Chapter 12

Chapter 12Chapter 12

Money and Financial InstitutionsMoney and Financial Institutions

Money and BankingMoney and Banking

The Purpose of Money-The Purpose of Money-

Enables people and businesses to buy and sellgoods and services easily around the world.Enables people and businesses to buy and sellgoods and services easily around the world.

Money is a standard of value and a means ofexchange or payment. Money can be anything thatpeople accept as a standard of payment. Ex.Shells, stones, corn.Money is a standard of value and a means ofexchange or payment. Money can be anything thatpeople accept as a standard of payment. Ex.Shells, stones, corn.

Modern society uses coins, currency, checks, anddebit cards.Modern society uses coins, currency, checks, anddebit cards.

Functions of MoneyFunctions of Money

Barter-to trade goods or services directlyfor other goods or services. Barteringcan be difficult, trying to find someonewho wants what you have and they havewhat you want. Ex. Tradio.Barter-to trade goods or services directlyfor other goods or services. Barteringcan be difficult, trying to find someonewho wants what you have and they havewhat you want. Ex. Tradio.

3 Basic Functions ofMoney:3 Basic Functions ofMoney:

It is a medium of exchange (a measure ofvalue or wealth)It is a medium of exchange (a measure ofvalue or wealth)

It functions as a standard of value (a wayto measure the value of something)It functions as a standard of value (a wayto measure the value of something)

It functions as a store of value (it holds itvalue over time and can be saved)It functions as a store of value (it holds itvalue over time and can be saved)

Characteristics of MoneyCharacteristics of Money

Must be stable in value.Must be stable in value.

Must be scarce-it can’t be overplentiful.Must be scarce-it can’t be overplentiful.

Must be accepted-people have to bewilling to take it in exchange.Must be accepted-people have to bewilling to take it in exchange.

Should be divisible into parts.Should be divisible into parts.

Must be portable and durable.Must be portable and durable.

Must be hard to counterfeit or copy.Must be hard to counterfeit or copy.

The Functions of BanksThe Functions of Banks

Financial Institutions (Banks) are firmsthat manages money.Financial Institutions (Banks) are firmsthat manages money.

Storing MoneyStoring Money

Transferring MoneyTransferring Money

Lending MoneyLending Money

Function of Storing MoneyFunction of Storing Money

Service banks provide storing money.Service banks provide storing money.

Bank account is a record of the account ofmoney a customer has deposited into orwithdrawn from a bank.Bank account is a record of the account ofmoney a customer has deposited into orwithdrawn from a bank.

Deposit-money put into an account.Deposit-money put into an account.

Withdrawal-money taken out of an account.Withdrawal-money taken out of an account.

Keeping money in a bank helps prevent it frombeing stolen or lost.Keeping money in a bank helps prevent it frombeing stolen or lost.

2 Types of Bank Accounts2 Types of Bank Accounts

Checking Accounts-used for storingmoney in a short term. Banks charge afee.Checking Accounts-used for storingmoney in a short term. Banks charge afee.

Savings Accounts-used for storingmoney over a longer period of time.Money earns interest.Savings Accounts-used for storingmoney over a longer period of time.Money earns interest.

Interest is the rate that the bank payscustomers for keeping their money.Interest is the rate that the bank payscustomers for keeping their money.

Function of TransferringMoneyFunction of TransferringMoney

Banks use checks and electronic fund transfersto move money.Banks use checks and electronic fund transfersto move money.

EFT (Electronic Funds Transfer) allow moneyto be transferred from one bank to anotherthrough an network of computers.EFT (Electronic Funds Transfer) allow moneyto be transferred from one bank to anotherthrough an network of computers.

Direct Deposit is the electronic transfer of apayment directly from the payer’s bank accountto that of the party being paid. (Payroll)Direct Deposit is the electronic transfer of apayment directly from the payer’s bank accountto that of the party being paid. (Payroll)

Function of LendingMoneyFunction of LendingMoney

Lending money is the primary way for banks togenerate profit. Money that you deposit makesit possible for a bank to lend money to others.Lending money is the primary way for banks togenerate profit. Money that you deposit makesit possible for a bank to lend money to others.

Banks pay interest to those who put money inan account with a bank, customers also payinterest on borrowing money from a bank.Banks then use the interest they earned to payinterest on customer’s savings accounts.Banks pay interest to those who put money inan account with a bank, customers also payinterest on borrowing money from a bank.Banks then use the interest they earned to payinterest on customer’s savings accounts.

Collateral is property or goods pledged by aborrower to use as security against a loan if itis not repaid.Collateral is property or goods pledged by aborrower to use as security against a loan if itis not repaid.

