macroeconomic mcgrowhill macro ch 14 19e use this one

14
Money, Banking, and Financial
Institutions

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter Objectives
•
•
•
•

The functions of money
Components of the money supply
What “backs” the money supply
The Federal Reserve and the
U.S. banking system
• The functions and responsibilities
of the Federal Reserve
31-2


Functions of Money
• Medium of exchange
• Used to buy/sell goods
• Unit of account
• Goods valued in dollars
• Store of value

• Hold some wealth in money form
• Money is liquid

LO1

14-3


Money Definition M1

• M1
• Currency
• Checkable deposits
• Institutions offering checkable deposits
• Commercial banks
• Savings and loan associations
• Mutual savings banks
• Credit unions
LO1

14-4


Money Definition M2

• M2
• M1 plus near-monies
• Savings deposits including money
market deposit accounts (MMDA)

• Small-denominated time deposits
• Money market mutual funds
(MMMF)
LO1

14-5


Money Definitions
January 2010

Source: Federal Reserve System
LO1

14-6


What “Backs” the Money Supply?

• Guaranteed by government’s ability to
•
•

LO2

keep value stable
Money as debt
Why is money valuable?
• Acceptability
• Legal tender

• Relative scarcity
14-7


What “Backs” the Money Supply?

• Prices affect purchasing power of
•
•

LO2

money
Hyperinflation renders money
unacceptable
Stabilizing money’s purchasing power
• Intelligent management of the money
supply – monetary policy
• Appropriate fiscal policy
14-8


Federal Reserve Video


Federal Reserve - Banking System

• Historical background
• Board of Governors
• 12 Federal Reserve Banks

• Serve as the central bank
• Quasi-public banks
• Banker’s bank

LO3

14-10


Federal Reserve – Banking System
Board of Governors
Federal Open Market Committee

12 Federal Reserve Banks

Commercial Banks

Thrift Institutions
(Savings and Loan Associations,
Mutual Savings Banks,
Credit Unions)

The Public
(Households and
Businesses)

LO3

14-11

Federal Reserve – Banking System
The 12 Federal Reserve Banks

LO3

14-12


Federal Reserve – Banking System

• Federal Open Market Committee
• Aids Board of Governors in
•

LO3

setting monetary policy
• Conducts open market operations
Commercial banks and thrifts
• 6,800 commercial banks
• 8,700 thrifts
14-13


Federal Reserve Functions

• Issue currency
• Set reserve requirements
• Lend money to banks

• Collect checks
• Act as a fiscal agent for U.S.
•
•
LO4

government
Supervise banks
Control the money supply
14-14


Federal Reserve Independence

• Established by Congress as an
•
•

LO4

independent agency
Protects the Fed from political
pressures
Enables the Fed to take actions to
increase interest rates in order to
stem inflation as needed
14-15


Financial Institutions

World’s 12 Largest Financial Institutions, 2009
0

Assets (Trillions of U.S. Dollars)
1.5
2.5
3.5

Royal Bank of Scotland (UK)
Barclays (UK)
Deutsche Bank (Germany)
BNP Paribas (France)
HSBC Holdings (UK)
JPMorgan Chase (US)
Credit Agricole (France)
Citigroup (US)
Mitsubishi UFJ (Japan)
UBS (Switzerland)
ING Group (Netherlands)
Bank of America (US)
Source: Forbes Global 2000,
LO4

14-16


The Global Greenback
• U.S. currency circulating abroad
– Russia $80 billion
– Argentina $50 billion

– $450 billion total
– 60% of total US currency

•
•
•
•

U.S. profits from dollars leaving
Black markets and illegal activities
Dollar offers stable purchasing power
Exchange rate risk
31-17


The Financial Crisis of 2007 and
2008

• Mortgage Default Crisis
• Many causes
• Government programs that
encouraged home ownership
• Declining real estate values
• Bad incentives provided by
mortgage-backed bonds
LO5

14-18

The Financial Crisis of 2007 and
2008

• Securitization- the process of slicing
•
•

LO5

up and bundling groups of loans into
new securities
As loans defaulted, the system
collapsed
“Underwater” homeowners
abandoned homes and mortgages

14-19


The Financial Crisis of 2007 and
2008

• Failures and near-failures of financial

•

LO5

firms
• Countrywide: second largest lender

• Washington Mutual: largest lender
• Wachovia
Other firms came close

14-20


The Financial Crisis of 2007 and
2008
• Troubled Asset Relief Program
(TARP)
• Allocated $700 billion to make
emergency loans
• Saved several institutions from failure

LO6

14-21


The Financial Crisis of 2007 and
2008
• The Fed’s lender-of-last-resort
activities
• Primary Dealer Credit Facility
• Term Securities Lending Facility
• Asset-Backed Commercial Paper
Money Market Mutual Fund
Liquidity Facility
• Commercial Paper Funding Facility

LO6

14-22


The Financial Crisis of 2007 and
2008
• Money Market Investor Funding
Facility
• Term Asset-Backed Securities Loan
Facility
• Interest Payments on Reserves

LO6

14-23


Post-Crisis U.S. Financial Services

• Major Categories of Financial
Institutions

• Commercial Banks
• Thrifts
• Insurance Companies
• Mutual Fund Companies
• Pension Funds
• Securities Firms
• Investment Banks

LO7

14-24


Major Categories of Financial
Institutions

LO7

Institution

Description

Examples

Commercial Banks

State and national banks that provide checking and savings
accounts and make loans

JP Morgan Chase, Bank
of America, Citibank,
Wells Fargo

Thrifts

Savings and loan associations, mutual savings banks, credit
unions that offer checking and savings accounts and make
loans

Charter One, New York
Community Bank

Insurance
Companies

Firms that offer policies through which individuals pay
premiums to insure against lose

Prudential, New York
Life, Northwestern
Mutual, Hartford

Mutual Fund
Companies

Firms that pool customer deposits to purchase stocks or
bonds

Fidelity, Vanguard,
Putnam, Janus, T Rowe
Price

Pension Funds

Institutions that collect savings from workers throughout their
working years and then invest the funds to pay retirement
benefits

TIAA-CREF, Teamsters’
Union, CalPERs

Securities Firms

Firms that offer security advice and buy and sell stocks and
bonds for clients

Merrill Lynch, Smith
Barney, Charles Schwab

Investment Banks

Firms that help corporations and governments raise money
by selling stocks and bonds

Goldman Sachs, Morgan
Stanley, Deutsche Bank,
Nomura Securities

14-25