Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-31
banking.
D. SERVICES TO BORROWERS
1. Loans are generally given on the basis of the re-
cipient’s CREDITWORTHINESS.
2. Banks are supposed to screen loan applicants
carefully to make sure that the loan plus interest
will be paid back on time.
E. SAVINGS AND LOAN ASSOCIATIONS (S&Ls)
1. A SAVINGS AND LOAN ASSOCIATION (S&L)
is a financial institution that accepts both savings
and checking deposits and provides home mort-
gage loans.
a. S&Ls are often known as THRIFT INSTITU-
TIONS since their original purpose was to
promote consumer thrift and home owner-
ship.
b. Thrifts were permitted to offer slightly higher
interest rates to attract funds.
c. These funds were then used to offer LONG-
TERM FIXED RATE MORTGAGES.
d. S&Ls no longer offer better rates than banks.
2. In the early 1980s, S&Ls ran into trouble; 20% of
the nation’s S&Ls failed.
a. The biggest reason was that CAPITAL
GAINS taxes were raised, making invest-
ments in real estate less attractive.
b. S&Ls were left with property that was worth
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-32
PPT 20-27
Savings and Loan Associations
SAVINGS and
LOAN ASSOCIATIONS
20-27
LO 20-4
• Savings and Loan Associations (S&Ls) — A
financial institution that accepts both savings and
checking deposits and provides home mortgage
loans.
• Often known as thrift institutions because their
original purpose was to promote customer thrift
and home ownership.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-33
less than the money they had lent to inves-
tors.
c. In the 1980s, the federal government has
stepped in to strengthen S&Ls, allowing
them to:
i. Offer HIGHER INTEREST RATES
ii. Allocate up to 10% of their funds to
COMMERCIAL LOANS
iii. Offer mortgage loans with ADJUSTA-
BLE INTEREST RATES
d. Savings and loans have become very similar
to commercial banks.
F. CREDIT UNIONS
1. CREDIT UNIONS are nonprofit, member-owned
financial cooperatives that offer the full variety of
banking services to their members, including:
a. Interest-bearing checking accounts at rela-
tively high rates
b. Short-term loans at relatively low rates
c. Financial counseling
d. Life insurance
e. Home mortgage loans
2. As not-for-profit institutions, credit unions enjoy
an exemption from federal income taxes.
G. OTHER FINANCIAL INSTITUTIONS (NONBANKS)
1. NONBANKS are financial organizations that ac-
cept no deposits but offer many of the services
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-34
PPT 20-28
Credit Unions
• Credit Unions —
Nonprofit, member-owned
financial cooperatives that
offer the full variety of
banking services to their
members.
CREDIT UNIONS
20-28
LO 20-4
• As nonprofits, credit
unions enjoy an
exemption from federal
income taxes.
lecture enhancer 20–8
CREDIT UNIONS BECOME MORE
LIKE BANKS
The differences between banks and credit unions are starting
to meld together. (See the complete lecture enhancer on page
20.75 of this manual.)
lecture enhancer 20-9
MORE BANKS TEAM UP WITH
WESTERN UNION
Banks are seeing the profitability in cooperating with nonbank
functions, like money wiring. (See the complete lecture en-
hancer on page 20.76 of this manual.)
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-35
provided by regular banks.
a. NONBANKS include life insurance compa-
nies, pension funds, brokerage firms, com-
mercial finance companies, and corporate
financial services.
b. Nonbanks cut back their lending during the
recent banking crisis.
c. Competition between banks and nonbanks
has increased making the difference be-
tween them less apparent.
d. In response to the diverse investment alter-
natives offered by nonbanks, banks expand-
ed their services.
e. Some banks have merged with brokerage
firms.
2. LIFE INSURANCE COMPANIES provide finan-
cial protection for policyholders who periodically
pay premiums.
