BMATWT 353 - Business of Building

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Money and Banking

1. Money

2. US Financial System

3. Federal Reserve System

4. Changes to the Banking System

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1. Money

Defn.: An object that is portable, divisible, durable, stable and serves as a medium of exchange, stores value and is used as a unit of account.

Characteristics

• Portable
• Divisible
• Durable
• Stable

Functions

• Medium of exchange
• Store of value
• Unit of account

M-1 Money Supply

Liquid (spendable) forms of money: currency, checking accounts.

M-2 Money Supply

M-1 Plus others that are easily converted into spendable form including: certificates of deposit, savings certificates, money market mutual funds

Credit cards are not money.

Generally high interest rates 11-20%, charge the merchants who accept them 2-5% per transaction.

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2. US Financial System

Financial Institutions

Commercial Banks - Federal or state charter, take deposits and make loans for profit.

Trend is toward consolidation, through mergers and acquisitions (Economies of Scale)

Prime Rate - INterest rate charged by banks to their most trustworthy customers (now "sub-prime")

Savings and Loan Associations - Loans target residential mortgages

Mutual Savings Banks - Owned by depositors (like a cooperative)

Credit Union - Deposits accepted only from a specific population (UMASS 5-Colleges)

Non-Deposit Institutions

• Pension Funds
• Insurance Companies
• Finance Companies (GMAC)
• Securities Brokers

Special Financial Services

Pension - for retirement

Trust Services - Management of funds left in the bank's trust, for children, elderly, and others.

Banks Create Money!

Deposit less reserve = Money available to lend

Loans are then re-deposited some is held back in reserve and the rest is loaned out again.

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3. Federal Reserve System

Board of Governors - Including Fed Chairman, currently Ben Bernanke.

12 Federal Reserve Banks

Member Banks

What does the Fed Do?

• Produces currency
• Lends money to the Government (Sells notes and bonds)
• Provides banking services to Banks
• Clears Checks - Time = Float
• Controls the Money Supply to Control Inflation
  • Reserve requirement - What percentage of deposits banks have to hold in cash or deposit into the reserve system.
  • Discount rate - Lending rate to banks
  • Open-Market Operations - Buying or selling US Treasury notes and bonds
  • Other credit controls - margin requirements

   

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  4. Changes to the Banking System

Deregulation - 1980 1,000's of bank failures, weeding out of inefficient competitors.

Interstate banking - a new phenomenon, Bank of America

Debit cards - can only spend the amount on deposit.

Smart cards - prepaid phone cards.

Electronic Banking

International Banking - Trade Deficit/Surplus

Produced and maintained by David T. Damery
Building Materials and Wood Technology
Department of Natural Resources Conservation
College of Natural Resources and the Environment
University of Massachusetts, Amherst.