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Finance: Money & Banking

Finance: Money & Banking

Table of Contents

Money & Banking Terms

Definitions of the following terms are taken directly from Barron’s Dictionary of Finance and Investment Terms, 7th Edition, John Downes, A.B. & Jordan Elliot Goodman, A.B., M.A. available in the Maag Reference Room at call number HG151 .D69 2006.

BANK INSURANCE FUND (BIF): Federal Deposit Insurance Corporation (FDIC) unit providing deposit insurance for banks other than thrifts. BIF was formed as part of the 1989 savings and loan association bailout bill to keep separate the administration of the bank and thrift insurance programs. There were thus two distinct insurance entities under the FDIC: BIF and Savings Association Insurance Fund (SAIF). In 2005, Congress passed legislation merging the SAIF and BIF into one insurance fund called the Deposit Insurance Fund (DIF). The same law also raised the federal deposit insurance level from $100,000 to $250,000 on retirement accounts and gave the FDIC the option to increase insurance ceilings on regular bank accounts from $100,000 by $10,000 a year, based on inflation, every five years thereafter starting April 1, 2010.

CENTRAL BANK: Country’s bank that (1) issues currency; (2) administers monetary policy, including open market operation; (3) holds deposits representing the reserves of other banks; and (4) engages in transactions designed to facilitate the conduct of business and protect the public interest. In the United States, central banking is a function of the Federal Reserve System.

COMPTROLLER OF THE CURRENCY: Federal official, appointed by the President and confirmed by the Senate, who is responsible for chartering, examining, supervising, and liquidating all national banks. In response to the comptroller’s call, national banks are required to submit call reports of their financial activities at least four times a year and to publish them in local newspapers. National banks can be declared insolvent only by the Comptroller of the Currency.

CREDIT UNION: Not-for-profit financial institution typically formed by employees of a company, a labor union, or a religious group and operated as a cooperative. Credit unions may offer a full range of financial services and pay higher rates on deposits and charge lower rates on loans than commercial banks. Federally chartered credit unions are regulated and insured by the National Credit Union Administration.

DEMAND DEPOSIT: Account balance which, without prior notice to the bank, can be drawn on by check, cash withdrawal from an automatic teller machine, or by transfer to other accounts using the telephone or home computers. Demand deposits are the largest component of the U.S. money supply, and the principal medium through which the Federal Reserve implements monetary policy.

DISCOUNT RATE: (1) Interest rate that the Federal Reserve charges member banks for loans, using government securities or eligible paper as collateral. This provides a floor on interest rates, since banks set their loan rates a notch above the discount rate. (2) Interest rate used in determining the present value of future cash flows.

DISCOUNT WINDOW: Place in the Federal Reserve where banks go to borrow money at the discount rate. Borrowing from the Fed has been a last resort for banks short of reserves, but in mid-2002, the Fed proposed encouraging direct loans to reduce volatility in the federal funds rate. Banks would be expected to use the “window” when Fed funds exceeded the Fed’s target rate.

EXCHANGE RATE: Price at which one country’s currency can be converted into another’s. The exchange rate between the U.S. dollar and the British pound is different from the rate between the dollar and the Euro, for example. A wide range of factors influences exchange rates, which generally change slightly each trading day. Some rates are fixed by agreement.

FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): Federal aency established in 1933 that guarantess (within limits) funds on depositS in member banks and thrift institutions and performs other functions such as making loans to or buying assets from member institutions to facilitate mergers or prevent failures. In 1989, Congress passed savings and loan association bailout legislation that reorganized FDIC into two insurance units: the Bank Insurance Fund (BIF) continued the traditional FDIC functions with respect to banking institutions and the Savings Association Insurance Fund (SAIF) insured thrift institution deposits, replacing the Federal Savings and Loan Insurance Corporation (FSLIC), which ceased to exist. In 2005, Congress passed the FDI Reform Act merging the SAIF and BIF into one insurance fund called the Deposit Insurance Fund (DIF). The same law also raised the federal deposit insurance level from $100,000 to $250,000 on retirement accounts and gave the FDIC the option to increase insurance ceilings on regular bank accounts from $100,000 by $10,000 a year, based on inflation, every five years thereafter starting April 1, 2010.

