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Lecture Economics of social issues - Chapter 12: Money, banking, and the financial system: Old problems with new twists

Banks play an important role in our modern economy as financial intermediaries which bring together savers and borrowers. By collecting deposits and making loans, commercial banks and other financial institutions keep the economy operating by providing a wide range of services. This chapter provides knowledge of money, banking, and the financial system. | Chapter 12 Money, Banking, and the Financial System: Old Problems with New Twists Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin What Are Banks? Commercial banks Commercial banks as financial intermediaries 12- Savers Investors Commercial Banks Direct investment Bank deposits Bank loans Investment Banks Stocks Partial ownership Dividends Capital Gains Bonds Bonds as debt Primary v secondary financial markets Liquidity 12- Insurance Companies Insurance policies Insurance premiums 12- 12- What Is Money? Money is anything generally acceptable in payment for goods and services and in payment for debt 12- Functions of Money Medium of Exchange Measure of Account Store of Value M1 Currency 848.8 52.8% Traveler’s Checks 5.3 0.3% Demand Deposits 407.6 25.3% Other Checkable Deposits 346.1 21.5% Total 1607.8 100.0% April 2009 0 12- M2 M1 1607.8 19.2% Small-denomination time deposits 1328.3 15.9% Savings Deposits 4403.3 52.7% Money market mutual funds 1019.0 12.2% Total 8358.3 100.0% April 2009 0 12- 12- Growth Rate in M2, 1968-2008 Graph based on datasheet 12- Commercial Banks and Other Depository Institutions The Business of Banking State versus National Banks Monetary Control Act of 1980 Savings and Loan Institutions Mutual Savings Banks Credit Unions 12- Banking Regulation Glass-Steagall Act 1933 Gramm-Leach-Biley Act 1999 Merger wave 2008 Financial crisis 12- Balance Sheet of a Bank Assets Liabilities + Net Worth Reserves: Legal reserves Excess reserves Loans and investments Fixed investments Liabilities: Demand deposits Time Deposits Net Worth 12- The Fractional Reserve Banking System Legal reserves Deposits at Federal Reserve Banks Vault cash Excess reserves 12- R 2,000 L 23,000 DD 20,000 NW 5,000 1 R 12,000 L 23,000 DD 30,000 NW 11,000 1 R 12,000 L 32,000 CD 39,000 NW 5,000 1 Money Supply Cash -10,000 DD +10,000 Net 0 R = .10 . | Chapter 12 Money, Banking, and the Financial System: Old Problems with New Twists Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin What Are Banks? Commercial banks Commercial banks as financial intermediaries 12- Savers Investors Commercial Banks Direct investment Bank deposits Bank loans Investment Banks Stocks Partial ownership Dividends Capital Gains Bonds Bonds as debt Primary v secondary financial markets Liquidity 12- Insurance Companies Insurance policies Insurance premiums 12- 12- What Is Money? Money is anything generally acceptable in payment for goods and services and in payment for debt 12- Functions of Money Medium of Exchange Measure of Account Store of Value M1 Currency 848.8 52.8% Traveler’s Checks 5.3 0.3% Demand Deposits 407.6 25.3% Other Checkable Deposits 346.1 21.5% Total 1607.8 100.0% April 2009 0 12- M2 M1 1607.8 19.2% Small-denomination time deposits 1328.3 15.9% Savings Deposits .