Chapter 15: Chapter Summary: Understanding Money and Financial Institutions

Because financial institutions connect people with money, this chapter begins with a discussion of money, its characteristics and functions, and the components of the U.S. money supply. Money is anything that is acceptable as payment for goods and services. It affects our lives in many ways. Businesses and government use money in similar ways. Both require money to finance their operations. By controlling the amount of money in circulation, the federal government can promote economic growth and stability.

For money to be a suitable means of exchange, it should be scarce, durable, portable, and divisible. Money functions as a medium of exchange, a standard of value, and a store of value. The U.S. money supply consists of currency (coins and paper money), demand deposits (checking accounts), and time deposits (interest-bearing deposits that cannot be withdrawn on demand).

The Federal Reserve System(commonly called the Fed) is the central bank of the United States. The Fed’s primary mission is to oversee the nation’s monetary and credit system and to support the ongoing operation of America’s private-banking system. The three tools it uses in managing the money supply are open market operations, reserve requirements, and the discount rate. The Federal Reserve also distributes the coins minted and the paper money printed by the U.S. Treasury to banks. Another important activity of the Federal Reserve is processing and clearing checks between financial institutions.

Financial institutions can be divided into two main groups: depository institutions and nondepository institutions. Depository institutions include commercial banks, thrift institutions, and credit unions. Nondepository institutions include insurance companies, pension funds, brokerage firms, and finance companies.

The Federal Deposit Insurance Corporation insures deposits in commercial banks through the Bank Insurance Fund and deposits in thrift institutions through the Savings Association Insurance Fund. The ceiling for all FDIC-member banks is $250,000 per account. Deposits in credit unions are insured by the national Credit Union Share Insurance Fund, which is administered by the national Credit Union Administration. The FDIC also sets banking policies and practices and reviews banks annually to ensure that they operate fairly and profitably.

The financial marketplace spans the globe, with money routinely flowing across international borders. U.S. banks play an important role in global business by providing loans to foreign governments and businesses. Multinational corporations need many special banking services, such as foreign-currency exchange and funding for overseas investments. U.S. banks also offer trade-related services, such as global cash management, that help firms manage their cash flows, improve their payment efficiency, and reduce their exposure to operational risks. Political and economic uncertainty in other countries can make international banking a high-risk venture.

The banking industry continues to change. Several trends are influencing the future of the financial industry; including a continued focus on regulatory and compliance issues as well as on operational efficiency and technological advances. Financial technology (or “fintech” services) will continue to disrupt the banking industry and provide opportunities for banks and other institutions to work closely with fintech companies that can help them innovate and streamline their business practices. Banks will continue to tackle customer engagement and technology initiatives over the next few years. Mobile financial apps will continue to be a strategic advantage that separates traditional banking approaches from innovative companies that can offer their clients a connected, digital experience when it comes to their money and investments. Finally, the next few years will see branch banking become less prevalent as online and mobile services become more popular.