FEDERAL HOME LOAN BANK SYSTEM: System supplying credit reserves for savings and loans, cooperative banks, and other mortgage lenders in a manner similar to the Federal Reserve’s role with commercial banks. The Federal Home Loan Bank System is made up of 12 regional Federal Home Loan Banks. It raises money by issuing notes and bonds and lends money to savings and loans and other mortgage lenders based on the amount of collateral the institution can provide. The system was established in 1932 after a massive wave of bank failures. In 1989, Congress passed savings and loan bailout legislation revamping the regulatory structure of the industry. The Federal Home Loan Bank Board was dismantled and replaced with the Federal Housing Finance Board, which now oversees the home loan bank system. The Financial Services Modernization Act of 1999 expanded the collateral that member banks could use to obtain an advance. In addition to traditional mortgage loans, banks can now put up rural, agricultural, and small business loans.

FEDERAL HOUSING FINANCE BOARD (FHFB): U.S. government agency created by Congress in 1989 to assume oversight of the Federal Home Loan Bank System from the dismantled Federal Home Loan Bank Board.

FEDERAL OPEN-MARKET COMMITTEE (FOMC): Committee that sets interest rate and credit policies for the Federal Reserve System, the United States’ central bank. The FOMC has 12 members. Seven are the members of the Federal Reserve Board, appointed by the president of the United States. The other five are presidents of the 12 regional Federal Reserve banks. Of the five, four are picked on a rotating basis; the other is the president of the Federal Reserve Bank of New York, who is a permanent member. The Committee decides whether to increase or decrease interest rates through open-market operation of buying or selling government securities. The Committee’s decisions are closely watched and interpreted by economists and stock and bond market analysts, who try to predict whether the Fed is seeking to tighten credit to reduce inflation or to loosen credit to stimulate the economy.

FEDERAL RESERVE BANK: One of the 12 banks that, with their branches, make up the Federal Reserve System. These banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The role of each Federal Reserve Bank is to monitor the commercial and savings banks in its region to ensure that they follow Federal Reserve Board regulations and to provide those banks with access to emergency funds from the discount window. The reserve banks act as depositories for member banks in their regions, providing money transfer and other services. Each of the banks is owned by the member banks in its district.

FEDERAL RESERVE BOARD (FRB): Governing board of the Federal Reserve System. Its seven members are appointed by the President of the United States, subject to Senate confirmation, and serve 14-year terms. The Board establishes Federal Reserve System policies on such key matters as reserve requirements and other bank regulations, sets the discount rate, tightens or loosens the availablility of credit in the economy, and regulates the purchase of securities on margin.

FEDERAL RESERVE SYSTEM: System established by the Federal Reserve Act of 1913 to regulate the U.S. monetary and banking system. The Federal Reserve System (the Fed) is comprised of 12 regional Federal Reserve Banks, their 24 branches, and all national and state banks that are part of the system. National banks are stockholders of the Federal Reserve Bank in their region. The Federal Reserve System’s main functions are to regulate the national money supply, set reserve requirements for member banks, supervise the printing of currency at the mint, act as clearinghouse for the transfer of funds throughout the banking system, and examine member banks to make sure they meet various Federal Reserve regulations. Although the members of the system’s governing board are appointed by the President of the United States and confirmed by the Senate, the Federal Reserve System is considered an independent entity, which is supposed to make its decisions free of political influence. Governors are appointed for terms of 14 years, which further assures their independence.

FIXED EXCHANGE RATE: Set rate of exchange between the currencies of countries. At the Bretton Woods international monetary conference in 1944, a system of fixed exchange rates was set up, which existed until the early 1970s, when a floating exchange rate system was adopted.

