Introduction to Finance

LO 3.7 
Describe the bank balance sheet and the major account categories that it contains.
LO 3.8
Describe bank management practices in terms of bank liquidity and bank solvency, 
and explain why and how bank capital is managed.
LO 3.9 
Describe characteristics of several foreign banking systems.
W H E R E W E H A V E B E E N . . .
In Chapter 2, we presented an overview of the U.S. monetary system. We discussed how 
the monetary system is intertwined with the savings-investment process, and we identi-
fi ed the major participants in the monetary system. Money has three functions, which are 
a medium of exchange, a store of value, and a standard of value. An understanding of how 
money developed in the United States over time, as well as knowing current defi nitions 
of the U.S. money supply, will be useful as we move through Part 1. Having an under-
standing of the relationship between the money supply and the economy will help us 
understand how the actions of policy makers infl uence economic activity and the fi nan-
cial system itself.

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C H A PT E R 3 Banks and Other Financial Institutions
W H E R E W E A R E G O I N G . . .
As we move through Part 1, we continue to build on our understanding of the U.S. fi nancial 
system. Chapter 4 focuses on the Federal Reserve System. We will describe the structure of 
the Fed and discuss the Fed’s functions. The Fed directs monetary policy by setting reserve 
requirements and interest rates on loans to depository institutions and through buying and 
selling U.S. government securities. We will also discuss the Fed’s supervisory and regulatory 
responsibilities. The last two chapters in Part 1 focus on the role of the policy makers (those 
responsible for carrying out fi scal policy, monetary policy, and debt management) and on 
how international developments infl uence the fi nancial system.