FinancialIntermediationvs.DirectFinanceDirectFinance:Primaryvs.SecondaryMarketsBank-CenteredSystemsvs.Market-CenteredSystemsMoneyandBankingSomeFactsandFiguresHowwegothere:SomebankinghistoryTheRoleoftheGovernmentFunctionsofDepositoryInstitutionsWhatIsMoneyvs.WhatMoneyIsHowDoBanksWork?BasicsofAccountingBankAccountingIntermediationvs.DirectFinanceSource:MishkinandEakins,FinancialMarketsandInstitutions,6thed.,p.18SourcesofExternalFinanceIntermediationvs.DirectFinanceSource:MishkinandEakins,FinancialMarketsandInstitutions,6thed.,p.18FinanceJargon:

Primaryvs.SecondaryMarketsPrimarymarkets–wheresecuritiesarefirstsoldtothepublic,andwherefirmsorgovernmentsreceivethebulkoftherevenuefromthosesales.Secondarymarkets–whereindividualandinstitutionalinvestorstradesecuritiesamongthemselves.

Issuersofsecuritiesreceivenoneoftheproceedsfromtransactionsinthesecondarymarket.Intermediationvs.DirectFinanceSource:MishkinandEakins,FinancialMarketsandInstitutions,6thed.,p.18TypesofFinancialIntermediariesPrincipalFinancialIntermediariesandtheValueofTheirAssetsSource: FederalReserve,FlowofFundsAccountsoftheUnitedStates,June9,2011ReleaseEssentialActivity:Takedepositsandmake loansCommercialBanksThriftInstitutionsSavingsandLoanAssociations(S&Ls)SavingsBanksCreditUnionsMoneyMarketMutualFundsDepositoryInstitutionsNumberofCommercialBanks

intheU.S.

1984–2016June,20165,441Jan.,198414,388↓62%SizeDistributionofInsuredCommercialBanksandSavingsInstitutionsintheU.S.

2016AssetsNumberofBanksShareofBanks(%)TotalAssetsShareofAssetsHeld(%)<$100Million1,87229%$109.8Billion.7%$100Million-$1Billion3,95661%$1.2Trillion6%$1-$10Billion5749%$1.6Trillion10%>$10Billion1072%$12.6Trillion81%Total6,509100%$15.6Trillion100%Source:/qbp/2014dec/all3a2.htmlTenLargestU.S.Banks,

December31,2016TenLargestU.S.Banks,

December31,2016BankAssetsShareofAllCommercialBankAssets(%)DomesticBranches1.J.P.MorganChase$2.1T14%5,269Source:/releases/lbr/current/TenLargestU.S.Banks,

December31,2016BankAssetsShareofAllCommercialBankAssets(%)DomesticBranches1.J.P.MorganChase$2.1T14%5,2692.WellsFargo$1.7T12%6,152Source:/releases/lbr/current/TenLargestU.S.Banks,

December31,2016BankAssetsShareofAllCommercialBankAssets(%)DomesticBranches1.J.P.MorganChase$2.1T14%5,2692.WellsFargo$1.7T12%6,1523.BankofAmerica$1.7T12%4,626Source:/releases/lbr/current/TenLargestU.S.Banks,

December31,2016BankAssetsShareofAllCommercialBankAssets(%)DomesticBranches1.J.P.MorganChase$2.1T14%5,2692.WellsFargo$1.7T12%6,1523.BankofAmerica$1.7T12%4,6264.Citibank$1.3T11%736Source:/releases/lbr/current/TenLargestU.S.Banks,

December31,2016BankAssetsShareofAllCommercialBankAssets(%)DomesticBranches1.J.P.MorganChase$2.1T14%5,2692.WellsFargo$1.7T12%6,1523.BankofAmerica$1.7T12%4,6264.Citibank$1.3T11%7365.USBank$441B3%3,194Source:/releases/lbr/current/TenLargestU.S.Banks,

