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.