3/27/2023 0 Comments Moneymoney test![]() ![]() ![]() The Board’s most important function is to participate in the Federal Open Market Committee (FOMC) which determines the country’s monetary policy and money supply. Provide financial services to the banks (“the banker’s bank”).12 Federal Reserve Banks spread regionally throughout the US and.the seven-member Board of Governors based in Washington DC.The FDIC covers defaulting bank’s investor deposits by up to $100 000. The Federal Deposit Insurance Corporation (FDIC) is there to regulate banks’ lending practices, to make sure that banks do not take excessive risks which could result in bank failure. All are subject to the same banking regulations. Assistance in price discovery: commercial banks are the experts in the pricing of financial services and securities, to ensure the equitable and market-related distribution of surplus funds, and also to ensure that they remain competitive in the market.Īpart from the nearly 3000 member banks of the Federal Reserve System, there are another 17 000 deposit and lending institutions including non-member commercial banks, savings banks, savings and loan associations, and credit unions. The bank’s borrowing and lending pricing policies will reflect the degree of risk involved in the transaction.ģ. ![]() Efficient allocation of funds: banks try to allocate surplus funds according to their assessment of the client’s credit-worthiness, so as to reduce the dual risks of adverse selection (lending to clients who may be a bad risk) and moral hazard (borrowers taking risks with the bank’s loan money which were not disclosed in the loan application). To facilitate the flow of funds between lenders and borrowers this is a savings and wealth storage function, whereby surplus funds are safely stored in risk-free or low-risk financial instruments (government or non-government securities), thereby generating wealth (interest-bearing savings) while making these funds available for interest-bearing loans.Ģ. The regulators also promote free competition so that customers are charged a fair price for banking services.Ĭommercial banks perform a number of functions, but mainly these:ġ. Banking regulations ensure that banks do not take excessive risks in their lending practices, and that they maintain a certain level of financial reserves to protect their liquidity. ![]() Nearly 40% of the over 8 000 commercial banks in the US are members of the Federal Reserve System, and are required to hold 3% of their capital as stock in their Reserve Banks. All banks must apply for a licence to operate either nationally (federal charter) or locally (state charter). Structure of the banking industry: The banking system is regulated by the Federal Reserve Bank (the Fed) which is responsible for controlling the amount of money in the system. It was a big step forward in recognising banking’s evolved role in managing the financial markets. This repeal allowed commercial banks to engage in investment banking and insurance activities, previously prohibited. In 1999, Bill Clinton signed into law the Gramm-Leach-Bliley Act which repealed the 66-year-old Glass-Steagall Act. The Depository Institutions Deregulation and Monetary Control Act of 1980 (Monetary Control Act) required the Reserve Banks to standardise their practice with regard to the pricing of financial services to depository institutions (banks).ī. do NOT fall within the definition of money.Ī. Other sources distinguish three main types of money as (1) currency (sometimes called fiat money because it has no intrinsic value, apart from that decreed by the issuing authority), (2) bank deposits, and (3) central bank reserves.Īlthough regarded as stores of value or wealth, other assets such as property, art, stamp collections, rare wines, etc. Some sources distinguish between commodity money (gold, silver), fiat money (paper money), and bank money (checks, credit cards, etc.). bank and credit money – checks, promissory notes, letters of credit, etc. paper money – convertible to gold, or inconvertible/fiat money Ĥ. metallic money – gold, silver, copper, etc., either full-bodied (e.g. commodities – as in a barter economy, exchanging goods or services for other goods or services (not common these days) Ģ. Over time, money has taken the form of:ġ. hard to counterfeit – not easily copied.Īny asset which performs these functions and possesses these qualities can be defined as ‘money’. divisibility – can be divided into smaller denominations andĤ. portability – easy to carry around in your wallet or purse ģ. durability – it won’t rust or be easily damaged or destroyed Ģ. a standard of deferred payment – a current debt can be paid off at a future date or over time.ġ. a store of value – it will keep its current value (more or less) for a future date Ĥ. a unit of account – to compare prices and value of goods and services ģ. a medium of exchange – people use it to pay for goods and services Ģ. ![]()
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