4 Main Types of Loans4 Main Types of Loans

Mortgage-real estateMortgage-real estate

Commercial-businesses to buy suppliesand equipmentCommercial-businesses to buy suppliesand equipment

Individual-individual for personal items,car, home repairs, or vacationIndividual-individual for personal items,car, home repairs, or vacation

Line of Credit-banks lends an amount ofmoney to be used at any time for anypurposeLine of Credit-banks lends an amount ofmoney to be used at any time for anypurpose

Other Financial ServicesOther Financial Services

Banks not only store money, they alsostore valuable items.Banks not only store money, they alsostore valuable items.

Safe-deposit boxes are secure boxes in abank’s vault used for the safe storage ofa customer’s valuables.Safe-deposit boxes are secure boxes in abank’s vault used for the safe storage ofa customer’s valuables.

Debit CardsDebit Cards

Credit CardsCredit Cards

Financial InstitutionsFinancial Institutions

To open a federal or a state bank in theUnited States, the owners have to meetspecial requirements.To open a federal or a state bank in theUnited States, the owners have to meetspecial requirements.

The owners must also apply for a charterfrom the government.The owners must also apply for a charterfrom the government.

The owners need to prove they haveenough capital to start a bank.The owners need to prove they haveenough capital to start a bank.

3 Types of Banks in theUS3 Types of Banks in theUS

Commercial BanksCommercial Banks

Savings and Loan AssociationsSavings and Loan Associations

Credit UnionsCredit Unions

Commercial BanksCommercial Banks

Offer the entire range of bankingservices.Offer the entire range of bankingservices.

Full service banks.Full service banks.

Serve individuals and businesses.Serve individuals and businesses.

To make a profit, they charge moreinterest on money that they lend than theinterest they pay on savings accounts.To make a profit, they charge moreinterest on money that they lend than theinterest they pay on savings accounts.

Savings and LoansAssociationsSavings and LoansAssociations

Hold customers funds in interest-bearingaccounts and invest mainly in mortgageloans.Hold customers funds in interest-bearingaccounts and invest mainly in mortgageloans.

In the late 1980’s, about 20 percent ofthe savings and loans associations faileddue to new regulations.In the late 1980’s, about 20 percent ofthe savings and loans associations faileddue to new regulations.

Credit UnionsCredit Unions

Not-for-profit banks set up byorganizations for their customers ormembers to use.Not-for-profit banks set up byorganizations for their customers ormembers to use.

Offer members credit cards, checkingaccounts, low-interest loans, and highinterest savings accounts.Offer members credit cards, checkingaccounts, low-interest loans, and highinterest savings accounts.

Some pay interest on checking accounts.Some pay interest on checking accounts.

Other FinancialInstitutionsOther FinancialInstitutions

Mortgage CompaniesMortgage Companies

Finance Companies-short term loans tobusinesses and consumers at higherinterest ratesFinance Companies-short term loans tobusinesses and consumers at higherinterest rates

Insurance Companies-provide protectionagainst problems such as fire and theft,and loans to businesses and consumersInsurance Companies-provide protectionagainst problems such as fire and theft,and loans to businesses and consumers

Brokerage Firms-sell stocks and bondsBrokerage Firms-sell stocks and bonds

The Federal ReserveSystemThe Federal ReserveSystem

“The Fed”-Central Bank of the US“The Fed”-Central Bank of the US

The bankers bank.The bankers bank.

Congress established in 1913.Congress established in 1913.

Based in Washington DCBased in Washington DC

It monitors the money supply.It monitors the money supply.

12 Federal Reserve Districts.12 Federal Reserve Districts.

25 branch banks.25 branch banks.

5,000 member banks.5,000 member banks.

Ran by the Board of GovernorsRan by the Board of Governors

6 Functions6 Functions

6 Functions of the FederalReserve6 Functions of the FederalReserve

1. Clearing Checks1. Clearing Checks

2. Acting as the Federal Government’sFiscal Agent.2. Acting as the Federal Government’sFiscal Agent.

3. Supervising Member Banks3. Supervising Member Banks

4. Regulating the Money Supply4. Regulating the Money Supply

5. Setting Reserve Requirements-fundsset aside for emergencies5. Setting Reserve Requirements-fundsset aside for emergencies

6. Supplying Paper Currency6. Supplying Paper Currency

Vocabulary:Vocabulary:

MoneyMoney

Monetary SystemMonetary System

Financial InstitutionFinancial Institution

Bank AccountBank Account

DepositDeposit

WithdrawalWithdrawal

InterestInterest

Electronic Fund Transfer (EFT)Electronic Fund Transfer (EFT)

Direct DepositDirect Deposit

CollateralCollateral

MortgageMortgage

Safe-Deposit BoxSafe-Deposit Box

Commercial BanksCommercial Banks

Savings and Loan AssociationsSavings and Loan Associations

Credit UnionsCredit Unions

Mortgage CompaniesMortgage Companies

Finance CompaniesFinance Companies

Insurance CompaniesInsurance Companies

Brokerage FirmsBrokerage Firms

Federal Reserve SystemFederal Reserve System

ReservesReserves