Chapter 4 Financial Intermediaries and the Baking System PDF

Chapter 4 Financial Intermediaries and the Banking System Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 Chapter 4- Learning Object...

Chapter 4 Financial Intermediaries and the Banking System Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 Chapter 4- Learning Objectives  Explain what a financial intermediary is and why so many different types of financial intermediaries exist.  Describe the functions financial intermediaries perform.  Describe a fractional reserve system.  Describe the major characteristics of the U.S. banking system.  Explain the function of the Federal Reserve.  Explain how banks in the United States differ from banks in other countries. Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Financial Intermediaries Specialized financial firms that facilitate the indirect transfer of funds from savers to borrowers by offering savings instruments and borrowing instruments Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Financial Intermediation The process by which financial intermediaries transform funds provided by savers into funds used by borrowers Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 The Financial Intermediation Process Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5 Benefits of Intermediaries 1. Reduced costs 2. Risk/diversification 3. Funds divisibility/pooling 4. Financial flexibility 5. Related services Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 Types of Intermediaries Commercial banks Credit unions Thrift institutions (savings & loans) Mutual funds Whole life insurance companies Pension funds Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 Safety (Risk) of Financial Institutions  Banks, thrifts and credit unions  Insured by FDIC  Regulated by Federal Reserve and Office of Thrift Supervision or NCUA  Insurance companies  Regulated by states  Pensions  ERISA established PBGC  Mutual funds  SEC Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 Evolution of Banking Systems  Storage of valuables (gold & silver)  Depository receipts  Receipts could be traded like modern money  Inventory could be lent out  Only necessary to maintain enough reserves to cover demand for withdrawal (fractional reserves) Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Fractional Reserve System When the amount of reserves maintained by a financial institution to satisfy requests for withdrawals is less than 100 percent of total deposits Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 Excess Reserves Reserves at a bank in excess of the amount required Equal to the total reserves minus the required reserves Available for lending  An increase in reserves increases the money supply Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Money Supply Maximum change in the money supply equals the excess reserves divided by the reserve requirement Excess reserves Maximum change in MS = Reserve requirements Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 U. S. Banking System  Dual banking system  Banks are chartered either at the state or the national level  Intrastate branching  Establishing branch banks within the same state  Interstate branching  Establishing branch banks in more than one state (across state lines) Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Bank Holding Company Corporation that owns controlling interest in one or more banks Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 Central Banking – The Federal Reserve System Manages the monetary policy of the country Decentralized network of regional, district banks Supervised by the Board of Governors, who are appointed by the President Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Responsibilities of the Fed Monetary Policy of the U.S.  To promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 Monetary Policy Open Market Operations  Buy and sell Treasury securities to expand or contract the nation’s money supply Primary Dealer  Has established relationship with the Federal Reserve to buy and sell government securities Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17 Monetary Policy Change Money Supply  Increase Ms—buy securities from dealers Federal Reserve Make payment—increase bank reserves (money flows to the public) Bank of Primary Dealer Receive securities from bank/dealer  Decrease Ms—sell securities to dealers Federal Reserve Receive payment—decrease bank reserves (money flows from the public) Bank of Primary Dealer Deliver securities to bank/dealer Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18 Monetary Policy Reserve requirement  Funds that a financial institution must retain “in the vault” to back customers’ deposits Discount rate  Charged by the Fed for loans it makes to banks to meet temporary shortages in required reserves Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 Recent Legislation in the U.S. Banking Industry  Depository Institutions Deregulatory and Monetary Control Act (DIDMCA) of 1980  Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994  Gramm-Leach-Bliley Act of 1999  Emergency Economic Stabilization Act of 2008  Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010  Basil III Accord (2010) Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20 U.S. Banking in the Future Deregulation  Intermediaries are more similar in operations  Number of intermediaries has decreased Large financial service corporations Overlapping of products available Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 International Banking Other countries have fewer financial institutions, but with more branches Foreign banks are allowed to engage in non-banking business activities Most of the world’s largest banks are not U. S. banks Edge Act (1919) International Banking Facilities (IBFs) Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 Chapter Principles Key Financial Intermediaries Concepts  What is a financial intermediary? Why are there so many different types?  An organization that takes “deposits” and uses the money to generate returns  Individuals/businesses have differing needs that require different services and products  What functions do financial intermediaries perform?  Primary function is to facilitate the transfer of funds from savers to borrows Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 Chapter Principles Key Financial Intermediaries Concepts  What is a fractional reserve system?  Financial internediaries do not have to retain 100 percent of the funds that customers deposit  What are the major characteristics of the U.S. banking system?  Based on the fractional reserve system  A dual banking system—banks are chartered either at the state level or the federal level Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 Chapter Principles Key Financial Intermediaries Concepts  What is the function of the Federal Reserve?  To direct the monetary policy of the United States  Manage the supply of money by buying and selling government securities  Manage existing reserve requirements of financial institutions  How do banks in the United States differ from foreign banks?  In the U.S., there are more banks that are smaller in size and offer fewer services than in most foreign countries Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 End of Chapter 4 Financial Intermediaries and the Banking System Principles of Finance 6e, Chapter 4 Financial Intermediaries © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26