Money and banking

COURSE MONEY AND BANKING 2006 Lecturer: Dr Karel Jansen Part I The Banking System: Financial Markets Financial Intermediation and Development Banking as Risk Management Financial Fragility and Financial Crisis Part II Money in the economy: monetary theory and monetary policy Money Supply and Money Demand Monetary Theory: Money and the Real Sector Monetary Policy Part III Financial development and banking in Vietnam The Banking System during Transition in Viet Nam Financial markets Introduction Money Overview of financial markets Some definitions Money = token of value which is generally acceptable in the purchase and sale of goods, services and assets and the settlement of debts Financial markets = markets in which banks and other financial institutions provide a variety of financial services and products which facilitate the production, distribution and consumption of goods and services as well as the distribution of income and, crucially, entitlements to income Some definitions (contd) Financial market innovation = the development of new services and products and new technologies and processes for the delivery of these new services and products Financial market regulation = the statutory constraints on the activities of financial market institutions Monetary policy = policies designed to influence macroeconomic aggregates by influencing the quantity or price of money in the economy Objectives Introduction to certain technical details pertaining to money, financial markets, institutions, instruments, developments and policies Appreciation of different theoretical perspectives pertaining to the nature and behaviour of financial markets and determination of prices in these markets Understanding the conduct and effectiveness of monetary policy in the context of macroeconomic management and policy issues pertaining to the development and regulation of financial markets Money: what is it? Money = value par excellance Exchangeable with all; Goods and services Assets Acceptable in settlement of any debt Money: functions means of payment, settlement of debt, store of value, standard of price and unit of account Money: characteristics General acceptability Transportability Divisibility Stability in value Liquidity Money: historical development Important consumables, including live animals Various luxury items – pelts, hides, cloth, trinkets, etc Metals Paper Electronic money Money: measures of money Coins and notes (M0) M0 + demand deposits (M1) M1 + savings and fixed deposits (M2) M2 + deposits with other deposit taking institutions (M3) M3 plus short-term government debt instruments (Mx), etc Financial markets: overview Financial markets Money market (1) Capital market (2)(3) Foreign exchange market (4) Financial derivatives markets (5) Monetary authority (6) Financial markets: the money market Nature and behaviour of money markets Determination of money market rates Money markets money markets retail wholesale other transactions between financial institutions large sums of money fin institutions + govt. Insurance Mortgage transactions between fin. institutions and general public small sums of money commercial banks dominate Wholesale money market Wholesale money market Short-term borrowing and lending (1) Interbank Call Short term debt (3)(4) TB market (5)(6) Other CDs,CPs, BAs, BoEs, etc (10) Primary (7)(8) Secondary (9) Repo (2) Retail money market Retail money market Commercial banks (1) Borrowing and lending Investment in financial securities (3) Other deposit taking institutions Savings institutions (4) Mortgage institutions (5) Off-balance sheet activities (2) Financial markets intermediate Financial markets intermediate between those with surplus funds and those with shortages of fund. Financial intermediation can be direct, e.g. on the stock market between the firm that issues the shares and the investor that buys the shares, or indirect, i.e. through a financial institution. BANKING AS FINANCIAL INTERMEDIATION: an accounting framework CENTRAL BANK (CB) assets liabilities foreign reserves FA currency CU goverment bonds Bcb deposits of MB Dmb loans to MB Lmb MONEY BANKS (MB) assets liabilities vault cash CUmb demand deposits DD deposits at CB Dmb saving deposits SD government bonds Bmb borrowing from CB Lmb loans to government Lg borrowing abroad FLmb loans to private sector Lp CONSOLIDATED STATEMENT OF MONETARY SYSTEM assets liabilities foreign reserves FA currency in circulation CUp government bonds B demand deposits DD loans to govt Lg saving deposits SD loans to priv. sector Lp borrowing abroad Lmb Some definitions CUp = CU - CUmb M1 = CUp + DD M2 = M1 + SD M2 = NFA + DA where: NFA = FA - FLmb and DA = B + Lp + Lg DC = Lg + Lp The reserves of the money banks (RES) and its reserve ratio (RR) are defined RES = CUmb + Dmb RR = RES / DD Balance sheet private sector Balance sheet government Asset-Liability Matrix Asset-Liability Matrix leads to Flow of Funds account Leads to: Determination of money market interest rates money markets retail wholesale Loan rates Deposit rates Interbank Short-term debt Wholesale money market: Short run Wholesale money market rates Treasury Bill (1) Interbank rates (6) Supply Demand Deficit, financing options + decisions, tap operations (2)(3)(4) Supply Demand Levels of income, liquidity, returns on similar money market assets, uncertainty (5) Fiscal/Monetary policy and balance of payment (7) Inflation, economic activity, seasonal factors, speculative activity (8)(9) Retail money market: Short run Retail money market rates Loan rates (1) Deposit rates (5) Loan demand Cost of funds Inflation, level of economic activity (2) Fixed (3) variable Deposit rates, cost of money market borrowing (4) Fixed (6) Savings (7) Financial market behaviour, Behaviour of capital markets Determination of yields in capital markets Capital markets Capital markets (1-4) Bond Equity Other (5) Medium and long-term credit Venture capital Leasing Primary market Secondary market Primary market Secondary market Bond market Bond market Primary Secondary Issuers Government, local authorities, business Buyers Sellers Pension funds Banks Unit trusts Insurance companies