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Chapter

20 Understanding Money and Financial

Institutions

20-1

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The Federal Reserve

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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

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Regional Reserve Banks

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The Federal Reserve

The Banker’s Bank• Holds the deposits of commercial banks and

makes loans to banks that need additional funds

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The Money Supply

Currency

Demand

Deposits

= TotalM1

+Time

Deposits & Money Market Accts.

Total M2+ =

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The Money Supply Why Do We Care?

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Control of the Money Supply

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Fed Regulates Money Supply

Increase / Reduce Money Supply

I. Reserve RequirementII. Open Market OperationsIII. Discount Rate

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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

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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

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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

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Fed Regulates Money Supply

Increase Money SupplyReduce Reserve RequirementBuy Government BondsDecrease Discount Rate

Expand

Reduce Money SupplyIncrease Reserve RequirementSell Government BondsIncrease Discount Rate

Slow Down

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American Banking System

– Commercial Banks– Savings and Loan

Associations/Thrifts– Credit Unions

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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

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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

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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

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American Banking System

• Non-Depository– Life Insurance Companies– Pension Funds– Brokerage Firms– Finance Companies

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How the Government

Protects Your Funds

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How the Government Protects Your Funds

- FDIC - $250,000/Account

- SAIF(FSLIC)- $250,000/Account

- NCUA- $250,000/Account

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International Banking

Letter of Credit – Promise to pay seller

given amount if certain conditions met

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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.