– Provide protection against problems and also offer loans to

businesses

• Brokerage Firms– Sell stock and bonds and also offer a wide range of financial

services.

The Federal Reserve System

• Central Bank of the United States

• It is the banker’s bank

• They monitor the money supply

• There are 12 Federal Reserve Districts, 25 Branch Banks, and 5,000 member banks

The Federal Reserve System

• It’s mission is to:– Provide the United States with a safe, flexible,

and stable monetary and financial system

• Run by a board of directors

The Federal Reserve System

• It has six functions:– Clearing Checks– Acting as the Federal Government’s Fiscal

Agent– Supervising Member Banks– Regulating the Money Supply– Setting Reserve Requirements– Supplying Paper Currency

Assignment

• Name the headquarters of the 12 Federal Reserve district banks across the United States

• Find an example of each in the United States:

• Commercial Bank, Savings and Loan Association, Credit Union, Mortgage Companies, Finance Companies, Insurance Companies, and Brokerage Firms