Chapter 12: Money and Financial Institutions

Money and Banking

The Purpose of Money

Money enables people and businesses to buy and sell goods and services more easily around the world. * $Money$ is a standard of value and a means of exchange or payment.
Modern society uses coins, currency, checks, and debit cards as part of the $monetary system$ .
Goods and services are directly exchanged using money.
Without money, people would be forced to barter, or trade goods or services directly for other goods or services.
Money has three basic functions: * It is a medium of exchange * Money functions as a standard of value. * Money functions as a store of value.
Characteristics of money: * Money must be stable in value. * To be used as money, an item must be scarce * Money must be accepted * Money also has to be portable and durable * Finally, it must be hard to counterfeit. * To counterfeit means to make a copy of something in order to defraud or deceive people.

The Functions of Banks

A $financial institution$ is a firm that manages money. * Banks are the main types of financial institutions.
One of the main services banks provide is storing money in bank accounts. * To store money means to place or leave it for preservation or later use.
A $bank account$ is a record of the amount of money a customer has deposited into or withdrawn from a bank.
The money put in a bank account is called a $deposit$ .
The money taken out is called a $withdrawal$ .
The two main types of bank accounts are checking accounts and savings accounts. * Checking accounts are used for storing money in the short term. * Banks usually charge a fee for checking accounts. * Savings accounts are used for storing money over a longer period of time. * An advantage of a savings account is that it earns more interest than most checking accounts.
Interest is a rate that the bank pays customers for keeping their money.
Banks use checks and electronic funds transfers to move money.
Checks are primarily used to transfer money from one party to another.
$Electronic funds transfer (EFT)$ allows money to be transferred from one bank account to another through a 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.
Most bank loans require some form of collateral. * $Collateral$ is property or goods pledged by a borrower to use as security against a loan if it is not repaid.
There are four main types of loans that banks offer to businesses and individuals: * A mortgage loan is a loan used to buy real estate, such as a house or an office building. * A $mortgage$ is an agreement in which a borrower gives a lender the right to take the property if the loan is not repaid. * A commercial loan is a loan made to businesses to buy supplies and equipment. * An individual loan is a loan made to an individual to pay for personal items, such as a car, home repairs, or a vacation. * A line of credit is a credit arrangement in which a financial institution agrees to lend a specific amount of money to be used at any time for any purpose.
Many provide financial advice on managing and investing money.
A $safe-deposit box$ is a secure box in a bank’s vault used for the safe storage of a customer’s valuables.
As another service, many banks offer debit cards and credit cards, such as MasterCard® or Visa®.
Banks also have trust departments that manage money for individuals and organizations.

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Types of Financial Institutions

Financial Institutions

In the United States, there are three main types of banks. * They are commercial banks, savings and loan associations, and credit unions.
Most of the banks in the United States are commercial banks.
$Commercial banks$ offer the entire range of banking services, such as checking and savings accounts, loans, and financial advice. * They are often called full-service banks
Savings and loan associations are financial institutions that hold customers’ funds in interest-bearing accounts and invest mainly in mortgage loans.
Credit unions are not-for-profit banks set up by organizations for their customers to use. * Credit union customers are also called members.
There are other financial institutions that offer some of the same services as banks. * $Mortgage companies$ provide loans specifically for buying a home or business. * Finance companies offer short-term loans to businesses and consumers, but at much higher interest rates than banks charge. * $Insurance companies$ not only provide protection against problems such as fire and theft, but they also offer loans to businesses and consumers. * $Brokerage firms$ that sell stocks and bonds may also offer a wide range of financial services to their customers.

The Federal Reserve System

The $Federal Reserve System$ (or Federal Reserve) is the central bank of the United States.
Also known as “The Fed,” the Federal Reserve is the banker’s bank.
It monitors the money supply.
The Federal Reserve has six functions: * Clearing Checks: Funds are transferred from one bank to another when someone writes or deposits a check. * Acting as the Federal Government’s Fiscal Agent: The Federal Reserve distributes money to Federal Reserve member banks and commercial banks. * It also tracks the deposits and holds a checking account for the U.S. Treasury. * Supervising Member Banks: The Fed regulates banks that are members of the Federal Reserve System. * Regulating the Money Supply: The primary responsibility of the Federal Reserve is to determine the amount of money in circulation and either increase or decrease it. * Setting Reserve Requirements: Member banks must keep a certain percentage of deposits as reserves. * Reserves are funds set aside for emergencies, such as a rush of withdrawals. * Supplying Paper Currency: The Federal Reserve is responsible for printing and maintaining U.S. paper currency.

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