Chapter 12

1. Chapter 12 Money and Financial Institutions

2. Money and Banking • The Purpose of Money- • Enables people and businesses to buy and sell goods and services easily around the world. • Money is a standard of value and a means of exchange or payment. Money can be anything that people accept as a standard of payment. Ex. Shells, stones, corn. • Modern society uses coins, currency, checks, and debit cards.

3. Functions of Money • Barter-to trade goods or services directly for other goods or services. Bartering can be difficult, trying to find someone who wants what you have and they have what you want. Ex. Tradio.

4. 3 Basic Functions of Money: • It is a medium of exchange (a measure of value or wealth) • It functions as a standard of value (a way to measure the value of something) • It functions as a store of value (it holds it value over time and can be saved)

5. Characteristics of Money • Must be stable in value. • Must be scarce-it can’t be overplentiful. • Must be accepted-people have to be willing to take it in exchange. • Should be divisible into parts. • Must be portable and durable. • Must be hard to counterfeit or copy.

6. The Functions of Banks • Financial Institutions (Banks) are firms that manages money. • Storing Money • Transferring Money • Lending Money

7. Function of Storing Money • Service banks provide storing money. • Bank account is a record of the account of money a customer has deposited into or withdrawn from a bank. • Deposit-money put into an account. • Withdrawal-money taken out of an account. • Keeping money in a bank helps prevent it from being stolen or lost.

8. 2 Types of Bank Accounts • Checking Accounts-used for storing money in a short term. Banks charge a fee. • Savings Accounts-used for storing money over a longer period of time. Money earns interest. • Interest is the rate that the bank pays customers for keeping their money.

9. Function of Transferring Money • Banks use checks and electronic fund transfers to move money. • EFT (Electronic Funds Transfer) allow money to be transferred from one bank to another through an network of computers. • Direct Deposit is the electronic transfer of a payment directly from the payer’s bank account to that of the party being paid. (Payroll)

10. Function of Lending Money • Lending money is the primary way for banks to generate profit. Money that you deposit makes it possible for a bank to lend money to others. • Banks pay interest to those who put money in an account with a bank, customers also pay interest on borrowing money from a bank. Banks then use the interest they earned to pay interest on customer’s savings accounts. • Collateral is property or goods pledged by a borrower to use as security against a loan if it is not repaid.

11. 4 Main Types of Loans • Mortgage-real estate • Commercial-businesses to buy supplies and equipment • Individual-individual for personal items, car, home repairs, or vacation • Line of Credit-banks lends an amount of money to be used at any time for any purpose

12. Other Financial Services • Banks not only store money, they also store valuable items. • Safe-deposit boxes are secure boxes in a bank’s vault used for the safe storage of a customer’s valuables. • Debit Cards • Credit Cards

13. Financial Institutions • To open a federal or a state bank in the United States, the owners have to meet special requirements. • The owners must also apply for a charter from the government. • The owners need to prove they have enough capital to start a bank.

14. 3 Types of Banks in the US • Commercial Banks • Savings and Loan Associations • Credit Unions

15. Commercial Banks • Offer the entire range of banking services. • Full service banks. • Serve individuals and businesses. • To make a profit, they charge more interest on money that they lend than the interest they pay on savings accounts.

16. Savings and Loans Associations • Hold customers funds in interest-bearing accounts and invest mainly in mortgage loans. • In the late 1980’s, about 20 percent of the savings and loans associations failed due to new regulations.

17. Credit Unions • Not-for-profit banks set up by organizations for their customers or members to use. • Offer members credit cards, checking accounts, low-interest loans, and high interest savings accounts. • Some pay interest on checking accounts.

18. Other Financial Institutions • Mortgage Companies • Finance Companies-short term loans to businesses and consumers at higher interest rates • Insurance Companies-provide protection against problems such as fire and theft, and loans to businesses and consumers • Brokerage Firms-sell stocks and bonds

19. The Federal Reserve System • “The Fed”-Central Bank of the US • The bankers bank. • Congress established in 1913. • Based in Washington DC • It monitors the money supply. • 12 Federal Reserve Districts. • 25 branch banks. • 5,000 member banks. • Ran by the Board of Governors • 6 Functions

20. 6 Functions of the Federal Reserve • 1. Clearing Checks • 2. Acting as the Federal Government’s Fiscal Agent. • 3. Supervising Member Banks • 4. Regulating the Money Supply • 5. Setting Reserve Requirements-funds set aside for emergencies • 6. Supplying Paper Currency

21. Vocabulary: • Money • Monetary System • Financial Institution • Bank Account • Deposit • Withdrawal • Interest • Electronic Fund Transfer (EFT) • Direct Deposit • Collateral • Mortgage • Safe-Deposit Box • Commercial Banks • Savings and Loan Associations • Credit Unions • Mortgage Companies • Finance Companies • Insurance Companies • Brokerage Firms • Federal Reserve System • Reserves