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Business in Action Ch 20 BUSN100 The Money Supply and Banking Systems

After studying this chapter, you will be able to 1. Describe the money supply and explain the functions of the Federal Reserve System 2. Identify the most common types of commercial banking institutions and distinguish commercial banking from investment banking 3. Explain the meaning of an economic bubble and describe the forces behind the housing bubble of 2002- 2006 4. Describe the innovations and evolutions in mortgage lending that expanded homeownership but ultimately triggered the subprime…
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Anything generally accepted as a means of paying for goods and services; serves as a medium of exchange, a unit of accounting, a store of value, and a standard of deferred value
money
The amount of money in circulation at any given point in time
money supply
The central banking system of the United States; responsible for regulating banks and implementing monetary policy
Federal Reserve System
Interest rate that member banks charge each other to borrow money overnight from the funds they keep in the Federal Reserve accounts
federal funds rate
Interest rate that member banks pay when they borrow funds from the Fed
discount rate
Sums of money, equal to a certain percentage of their deposits, that banks are legally required to keep on hand
reserves
( FDIC) Federal agency responsible for protecting money in customer accounts and managing the transition of assets whenever a bank fails
Federal Deposit Insurance Corporation
Government- sponsored enterprise responsible for guaranteeing and
Fannie Mae
Financial market in which mortgages are bought and sold, providing much of the funds that are loaned to home buyers
secondary mortgage market
Secondary mortgage institution similar to Fannie Mae
Freddie Mac
Financial institutions that accept deposits, offer various types of checking and savings accounts, and provide loans
commercial banks
Banks that provide financial services to consumers
retail banks
Banks that provide financial services to businesses; can also refer to private equity management
merchant banks
Banking institutions that offer deposit accounts and focus on offering home mortgage loans; also called thrifts or savings and loan associations
thrift banks
Not- for- profit, member- owned cooperatives that offer deposit accounts and lending services to consumers and small businesses
credit unions
Banking services for wealthy individuals and families
private banking
Firms that offer a variety of services related to initial public stock offerings, mergers and acquisitions, and other investment matters
investment banks
Nonbank companies that use their own funds to offer mortgages
independent mortgage companies
Nonbank companies that initiate loans on behalf of a mortgage lender in exchange for a fee
mortgage brokers
Nonbank institutions that lend money to consumers and businesses for cars and other vehicles, home improvements, expansion, purchases, and other purposes
finance companies
Companies that offer opinions about the creditworthiness of borrowers and of specific investments
credit rating agencies
Market situation in which frenzied demand for an asset pushes the price of that asset far beyond its true economic value
bubble
The percentage of an asset's market value that a lender is willing to finance when offering a loan; the rest of the purchase price has to be paid by the buyer as a down payment
loan-to-value ( LTV)
( ARM) Mortgage that features variable interest rates over the life of the loan
adjustable rate mortgage
Type of ARM that lets borrowers choose from several repayment options
option ARM
Payment situation in which the balance owed on a loan increases over time rather than decreases
negative amortization
Home loans offered to the most creditworthy customers
prime mortgages
Home loans for borrowers with low credit scores
subprime mortgages
Situation in which borrowers stop making payments on a loan
default
Process in which debts such as mortgages are pooled together and transformed into investments
securitization
( ABSs) Credit derivatives based on auto loans, credit card debts, and other loan assets
asset-backed securities
( MBSs) Credit derivatives based on home mortgages
mortgage-backed securities
Lenders taking possession of homes after borrowers default on their payments
foreclosures
Severe shortage of liquidity throughout a sector of the economy or the entire economy, during which companies can't get enough cash to meet their operating needs
liquidity crisis
Situation in which credit has become so scarce that it is virtually unavailable, at any cost, to most potential borrowers
credit freeze