December31,2016BankAssetsShareofAllCommercialBankAssets(%)DomesticBranches6.PNCBank$356B2%2,5967.CapitalOne$286B2%6988.TDBank$269B2%1,2759.BankofNY/Mellon$258B1%210.StateStreet$239B1%2Source:/releases/lbr/current/TenLargestBanksintheWorldFeb.,2017BankCountryAssets1.IndustrialandCommercialBankofChinaChina$3.5T2.ChinaConstructionBankChina$3.0T3.AgriculturalBankofChinaChina$2.8T4.BankofChinaChina$2.6T5.BNPParibasFrance$2.2TSource:/resources/bank-rankings/TenLargestBanksintheWorldFeb.,2017BankCountryAssets6.JPMorganChaseUS$2.1T7.ChinaDevelopmentBankChina$1.9T8.JapanPostBankJapan$1.9T9.BankofTokyo-MitsubishiJapan$1.8T10.WellsFargoUS$1.7TSource:/resources/bank-rankings/EconomicFunctionsCreatingLiquidityBorrowing“short”andlending“l(fā)ong”MinimizingtheCostofBorrowingMinimizingtheCostofMonitoringBorrowersPoolingRiskDepositoryInstitutionsReasonsforBankMergerActivityAntiquatedbankingregulationsinplaceuntiltheearly1990sledtotoomanybanks—overcapacityMcFaddenAct(1927)—prohibitedbranchingGlass-Steagall(1933&1935)CreatedtheFDICSeparatedbankingfromthesecuritiesindustryRestrictedcheckingdepositstocommercialbanksProhibitedinterestoncheckingdepositsRegulationQ(1933)RuleunderwhichtheFedputacaponinterestbankscouldpayondepositsReasonsforBankMergerActivityRegulationQphasedoutinstepsfrom1978to1986Riegle-NealInterstateBankingandBranchingEfficiencyActof1994—abolishedallprohibitionsoninterstatebankingRecentDevelopments:TheVolckerRuleReasonsforBankMergerActivityEconomiesofscaleReasonsforBankMergerActivityEconomiesofscaleEconomiesofscopeReasonsforBankMergerActivityEconomiesofscaleEconomiesofscopeLoandiversificationFunctionsofMoneyFunctionsofMoneyMediumofExchangeFunctionsofMoneyMediumofExchangeStoreofValueFunctionsofMoneyMediumofExchangeStoreofValueUnitofAccountLiquidityLiquidIlliquidLiquidityLiquidIlliquidCashLiquidityLiquidIlliquidCashChkg.DepLiquidityLiquidIlliquidCashChkg.DepSavingsDepositsLiquidityLiquidIlliquidCashChkg.DepSavingsDepositsTimeDepositsLiquidityLiquidIlliquidCashChkg.DepSavingsDepositsStocksandBondsTimeDepositsLiquidityLiquidIlliquidCashChkg.DepSavingsDepositsStocksandBondsRealEstateTimeDepositsLiquidityLiquidIlliquidCashChkg.DepSavingsDepositsStocksandBondsRealEstateTimeDepositsFineArtM1CurrencyandTraveler’sChecksCashinthehandsofthepublicCheckingDepositsHeldatcommercialbanks,S&Ls,SavingsBanks,andCreditUnionsAsofAug.31,2017,M1=$3.6TrillionMeasuresofMoneyLiquidityLiquidIlliquidCashChkg.DepSavingsDepositsStocksandBondsRealEstateTimeDepositsFineArtM1M1CurrencyandTraveler’sChecksCashinthehandsofthepublicCheckingDepositsHeldatcommercialbanks,S&Ls,SavingsBanks,andCreditUnionsAsofAug.31,2017,M1=$3.6TrillionM2M1SavingsdepositsTimedepositsMoneymarketmutualfundsandotherdepositsAsofAug.31,2017,M2=$13.6TrillionMeasuresofMoneyLiquidityLiquidIlliquidCashChkg.DepSavingsDepositsStocksandBondsRealEstateTimeDepositsFineArtM1M2Whatisnotmoney?ChecksChecksarenotmoney,butcheckingdepositsareCreditcardsCreditcardsmerelyallowyoutotakeashort-term,unsecuredloanMeasuresofMoneyBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)IndividualBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)Home$250,000IndividualBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)Home$250,000Car $25,000IndividualBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)Home$250,000Car $25IndividualBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)Home$250,000Car $25,000Stocks$100,000IndividualBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)Home$250,000Car $25,000Stocks$100,000Mortgage $100,000IndividualBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)Home$250,000Car $25,000Stocks$100,000Mortgage $100,000AutoLoan $10,000IndividualBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)Home$250,000Car $25,000Stocks$100,000Mortgage $100,000AutoLoan $10,000CreditCard$5,000IndividualBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(Assets–Liabilities)Home$250,000Car $25,000Stocks$100,000Mortgage $100,000AutoLoan $10,000CreditCard$5,000IndividualBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(Assets–Liabilities)$375,000-$115,000Home$250,000Car $25,000Stocks$100,000Mortgage $100,000AutoLoan $10,000CreditCard$5,000IndividualBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)$375,000-$115,000=$260,000Home$250,000Car $25,000Stocks$100,000Mortgage $100,000AutoLoan $10,000CreditCard$5,000TheBalanceSheetHASTO

Balance

NW=A–L A=L+NW

LHS=RHSIndividualBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)$375,000-$115,000=$260,000Home$250,000Car $25,000Stocks$100,000Mortgage $100,000AutoLoan $10,000CreditCard$5,000BusinessBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)OfficeBldg$10MBusinessBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)OfficeBldg$10MAccountsReceivable$5MBusinessBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)OfficeBldg$10MAccountsReceivable$5MInventory$3MBusinessBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)OfficeBldg$10MAccountsReceivable$5MInventory$3MMisc. $2MBusinessBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)OfficeBldg$10MAccountsReceivable$5MInventory$3MMisc. $2MTaxesDue$2MBusinessBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)OfficeBldg$10MAccountsReceivable$5MInventory$3MMisc. $2MTaxesDue$2MBankLoans$15MBusinessBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)Assets-LiabilitiesOfficeBldg$10MAccountsReceivable$5MInventory$3MMisc. $2MTaxesDue$2MBankLoans$15MBusinessBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)Assets–Liabilities$20M-$17MOfficeBldg$10MAccountsReceivable$5MInventory$3MMisc. $2MTaxesDue$2MBankLoans$15MBusinessBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)Assets–Liabilities$20M-$17M=$3MOfficeBldg$10MAccountsReceivable$5MInventory$3MMisc. $2MTaxesDue$2MBankLoans$15MBankBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=A–L)BankBalanceSheetAssets(A)Liabilities(L)NetWorth(NW)(=BankCapital)(=A–L)BankBalanceSheetAssets(A)Liabilities(L)Ba