Modern Banking

Measures of the Money Supply, Functions and Types of Financial Institutions, And Modern E-Banking

Measuring the Money Supply

To understand Modern Banking, an understanding of what constitutes

the Money Supply, the money available in the economy, is needed. The Money Supply is divided into two distinct categories: M1 Assets that can be easily accessed and immediately used to purchase goods and services. These are referred to as Liquid Assets.

Money deposited in Checking Accounts meets this criteria because checks represent Demand Deposits, as they are paid On Demand for the cash in the account.

M2 All of M1 and assets that cannot be used directly as cash but can

easily be converted to cash.

Money Market Mutual Funds are examples of this because they can be used as collateral against certain types of checks. Savings accounts also fall into this category.

Functions of Financial Institutions

Financial Institutions utilize the Money Supply

to perform many roles including: Storing Money Saving Money Loans Mortgages Credit Cards Conveying Interest (Simple and Compound) Earning a Profit

Storing Money
One of the basic

functions of a bank is to provide a safe, and convenient, storage location for valuables, chiefly money. Vaults are generally fireproof and nearly impenetrable. Banks are insured against losses due to theft.

Saving Money
Banks offer a variety of

means of saving money such as: Savings Accounts Checking Accounts Money Market Accounts Certificates of Deposit Banks generally pay interest, an amount paid for the use of your money, on these accounts.

Loans
Banks offer loans, money

given out for a period of time in exchange for fees and interest charges. Banks are limited in the total amount of loans that they issue because of the Fractional Reserve System. This is the idea that banks must keep a certain percentage of the value of loans that they issue on hand in the form of deposits.

Mortgages
Mortgages are specific types

of loans used to buy real estate. They generally come in term lengths of 15, 25, or 30 years. A key determining factor in determining the interest rate and the term on the mortgage is the borrowers Creditworthiness. That is a reflection of the likelihood that the borrower will be able to repay the loan and not default, or fail to repay the loan.

Credit Cards
Credit Cards are cards that

allow their holders to make purchases of goods and services in exchange for the credit cards provider immediately paying for the good or service, and the card holder promising to pay back the amount of the purchase to the card provider over a period of time, and with interest. The amount of credit available to a card holder is often a reflection of their creditworthiness.

Simple and Compound Interest

Banks earn income through the

interest that they charge on their lending. As we have already established, Interest is the price paid to use borrowed money. In can take two forms: Simple Interest paid on an annualized basis as a percentage of the value of the loan or deposit know as the Principal. Compound Interest paid annually on the total principal, and the accumulated interest from previous time periods.

Earning a Profit
Banks exist to earn

money the same as any other business. They do this through charging interest on their lending and through charging various fees for their services.

Modern E-Commerce
Modern Banks utilize electronic formats to

complete many of their functions. These electronic formats can include:

Automated Teller Machines (ATMs) Debit Cards Home Banking Automatic Clearing Houses (ACHs) Stored Value Cards

ATMs
ATMs replace human bank

tellers in performing basic banking functions such as: Deposits Withdrawals Account Inquiries Key advantages of ATMs include: 24 hour availability. Elimination of labor costs. Convenience of location.

Debit Cards
Debit cards are used to

electronically withdraw funds directly from the cardholders accounts. Most debit cards require a Personal Identification Number (PIN) to be used to verify the transaction.

Home Banking
Home banking is the process

of completing financial transactions from your own home as opposed to utilizing a branch of a bank. Actions can include: Make Account Inquiries Transfer Money Pay Bills Apply for Loans Direct Deposit

Automatic Clearing Houses (ACHs)

ACHs facilitate the payment

of bills without the need to write a check. An ACH can be used to create automatic monthly bill payments so that the payer does not have to initiate the payment of the bill. Benefits Include: Postal Savings No Forgotten Payments Time Savings

Stored Value Cards

Stored Value Cards are used

in a manner very similar to a Debit Card. The card is Loaded, or credited, with a set value. That value can then be used to make purchases. Examples of this concept include: Prepaid Calling Cards Store Gift Cards ACCESS Cards