Samenvatting - International Banking and Finance (EBM096A05)
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Course
International Banking and Finance (EBM096A05)
Institution
Rijksuniversiteit Groningen (RuG)
Dit document is een samenvatting van al het te lezen en te bekijken studiemateriaal van het vak International Banking and Finance, van de Rijksuniversiteit Groningen. De inhoud:
- Howells, P and Bain, K - Economics of Money, Banking and Finance: A European Text, FT-Prentice Hall, chapter 1 ‘The ...
Economics of Money, Banking and Finance: A European Text – P. Howells, K. Bain
Chapter 1 – The role of a financial system
Financial system: a set of markets for financial instruments, and the individuals and institutions who
trade in those markets, together with the regulators and supervisors of the system. The facilities
offered by a financial system are: intermediation between surplus and deficit units; financial services
such as insurance and pensions; a payments mechanism; portfolio adjustment facilities. All kinds of
financial activity have the effect in some degree of channelling funds from lenders to borrowers. It is
about the end users (of the system): ultimate lenders or ultimate borrowers, rather than
intermediate lenders or intermediate borrowers. The end users have a choice between three broad
approaches:
- Direct lending: end users deal with each other
- Lending through organized markets: stock market for example
- Lending through intermediaries: banks (deposit takers) and other (non-deposit-taking
institutions). The liabilities of deposit takers are used as money, which isn’t the case for non-
deposit takers.
In developed economies people’s incomes are generally higher than their consumption. The
difference between income and consumption is saving (Y – C = S). Savings can be used to buy “real”
capital assets such as machinery and equipment, or investment (I). Many households save without
undertaking any real investment. The difference between saving and real investment is financial
surplus (S – I = NAFA). They are surplus units. Financial surplus can be lend out or to accumulate
hoards (holdings of money. When spending on consumption and real investment exceeds income,
you have a financial deficit, or deficit units. Deficit units must either shed financial assets
(accumulated in the past) or incur financial liabilities (debt). The NAFA for deficit units is negative,
instead of positive. In the aggregate, sector deficits and surpluses must sum to zero.
,Lenders wish to get the maximum return for the minimum of risk. It is also assumed that lenders
have a positive attitude toward liquidity.
Default risk: the borrower fails to repay when expected
Income risk: the asset fails to yield the return expected
Capital risk: the asset’s nominal value differs from what was expected
Inflation risk: the risk that the price level changes unexpectedly, causing a change in the real value of
assets
A (flow) surplus leads to an increase in the stock of net financial wealth; a (flow) deficit leads to a
reduction in that stock.
Portfolio choice: arranging the portfolio, the mixture of assets and liabilities, in such a way that, for a
given cost, the benefit derived from each asset or liability is equal at the margin. When this is the
case, you are in portfolio equilibrium. The study around this is portfolio theory.
Intermediation: shifting funds from ultimate lenders to ultimate borrowers
What intermediaries do is: to create assets for lenders and liabilities for borrowers which are more
attractive to each than would be the case if the parties had to deal with each other directly.
Maturity transformation means that intermediaries accept funds of a given maturity, that is, funds
which are liable for repayment to lenders at a given date or with a given degree of notice, and
‘transform’ them into loans of a longer maturity.
Financial intermediaries are able to reduce risk through a number of devices. The two principal ones
are diversification and specialist management.
Search and transaction cost reduction. The lower costs available through an intermediary result, of
course, from the ability to pool funds and to trade in large blocks of securities where the dealing
commission is very small as a proportion of the value.
The alternative solution is for intermediaries to take on the monitoring task. This involves the
development of skills in discriminating between more and less risky projects and firms.
,In the presence of financial intermediaries, there will be more financial assets and liabilities than
there would be without. Financial assets are growing relative to real assets. Liquidity has three
dimensions: time (the speed with which an asset can be exchanged for money), risk (the possibility
that the asset may be realizable for value different from that which is expected) and cost (the
pecuniary and other sacrifies that have to be made in carrying out the exchange).