FLOATING EXCHANGE RATE: Movement of a foreign currency exchange rate in response to changes in the market forces of supply and demand; also known as flexible exchange rate. Currencies strengthen or weaken based on a nation’s reserves of hard currency and gold, its international trade balance, its rate of inflation and interest rates, and the general strength of its economy. Nations generally do not want their currency to be too strong, because this makes the country’s goods too expensive for foreigners to buy. A weak currency, on the other hand, may signify economic instability if it has been caused by high inflation or a weak economy. The opposite of the floating exchange rate is the fixed exchange rate system.

FOREIGN EXCHANGE: Instruments employed in making payments between countries – paper currency, notes, checks, bills of exchange, and electronic notifications of international debits and credits.

FOREX MARKET: The exchanges and electronic trading systems comprising the market for foreign exchange, including the spot market for currencies, foreign currency futures and options, and forward exchange transactions. Participants include central banks, commercial and investment banks, hedge funds, international corporations, and individual traders. The Forex operates 24 hours a day, five days a week.

MEMBER BANK: Bank that is a member of the Federal Reserve System, including all nationally chartered banks and any state-chartered banks that apply for membership and are accepted. Member banks are required to purchase stock in the Federal Reserve Bank in their districts. Half of that investment is carried as an asset of the member bank. The other half is callable by the Fed at any time. Member banks are also required to maintain a percentage of their deposits as reserves in the form of currency in their vaults and balances on deposit at the Fed district banks. These reserve balances make possible a range of money transfer and other services using the Fed Wire system to connect banks in different parts of the country.

MONETARY INDICATORS: Economic gauges of the effects of monetary policy, such as various measures of credit market conditions, U.S. Treasury bill rates, and the Dow Jones Industrial Average (of common stocks).

MONETARY POLICY:Federal Reserve Board decisions on the money supply. To make the economy grow faster, the Fed can supply more credit to the banking system through its open market operations, or it can lower the member bank reserve requirement or lower the discount rate – which is what banks pay to borrow additional reserves from the Fed. If, on the other hand, the economy is growing too fast and inflation is an increasing problem, the Fed might withdraw money from the banking system, raise the reserve requirement, or raise the discount rate, thereby putting a brake on economic growth. Other instruments of monetary policy range from selective credit controls to simple but often highly effective moral suasion. Monetary policy differs from fiscal policy, which is carried out through government spending and taxation. Both seek to control the level of economic activity as measured by such factors as industrial production, employment, and prices.


MONEY: Legal tender as defined by a government and consisting of currency and coin. In a more general sense, money is synonymous with cash, which includes negotiable instruments, such as checks, based on bank balances.

MONEY SUPPLY: Total stock of money in the economy, consisting primarily of (1) currency in circulation and (2) deposits in savings and checking accounts. Too much money in relation to the output of goods tends to push interest rates down and push prices and inflation up; too little money tends to push interest rates up, lower prices and output, and cause unemployment and idle plant capacity. The bulk of money is in demand deposits with commercial banks, which are regulated by the Federal Reserve Board. It manages the money supply by raising or lowering the reserves that banks are required to maintain and the discount rate at which they can borrow from the Fed, as well as by its open market operations – trading government securities to take money out of the system or put it in. Changes in the financial system, particularly since banking deregulation in the 1980s, have caused controversy among economists as to what really constitutes the money supply at a given time. In response to this, a more comprehensive analysis and breakdown of money was developed. Essentially, the varous forms of money are now grouped into two broad divisions: M-1, M-2, and M-3, representing money and near money; and L, representing longer-term liquid funds.

  • M-1: Currency in circulation; commercial bank demand deposits; NOW and ATS (automatic transfer from savings) accounts; credit union share drafts; mutual savings bank demand deposits; nonbank travelers checks.
  • M-2: M-1; overnight repurchase agreements issued by commercial banks; overnight Eurodollars; savings accounts; time deposits under $100,000; money market mutual fund shares.
  • M-3: M-2; time deposits over $100,000; term repurchase agreements.
  • L: M-3 and other liquid assets such as: Treasury bills; savings bonds, commercial paper, bankers’ acceptances, Eurodollar holdings of United States residents (nonbank).

