Chapters One and Two Banking Systems
central banks
a government bank that manages, regulates, and protects the money supply and the banks themselves
Federal Reserve Act
in 1913 created a system to stabilize the banking system
liability
in financial terms, a cash obligation. for banks deposits are liabilities
margin
stocks bought for a fraction of their price
return on assets (ROA)
the ratio of net income to total assets. net income/total assets=ROA
commercial bank
a financial institution that is authorized by law to receive money from businesses and individuals and lend money to them. are owned by stockholders who expect a profit on their investments
equity
is total asset minus total liabilities
gold standard
a monetary system in which paper money and coins are equal to the value of a certain amount of gold
inflation
a rise in general prices, including a rise in the supply of money and incomes. money has less purchasing power
the purpose of the national Banking Act of 1864
it established the office of the Comptroller of the Currency to isuue charters to national banks
return on equity (ROE)
measures how well a bnk is using its stockholders equity. net income/total equity=ROE
what three factors have changed the modern banking industry
mergers, technology and competition
deregulation
a series of laws passed in the 1980's lossened the restrictions on bankers and let them compete in the open market like other financial institions
what brought about the creation of the Federal Rserve in 1913
a severe economic panic in 1907
currency
all media of exchange circulating in a country
money supply
all the money available in the United States economy
bank
an institution for receiving, keeping, and lending money
credit cards
another form of lending
liquid asset
anything that can readily be exchanged. like cash
medium of exchange
anything that is used to determine value during the exchage of goods and services; buying food with money
money
anything that serves as a medium of exchange, a unit of account, and a store of value
nondepository intermediaries: insurance co. trust co and pension funds, brokerage houses, loan co, payday loans, currency exchanges
are banks that do not take or hold deposits. they earned their money selling specific services or policies
depository intermediaries: commercial banks, saving & loan associations, mutual savings banks, and credit unions
are banks that get funds from the public and use them to finance their business.
why is an insurance company considered a financial intermediary
because they safeguard, exchange transfer money, and can be used to secure a loan
difference between credit unions and other depositor owned financial institions
customers must be members and are not-for-profit institutions
what is the primary difference between depositary institutions and most nondepository institutions
depository are regulated and nondepository are not
Great Depression
the severe economic decline that began in 1929 and lasted for more than a decade
bank run
widespread panic in which great numbers of people try to redeem their paper money
six ways banks safeguard your money
recordkeeping, identification, enforcement, transfer security, sound business practices, federal or state bank examiners
wholesale bank
specialize only in business banking
creditor
person or institution to whom money is owed
retail bank
A bank that deals directly with individual customers and small businesses. It doesn't have big corporations or other banks as customers. Ex. savings and loan, credit unions.
national bank
a bank chartered, or licensed, by the national government
financial intermediary
a bank for safeguarding, exchanging or lending of money
asset
a bank's assets are its loans and investments
stagflation
a combination of a stagnant economy, high inflation and high unemployment
creditworthy
a customer that has a good credit reating, sufficient collateral for loans and a ongoing income source sufficient to make timely loan payments
recession
a decline in total production lasting a minimum of two consecutive quarters (at least six months
central bank
bank that can lend to other banks in times of need
how does lending stimulate the economy
banks make appropriate loans, the consumers buy homes, cars, etc., which create economic activity
depositor
people who put money into banks
greenback
paper currency issued during the Civil War
four functions that define a bank
safeguarding, exchanging, or lending of money
three sources of bank income
service fees, ATM fees, credit card interest
niche market
smaller banks that target particular consumers in defined locations or particular services
liquidity
the ability to be used as, or directly converted to, cash
spread
the difference between what a bank pays in interest and what it receives in interest. net interest income
FDIC Federal Deposit Insurance Corporation
the government agency that insures customers' deposits if a bank fails
guaranteeing the money
the government guarantees the value of the money and the banks back up the guarantee
Federal Reserve System
the nation's central banking system
Federal Reserve note
the national currency we use today in the United States
interest
the price paid for the use of borrowed money
what changes have deregulation and compettition brought to modern banking
they have become more customer oriented and are in new areas of financial services (credit cards, innovative lending and technology related services
why did the first two US National banks fail
they lacked political support
reserve liquidity
ways to convert reserves readily to cash
profit
what is left of revenue after costs are deducted
identity theft
when someone achieves financial gain by using another person's personal informantion to unlawfully assume the identity of the other person.