3. PENSION FUNDS are amounts of money put
aside by corporations, nonprofit organizations,
or unions to cover part of the financial needs of
members when they retire.
a. Contributions to pensions are made by em-
ployees, employers, or both.
b. Pension funds typically invest in low-return,
but safe, corporate stocks or government
securities.
c. Many large pension funds are becoming
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-36
PPT 20-29
Nonbanks
NONBANKS
20-29
– Life insurance companies
– Pension funds
– Brokerage firms
– Commercial finance
companies
– Corporate financial
services
LO 20-4
• Nonbanks — Financial institutions that accept no
deposits, but offer many of the services provided by
regular banks. Nonbanks include:
SPOLIGHT ON
small
business
PPT 20-30
Taking a Bite
Out of the
Sharks
TAKING a BITE OUT of the SHARKS
20-30
• Dealstruck is a new type of alternative,
nonbank lender.
• It uses a peer-to-peer model where
wealthy investors provide capital for
the loans.
• Interest rates range from 8 to 24% for
loans up to $250,000 and can stretch
for a period of three years.
PPT 20-31
What Attracts Customers to Online
Banking
WHAT ATTRACTS CUSTOMERS
to ONLINE BANKING
Source: comScore, www.comscore.com, accessed November 2014. 20-31
LO 20-4
• Free identity theft
protection
• Free credit score
monitoring
• Personal financial
management
• Instant messaging service
• Bank’s blog
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-37
forces in U.S. financial markets.
4. BROKERAGE FIRMS traditionally offered in-
vestments in stock exchanges, but now offer
services such as high-yield checking/savings
accounts and loans.
5. COMMERCIAL AND CONSUMER FINANCE
COMPANIES are institutions that offer short–
term loans to businesses and individuals with
higher credit risks.
a. Interest rates are higher than regular banks.
b. Use caution when borrowing from such insti-
tutions because the INTEREST RATES
CAN BE QUITE HIGH.
learning objective 5
Briefly trace the causes of the banking crisis starting in 2008 and explain
how the government protects your funds during such crises.
V. THE BANKING CRISIS AND HOW THE GOV-
ERNMENT PROTECTS YOUR MONEY
A. THE RECENT BANKING CRISIS
1. Who is responsible?
a. The Federal Reserve, in keeping cost of bor-
rowing low
b. Congress, in creating more affordable hous-
ing
c. The Community Reinvestment Act, further
encouraged loans with families with ques-
tionable ability to repay
2. Banks made risky loans and then divided their
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-38
test
prep
PPT 20-32
Test Prep
TEST PREP
20-32
• Why did the U.S. need a Federal Reserve Bank?
• What is the difference between a bank, a savings
and loan association, and a credit union?
• What is a consumer finance company?
PPT 20-33
The Banking Crisis
The BANKING CRISIS
20-33
LO 20-5
• Almost 5 million households suffered through
housing foreclosures since 2007.
• Since the banks owned the mortgages, their profits
declined.
• This led to a banking crisis
and the government had to
help the banks out.
• Assigning blame to only one
agency is not possible, but it
had to be fixed.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-39
portfolios of mortgages up into MORTGAGE-
BACKED SECURITIES (MBSs) and sold to
other organizations.
a. Banks sold more and more MBSs to con-
sumers.
b. The Fed and the SEC failed to provide suffi-
cient oversight and regulatory functions.
c. House values plummeted and people lost
their homes.
3 Bank profit dropped; this led to the banking cri-
sis.
4. Toward the end of George W. Bush’s presiden-
cy, the Treasury Department created a $700 bil-
lion “bailout” package, known as the TROU-
BLED ASSETS RELIEF PROGRAM (TARP),
but the program did not work as anticipated.
5. Under President Barack Obama’s administra-
tion, Congress passed another $800 billion
spending program to stimulate the economy.
B. PROTECTING YOUR FUNDS
1. As a result of the depression of the 1930s, sev-
eral organizations evolved to protect your mon-
ey.
2. Three organizations protect your money: the
Federal Deposit Insurance Company (FDIC), the
Savings Association Insurance Fund (SAIF), and
the National Credit Union Administration
(NCUA).
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-40
bonus case 20-2
REFORMING WALL STREET
After the recent recession, Washington is trying to do its part
in preventing another widespread collapse. (See the complete
case, discussion questions, and suggested answers beginning
on page 20.89 of this manual.)
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-41
C. The FEDERAL DEPOSIT INSURANCE CORPO-
RATION (FDIC) is an independent agency of the
U.S. government that insures bank accounts.
