Chapter Fifteen

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Chapter Fifteen

• Money andthe Financial System

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The Three Functionsof Money

• Medium of Accepted as payment forExchange
  products and resources
• Unit of Single standard for assigning
  measurement and comparing values of
  products and resources
• Store of Means of retaining and value
  accumulating wealth

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The Six Characteristicsof Money

• Acceptability
• Divisibility
• Portability
• Stability
• Durability
• Difficulty to counterfeit

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Penny Pinchers
A penny saved is Those who alwaystake
penniesin change
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While 67 of adults say the government should
continue makingpennies, 51 sometimes leave
theirs at the store.
Source http//www.usatoday.com/snapshot/news/nsn
ap062.htm
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Near Money

• Savings account
• Money market account
• Guaranteed investment certificates
• Credit card
• Debit card
• Travelers cheque
• Money order
• Cashiers cheque

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Credit Card Bill Paying
With Income of50,000-100,000
AllHouseholds
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• Pay all each month 44 40
• Never pay off 36 45
• Pay some monthly 21 15

Source A New Financial Health
Barometer,Business Week, November 30, 1998, p.
8.
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Credit Cards Marketed on the Internet

• More than 15 million people searched the Internet
  for a new credit card within the last three
  years.
• Nearly 6 million people completed online card
  applications within the last two years.
• NextCard markets its credit card solely on the
  Web and receives between 80,000 and 100,000
  applications per month

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Source Tom Maguire, Click Here and
Charge,American Demographics, January 1999.
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The Bank of Canada

• Founded in 1934 to regulate credit policy
  and currency in the best interests of the
  economic life of the nation.

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• Became a crown corporation in 1938 with all
  shares now held by the Minister of Finance.

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The Responsibilities of thethe Bank of Canada

• To control the money supply using monetary policy
• To provide central banking services
• To be the sole issuer of currency
• To administer the public debt
• To oversee the administration of the clearing and
  settlement systems

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The Tools of Monetary Policy

• 1. Open market operations
• 2. Influence on the overnight rate
• 3. Cash management activities

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Central Banking Services

• One-day sale and repurchase transactions
• Acting as the federal governments banker
• Intervention in the foreign exchange market as
  agent of the Minister of Finance
• Management of the governments foreign exchange
  reserves
• Maintenance of deposit and safekeeping accounts
  for Canadian financial institutions and other
  central banks

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The Issuance of Currency

• The Bank of Canada is
• The sole issuer of Canadian bank notes
• Is responsible for ensuring the authenticity of
  all bank notes
• Operates to ensure a sufficient supply of
  currency in the economy

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Administration of the Public Debt

• The Bank of Canada
• Advises the federal government on borrowing
• Manages new debt offerings
• Services outstanding debt
• Administers some 7 million Canada Savings Bond
  holder accounts

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The Canadian Payment Association

• The CPA operates two major systems
• The Automated Clearing Settlement System (ACSS)
• The Large Value Transfer System (LVTS)

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How the System Works

• Step 1 Payment by one of the many means
  available cheque, debit card, direct
  deposit, and so on.
• Step 2 Clearing, the daily process by which CPA
  members exchange deposited payment items, and
  then determine net amounts owed each other
• Step 3 Settlement, the procedure by which CPA
  members use the funds on deposit at the Bank of
  Canada to fulfill their net obligations to all
  other members.

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Source www.cdnpay.ca/eng/pud/Intro
.to.CPA.ENG.htm
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Banking and Nonbanking Institutions

• Chartered banks
• Trust companies
• Credit unions
• Caisses populaires

• BankingInstitutions

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Banking and Nonbanking Institutions

• Insurance companies
• Pension funds
• Mutual funds
• Money market funds
• Brokerage firms
• Nonfinancial firms
• Finance companies

• NonbankingInstitutions

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Per Capita Spendingon Insurance
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Japan
Switzerland
U.S.A.
Source Swiss Reinsurance Co., http//www.usatoday
.com/snapshot/money/msnap004.htm.
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ABM Use in Canada

• There are bout 21,000 ABMs across Canada
• Canadians are relatively heavier users of ABMs
  than Americans
• Canadian carried out over 1.25 billion ABM
  transactions in 2000

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PC Banking

• Estimates indicate that the number of North
  American households doing PC banking jumped from
  4.8 million to more than 10 million by the end of
  2001.
• Two musts for successful online banking
  1. The service must be accessible via the
  Internet (as opposed to direct dial-up)
  2. No online security issues

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Source http//www.demographics.com/publications/a
d/99_ad/9902_ad/ad990205d.htm, March 15, 1999.
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Solve the Dilemma

• a. List the various types of Canadian financial
  institutions and the primary functions of
  each.
• b. What services of each financial institution is
  Hills new company likely to need?
• c. Which single financial institution is likely
  to best meet Hills small companys needs now?

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Additional Discussion Questions and Exercises

• 1. What is meant by a demand deposit?
• Why have credit cards become a popular substitute
  for money?
• 3. What are the advantages of automated bank
  machines (ABMs) for customers? For banks?

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