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The Financial System. Chapter 17. The financial system is the process by which money flows from savers to users. The Financial System. Financial System Savers Users Financial Institutions Financial Markets Savings is a function of many variables.

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Presentation Transcript
understanding the financial system
Financial System



Financial Institutions

Financial Markets

Savings is a function of many variables.

Funds can be transferred between users and savers directly or indirectly.

Understanding the Financial System
types of securities

Financial instruments

Obligations on the part of the issuer

Businesses and Governments

Provide rate of return to purchasers

Money Market Instruments



Types of Securities
money market instruments
Short-term Debt Securities

Issued by governments, financial institutions and corporations

Investors are paid interest for the use of their funds.

Generally low-risk

U.S. Treasury bills, commercial paper, and bank certificates of deposit

Money Market Instruments
Government Bonds

Bonds sold by the U.S. Department of the Treasury.

Municipal Bonds

Bonds issued by state or local governments

Revenue bonds are used toward a project that will produce revenue, General Obligation Bonds are not.

bond ratings
Price is determined by risk and interest rate.

Several firms rate bonds

Standard & Poor’s (S&P)




Bond Ratings
Common stock – ownership claims in corporations.

Vote on major company decisions

Cash dividends

Price appreciation

Preferred stock – stockholders with preference in the payment of dividends.

financial markets
Primary Market – firms and governments issue securities and sell them initially to the public.

When a firm offers a stock for sale to the general public for the first time.

Secondary Market – collection of financial markets in which previously issued securities are traded among investors.

Financial Markets
stock exchanges
The New York Stock Exchange – the Big Board is the most famous and one of the oldest stock markets in the world. More than 3,000 stocks are listed on NYSE.

The Nasdaq Stock Market – the second largest stock market. Over 5,000 companies have their stocks listed on Nasdaq but many are smaller firms.

Other U.S. Stock Markets

The American Stock Exchange/AMEX

Regional Stock Exchanges

Foreign Markets

Stock Exchanges
ecns and the future of stock markets
ECNs – electronic communication networks

The 4th Market

Buyers and sellers meet in a virtual market and exchange with one another

Take place on INET or Archipelago

INET and Archipelago have been purchased by Nasdaq and NYSE

ECNs and The Future of Stock Markets
investor participation in the stock markets
Investor Participation in the Stock Markets
  • Investors use brokerage firms, they:
      • Establish an account
      • Enter orders
      • Trade stock
  • The brokerage firm executes the trade on behalf of the investor, charging a fee for the order
    • Market Order
    • Limit Order
financial institutions
Commercial Banks

Savings Banks and Credit Unions

Non-depository Institutions

Financial Institutions
electronic banking
An increasing amount of funds move through electronic funds transfer (EFTs).

Millions of businesses and consumers now pay bills and receive payments electronically.

Most employees directly deposit employee paychecks.

Social security and other federal payments are made each year electronically.

Automated Teller Machines (ATMs) continue to grow in popularity.

More than 1/3 of American households use some online banking.

Electronic Banking
federal deposit insurance
Enacted by the Banking Act of 1933

Restore public confidence in the banking system

Before deposit insurance, runs were common as people rushed to withdraw their money from the bank

Deposit insurance shifts the risk of bank failures from individuals to the FDIC

Federal Deposit Insurance
savings banks and credit unions
Offer a variety of consumer services

85% of their loans are real estate loans

Credit unions are cooperative financial institutions that are owned by depositors/members.

Credit unions are created to serve consumers.

Insured by National Credit Union Administration (NCUA) which functions the same as the FDIC

Savings Banks and Credit Unions
the role of the federal reserve
Created In 1913

Central bank of the United States

Regulate commercial banks

Perform banking-related activities for the U.S. Department of Treasury

Providing services for banks

Setting monetary policy

The Role of the Federal Reserve
organization of the federal reserve
12 Federal reserve districts

Own federal reserve bank

District banks are run by a nine-member board of directors.

The board of governors is the governing body.

Politically independent

Federal Open Markets Committee (FOMC) sets most policies concerning monetary policy and interest rates.

Organization of the Federal Reserve
check clearing and the fed
Americans still write billions of paper checks.

The process by which funds are transferred from the check writer to receiver

The multiple-step process is managed and cleared by the FED.

The Check Clearing for the 21st Century Act is making this process more electronic.

Check Clearing and the Fed
monetary policy
Supply of money and credit

Measures of the money supply: M1 & M2

The FED requires banks to maintain reserves.

Set the discount rate

Open Market Operations

Monetary Policy
regulation of the financial system
Bank Regulation

Government Regulation of the Financial Markets

Industry Self-Regulation

Rules of conduct by professional organizations like National Association of Securities Dealers

Market Surveillance

Regulation of the Financial System
the financial system a global perspective
The Financial System:A Global Perspective
  • The financial system is more connected.
  • Financial institutions are more global.
  • Only 3 of the 30 largest banks in the world are US institutions.
  • Most nations have a central bank.
learning goals
Learning Goals

Outline the structure and importance of the financial system.

List the various types of securities.

Define financial market, and distinguish between primary and secondary financial markets.

Describe the characteristics of the major stock exchanges.

Discuss the organization and functioning of financial institutions.

Explain the functions of the Federal Reserve System and the tools it uses to control the supply of money and credit.

Evaluate the major features of regulations and laws affecting the financial system.

Describe the global financial system.