MUTUAL SAVINGS BANK: Savings bank organized under state charter for the ownership and benefit of its depositors. A local board of trustees makes major decisions as fiduciaries, independently of the legal owners. Traditionally, income is distributed to depositors after expenses are deducted and reserve funds are set aside as required. In recent times, many mutual savings banks have begun to issue stock and offer consumer services such as credit cards and checking accounts, as well as commercial services such as corporate checking accounts and commercial real estate loans.

NATIONAL BANK: Internationally, synonymous with central bank. In the United States, a nationally chartered bank.

OFFICE OF THRIFT SUPERVISION (OTS): Agency of the U.S. Treasury Department created by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), the bailout bill enacted to assist depositors that became law on August 9, 1989. The OTS replaced the disbanded Federal Home Loan Bank Board and assumed responsibility for the nation’s savings and loan industry. The legislation empowered OTS to institute new regulations, charter new federal savings and loan associations and federal savings banks, and supervise all savings institutions and their holding companies insured by the Savings Association Insurance Fund (SAIF).

OPEN-MARKET OPERATIONS: Activities by which the Securities Department of the Federal Reserve Bank of New York – popularly called the DESK – carries out instructions of the Federal Open Market Committee designed to regulate the money supply. Such operations involve the purchase and sale of government securities, which effectively expands or contracts funds in the banking system. This, in turn, alters bank reserves, causing a multiplier effect on the supply of credit and, therefore, on economic activity generally. Open-market operations represent one of three basic ways the Federal Reserve implements monetary policy, the others being changes in the member bank reserve requirements and raising or lowering the discount rate charged to banks borrowing from the Fed to maintain reserves.

RESERVE REQUIREMENTS: Federal Reserve System rule mandating the financial assets that member banks must keep in the form of cash and other liquid assets as a percentage of demand deposits and time deposits. This money must be in the bank’s own vaults or on deposit with the nearest regionaL Federal Reserve Bank. Reserve requirements, set by the Fed’s Board of Governors, are one of the key tools in deciding how much money banks can lend, thus setting the pace at which the nation’s money supply and economy grow. The higher the reserve requirement, the tighter the money – and therefore the slower the economic growth.

SAVINGS & LOAN INSTITUTION: Depository financial institution, federally or state chartered, that obtains the bulk of its deposits from consumers and holds the majority of its assets as home mortgage loans. A few such specialized institutions were organized in the 19th century under state charters but with minimal regulation. Reacting to the crisis in the banking and home building industries precipitated by the Great Depression, Congress in 1932 passed the Federal Home Loan Bank Act, establishing the Federal Home Loan Bank System to supplement the lending resources of state-chartered savings and loans (S&Ls). The Home Owners’ Loan Act of 1933 created a system for the federal chartering of S&Ls under the supervision of the Federal Home Loan Bank Board. Deposits in federal S&Ls were insured with the formation of the Federal Savings and Loan Insurance Corporation in 1934. A second wave of restructuring occurred in the 1980s. The Depository Institutions Deregulation and Monetary Control Act of 1980 set a six-year timetable for the removal of interest rate ceilings, including the S&Ls’ quarter-point rate advantage over the commercial bank limit on personal savings accounts. The act also allowed S&Ls limited entry into some markets previously open only to commercial banks (commercial lending, nonmortgage consumer lending, trust services) and, in addition, permitted mutual associations to issue investment certificates. In actual effect, interest rate parity was achieved by the end of 1982. The Garn-St Germain Depository Institutions Act of 1982 accelerated the pace of deregulation and gave the Federal Home Loan Bank Board wide latitude in shoring up the capital positions of S&Ls weakened by the impact of record-high interest rates on portfolios of old, fixed-rate mortgage loans. The 1982 act also encouraged the formation of stock savings and loans or the conversion of existing mutual (depositor-owned) associations to the stock form, which gave the associations another way to tap the capital markets and thereby to bolster their net worth. In 1989, responding to a massive wave of insolvencies caused by mismanagement, corruption, and economic factors, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) that revamped the regulatory structure of the industry under a newly created agency, the Office of Thrift Supervision (OTS). Disbanding the Federal Savings and Loan Insurance Corporation (FSLIC), it created the Savings Association Insurance Fund (SAIF), now the Deposit Insurance Fund (DIF), under the administration of the Federal Deposit Insurance Corporation (FDIC). It also created the Resolution Trust Corporation (RTC) and Resolution Funding Corporation (REFCORP) to deal with insolvent institutions and scheduled the consolidation of their activites with SAIF after 1996. The Federal Home Loan Bank Board was replaced by the Federal Housing Finance Board (FHFB), which now oversees the Federal Home Loan Bank System.