1. If a bank were to be in serious danger, the FDIC
would arrange to have its accounts transferred
to another bank or pay off depositors up to
$250,000 per account.
2. The goal is to maintain CONFIDENCE IN
BANKS so that if one falls others don’t.
3. The FDIC covers many institutions, mostly
commercial banks.
D. The SAVINGS ASSOCIATION INSURANCE FUND
(SAIF) insures holders of accounts in savings and
loan associations.
1. It was originally called the Federal Savings and
Loan Insurance Corporation).
2. During the Great Depression, some 1,700 bank
and thrift institutions failed, and people lost con-
fidence in them.
3. The FDIC and FSLIC were designed to CRE-
ATE MORE CONFIDENCE in banking institu-
tions.
4. Recently, the FSLIC was placed under the FDIC
(and renamed) to better control banking.
E. The NATIONAL CREDIT UNION ADMINISTRA-
TION (NCUA)
1. The NCUA provides up to $250,000 coverage
per depositor.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-42
PPT 20-34
Protecting Depositors’ Money
PROTECTING
DEPOSITORS’ MONEY
20-34
LO 20-5
• The Federal Deposit Insurance Corporation
(FDIC) — An independent agency of the U.S.
government that insures bank deposits up to
$250,000.
• The Savings Association Insurance Fund
(SAIF) — Insures holders of accounts in savings and
loan associations.
• The National Credit Union Administration
(NCUA) — Provides up to $250,000 coverage per
individual depositor per institution.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-43
2. Additional protection can be obtained by holding
accounts jointly or in trust.
learning objective 6
Describe how technology helps make banking more efficient.
VI. USING TECHNOLOGY TO MAKE BANKING
MORE EFFICIENT
A. Banks have long looked for ways to make the sys-
tem more efficient.
1. CREDIT CARDS reduce the flow of checks but
have their own costs.
a. There will be more electronic rather than
physical exchange of money in the future.
b. If you must use a credit card, look for one
that offers the best deal for you.
2. ELECTRONIC FUNDS TRANSFER (EFT)
SYSTEM is a computerized system that elec-
tronically performs financial transactions such as
making purchases, paying bills, and receiving
paychecks.
a. EFT tools include electronic check conver-
sion, debit cards, smart cards, direct depos-
its, and direct payments.
3. Debit cards ELIMINATE THE PAPER-
HANDLING COSTS of using checks.
a. A DEBIT CARD is an electronic funds trans-
fer tool that serves the same function as
checks; it withdraws funds from a checking
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-44
PPT 20-35
Technological Advancements in
Banking
TECHNOLOGICAL
ADVANCEMENTS in BANKING
20-35
LO 20-6
• Electronic Funds Transfer
System — Messages about a
transaction are sent from one
computer to another so funds can
be transferred quickly and more
economically.
• Debit Card — Serves the same
function as a check; it
withdrawals funds from a
checking account.
lecture enhancer 20–10
THE UNPREDICTABLE BITCOIN’S
VALUE SEESAW
A new form of e-cash is Bitcoin. Right now, the value of
Bitcoin is up in the air as it’s a very volatile currency. (See the
complete lecture enhancer on page 20.76 of this manual.)
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-45
account.
b. Your spending is limited to the amount that
is in your account.
c. A debit card is swiped at a point–of-sale ter-
minal signaling the bank to immediately
transfer funds.
d. Some companies use PAYROLL DEBIT
CARDS to reduce paper processing.
4. A SMART CARD is an electronic funds transfer
tool that is a combination credit card, debit card,
phone card, driver’s license card, and more.
a. The magnetic strip on a credit card is re-
placed with a microprocessor.
b. The card can store a variety of information,
including the bank balance.
c. Some smart cards have embedded radio-
frequency chips.
5. AUTOMATIC TRANSFERS
a. A DIRECT DEPOSIT is a credit made direct-
ly to a checking or savings account, such as
automatically deposited paychecks.
b. A DIRECT PAYMENT is a preauthorized
electronic payment.
B. ONLINE BANKING
1. Using online banking, you can complete all your
financial transactions from home on your com-
puter: