BUS Chapter 15: Money and the Financial System

Compare and contrast commercial banks, savings and loan associations, credit unions, and mutual savings banks.

Commercial banks are financial institutions that take and hold deposits in accounts for and make loans to individuals and businesses. Savings and loan associations are financial institutions that primarily specialize in offering savings accounts and mortgage loans. Credit unions are financial institutions owned and controlled by their depositors. Mutual savings banks are similar to S&Ls expect that they are owned by their depositors.

Investigate the challenges ahead for the banking industry.

Future changes in financial regulations are likely to result in fewer but larger banks and other financial institutions.

Distinguish among nonbanking institutions such as insurance companies, pension funds, mutual funds, and finance companies.

Insurance companies are businesses that protect their clients against financial losses due to certain circumstances, in exchange for a fee. Pension funds are investments set aside by organizations or individuals to meet retirement needs. Mutual funds pool investors' money and invest in large numbers of different types of securities. Brokerage firms buy and sell stocks and bonds for investors. Finance companies make short-term loans at higher interest rates than do banks.

Define money, its functions, and its characteristics.

Money is anything generally accepted as a means of payment for goods and services. Money serves as a medium of exchange, a measure of value, and a store of wealth. To serve effectively in these functions, money must be acceptable, divisible, portable, durable, stable in value, and difficult to counterfeit.

Describe various types of money.

Money may take the form of currency, checking accounts, or other accounts. Checking accounts are funds left in an account in a financial institution that can be withdrawn (usually by writing a check) without advance notice. Other types of accounts include savings accounts (funds left in an interest-earning account that usually cannot be withdrawn without advance notice), money market accounts (an interest-bearing checking account that is invested in short-term debt instruments), certificates of deposit (deposits left in an institution for a specified period of time at a specified interest rate), credit cards (access to a preapproved line of credit granted by a bank or company), and debit cards (means of instant cash transfers between customer and merchant accounts), as well as traveler's checks, money orders, and cashier's checks.

Specify now the Federal Reserve Board manages the money supply and regulates the American banking system.

The Federal Reserve Board regulates the U.S. financial system. The Fed manages the money supply by buying and selling government securities, raising or lowering the discount rate (the rate of interest at which banks may borrow cash reserves from the Fed), raising or lowering bank reserve requirements (the percentage of funds on deposit at a bank that must be held to cover expected depositor withdrawals), and adjusting down payment and repayment terms for credit purchases. It also regulates banking practices, processes checks, and oversees federal depository insurance for institutions.

debit card

a card that looks like a credit card but works like a check; using it results in a direct, immediate, electronic payment from the cardholder's checking account to a merchant or third party.

credit union

a financial institution owned and controlled by its depositors, who usually have a common employer, profession, trade group, or religion.

automated clearinghouses (ACHs)

a system that permits payments such as deposits or withdrawals to be made to and from a bank account by magnetic computer tape.

money market accounts

accounts that offer higher interest rates than standard bank rates but with greater restrictions.

savings accounts

accounts with funds that usually cannot be withdrawn without advance notice; also known as time deposits.

National Credit Union Administration (NCUA)

an agency that regulates and charters credit unions and insures their deposits through its National Credit Union Insurance Fund.

Federal Reserve Board

an independent agency of the federal government established in 1913 to regulate the nation's banking and financial industry.

Federal Deposit Insurance Corporation (FDIC)

an insurance fund established in 1933 that insures individual bank accounts.

mutual fund

an investment company that pools individual investor dollars and invests them in large numbers of well-diversified securities.

electronic funds transfer (EFT)

any movement of funds by means of an electronic terminal, telephone, computer, or magnetic tape.

money

anything generally accepted in exchange for goods and services.

finance companies

businesses that offer short-term loans at substantially higher rates of interest than banks.

insurance companies

businesses that protect their clients against financial losses from certain specified risks (death, accident, and theft, for example)

reward cards

credit cards made available by sores that carry a benefit to the user.

open market operations

decisions to buy or sell U.S. Treasury bills (short-term debt issued by the U.S. government ) and other investments in the open market.

mutual savings banks

financial institutions that are similar to savings and loan associations but, like credit unions, are owned by their depositors.

savings and loan associations (S&Ls)

financial institutions that primarily offer savings accounts and make long-term loans for residential mortgages; also called "thrifts"

brokerage firms

firms that buy and sell stocks, bonds, and other securities for their customers and provide other financial services.

pension funds

managed investment pools set aside by individuals, corporations, unions, and some nonprofit organizations to provide retirement income for members.

monetary policy

means by which the Fed controls the amount of money available in the economy.

credit cards

means of access to preapproved lines of credit granted by a bank or finance company

checking account

money stored in an account at a bank or other financial institution that can be withdrawn without advance notice; also called a demand deposit.

certificates of deposit (CDs)

savings accounts that guarantee a depositor a set interest rate over a specified interval as long as the funds are not withdrawn before the end of the period-six months or one year, for example.

credit controls

the authority to establish and enforce credit rules for financial institutions and some private investors.

commercial banks

the largest and oldest of all financial institutions, relying mainly on checking and savings accounts as sources of funds for loans to businesses and individuals.

automated teller machine (ATM)

the most familiar form of electronic banking , which dispenses cash, accepts deposits, and allows balance inquiries and cash transfers from one account to another.

reserve requirement

the percentage of deposits that banking institutions must hold in reserve.

discount rate

the rate of interest the Fed charges to loan money to any banking institution to meet reserve requirements.

finance

the study of how money is managed by individuals, companies, and governments.

investment banker

underwrites new issues of securities for corporations, states, and municipalities.