SAVINGS ASSOCIATION INSURANCE FUND (SAIF): U.S. government entity created by Congress in 1989 as part of its savings and loan association bailout bill to replace the Federal Savings and Loan Insurance Corporation (FSLIC) as the provider of deposit insurance for thrift institutions. SAIF was administered by the Federal Deposit Insurance Corporation (FDIC) separately from its bank insurance program, called the Bank Insurance Fund (BIF). In 2005, Congress passed legislation merging the SAIF and BIF into one insurance fund called the Deposit Insurance Fund (DIF). The same law also raised the federal deposit insurance level from $100,000 to $250,000 on retirement accounts and gave the FDIC the option to increase insurance ceilings on regular bank accounts from $100,000 by $10,000 a year, based on inflation, every five years thereafter starting April 1, 2010.

SAVINGS BANK: Depository financial institution that primarily accepts consumer deposits and makes home mortgage loans. Historically, savings banks were of the mutual (depositor-owned) form and chartered in only 16 states; the majority of savings banks were located in the New England states, New York, and New Jersey. Prior to the passage of the Garn-St Germain Depository Institutions Act of 1982, state-chartered savings bank deposits were insured along with commercial bank deposits by the Federal Deposit Insurance Corporation (FDIC). The Garn-St Germain Act gave savings banks the options of a federal charter, mutual-to-stock conversion, supervision by the Federal Home Loan Bank Board, and insurance from the Federal Savings and Loan Insurance Corporation (FSLIC). In 1989, the Federal Home Loan Bank Board was replaced by the Federal Housing Finance Board (FHFB), and the FSLIC by the newly created Savings Association Insurance Fund (SAIF), a unit of the FDIC.

SPOT MARKET: Market in which commodities or currencies are sold for cash and delivered immediately. Trades that take place in futures contracts expiring in the current month are also called spot market trades. The spot market tends to be conducted over-the-counter – that is, through telephone trading – rather than on the floor of an organized commodity exchange.

THRIFT INSTITUTION: Organization formed primarily as a depository for consumer savings, the most common varieties of which are the savings and loan association and the savings bank. Traditionally, savings institutions have loaned most of their deposit funds in the residential mortgage market. Deregulation in the early 1980s expanded their range of depository services and allowed them to make commercial and consumer loans. Deregulation led to widespread abuse by savings and loans that used insured deposits to engage in speculative real estate lending. This resulted in the Office of Thrift Supervision (OTS), established in 1989 by the Financial Institutions Reform and Recovery Act (FIRREA), popularly known as the “bailout bill.” Credit unions are sometimes included in the thrift institution category, since their principal source of deposits is also personal savings, though they have traditionally made small consumer loans, not mortgage loans.

TIME DEPOSIT: Savings account or certificate of deposit held in a financial institution for a fixed term or with the understanding that the depositor can withdraw only by giving notice. While a bank is authorized to require 30 days’ notice of withdrawal from savings accounts, passbook accounts are generally regarded as readily available funds. Certificates of deposit, on the other hand, are issued for a specified term of 30 days or more, and provide penalties for early withdrawal. Financial institutions are free to negotiate any maturity term a customer might desire on a time deposit or certificate, as long as the term is at least 30 days, and to pay interest rates as high or low as the market will bear.


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