Banks can draw on their deposits at the central bank without notice and can sell bills and other
securities for cash quite quickly. Money markets are markets for short-term money, capital markets
are markets for long-term capital.
Money and its Uses: Wealth or Development? – D. Bezemer
Chapter 1 – Features
Money is a means of settlement. Money is a standard of value and unit of account. Money is a store
of value. Money is a social institution. Money is sanctioned by the state. Money is a liability. Money is
hierarchical.
Recording debts made them transferable, so that they could be used as means of payment outside
the creditor-debtor relation within which they had been created. All money today is debt, not all debt
is money, because everybody can create a liability upon himself. The official currency is a public
liability, banks can issue money as their liabilities are universally accepted within the state’s
jurisdiction. The state validates their money by promising to accept it in payment of taxes.
Money is a means of settlement: Money is the ultimate means of payment. Whenever you have a
debt you must pay/settle, handing over money settles it. This distinguishes money from other assets.
Money is a social institution: Institutions set the rules of the game in society. Money is like this, we all
agree to accept something as money, to make transactions far more efficiently. No one is allowed to
counterfeit the official money.
, Money is sanctioned by the state: The state decides what qualifies as money, by law. The state also
claims tax from its citizens in its own money.
Money is a liability (and an asset): Money is a liability because my counterparty is liable to accept my
money. With money it is clear whose asset it is, but in everyday life it is not clear whose liability it is.
That only becomes clear when the money is spent. Money is a tool to bridge time. Credit is created
then destroyed when goods are exchanged. States that issue their own money cannot go bankrupt.
Bank liabilities are unique as they are as good as money, or treated as money itself.
Money is hierarchical: At the top of the hierarchy are notes, coins and bank reserves, which are
central bank liabilities, which the state promises to accept in tax payment to itself. Next come bank
deposits, which banks promise to convert into notes and coins on demand. Bank deposits are one
step removed from the ultimate issuer of liabilities (the state/central bank). Bank deposits are treated
as fully equivalents to notes and coins, except during a bank run for instance. Money is defined in
both space and in time. M1 = sum of currency in circulation and overnight deposits (bank reserves).
M2 = M1 + deposits with an agreed maturity of up to two years and deposits redeemable at notice of
up to three months. M3 = M2 + close money substitutes like repos, shares and debt securities with a
maturity of up to two years. The higher the M number, the further we move from the source of
money.
Inflation is determined by expansion of output and the quantity of money. When output rises faster
than money, you have deflation. When money rises faster than output, you have inflation. It also has
to do with many economic/political factors.
Chapter 2 – Functioning
The state licenses banks to print money. Commercial banks issue liabilities on themselves, which it
promises to accept as if it were money. To make that credible, the state also promises the public that
those liabilities (bank deposits) will (almost) always be exchanged one on one with central bank’s
liabilities (notes and coins). And to make it all work, the state gives the commercial banks access to a
settlement system with the central bank (their reserve accounts with the central bank) so that their
deposits can be converted into reserves, which is the “currency” that banks and the central bank
between them use.
How credit is created in a closed circular economy. New money creation supports economic activity.
Trust is needed for credit and money to work. When the bank gives someone a loan; the bank gives
him credit. The banker just adds the amount of the loan on the deposit amount of the lender. Credit
turned into money. Other sources of money, besides bank credit creation, are net international
capital inflows and government spending.
State spending is public credit creation. Accounting-wise, money creation by bank operations (private
money creation) and the state’s “spending money into existence” (public money creation) are quite
similar. Government spending is the exact opposite of taxation. Government spending and bank
lending increase the amount of money in the economy, government taxation and bank loan
repayment decrease the amount of money. State spending can kick-start economic development in
an underdeveloped economy. Bank loans need to be repaid by the borrower, state spending is in the
nature of a gift, because of that it’s money created out of nothing: no one needs to give up current
money in order to receive state spending.
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