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BANK307-lecture1.ppt
This document provides an overview of the key components of the financial system. It discusses the six main parts of the financial system: money, financial instruments, financial markets, financial institutions, regulatory agencies, and central banks. It then describes the core principles of money and banking. Finally, it outlines the structure of the financial industry, including depository institutions like banks, and non-depository institutions like insurance companies, investment banks, and mutual funds.
BANK307-lecture1.ppt
- 1. Lecture 1 Introduction toBanking Systems 1-1
- 2. Six Parts ofthe Financial System 1. Money To pay for purchases and store wealth. 2. Financial Instruments To transfer resources from savers to investors and to transfer risk to those best equipped to bear it. 3. Financial Markets To buy and sell financial instruments. 4. Financial Institutions To provide access to financial markets, collect information & provide services. 5. Regulatory Agencies To provide oversight for financial system. 6. Central Banks To monitor financial Institutions and stabilize the economy. 1-2
- 3. Six Parts ofthe Financial System 1. Money ◦ Money has changed from gold/silver coins to paper currency to electronic funds. ◦ Cash can be obtained from an ATM any where in the world. ◦ Bills are paid and transactions are checked online. 1-3
- 4. Six Parts ofthe Financial System 2. Financial instruments ◦ Buying and selling individual stocks used to be only for the wealthy. ◦ Today we have mutual funds and other stocks available through banks or online. ◦ Putting together a portfolio is open to everyone. 1-4
- 5. Six Parts ofthe Financial System 3. Financial Markets ◦ Once financial markets were located in coffeehouses and taverns. ◦ Then organized markets were created, like the New York Stock Exchange. ◦ Now transactions are mostly handled by electronic markets. This has reduced the cost of processing financial transactions. ◦ There is a much broader array of financial instruments available. 1-5
- 6. Six Parts ofthe Financial System 4. Financial Institutions ◦ Banks began as vaults, developed into institutions, to today’s financial supermarket. ◦ Offer a huge assortment of financial products and services. 1-6
- 7. Six Parts ofthe Financial System 5. Government regulatory agencies ◦ Government regulatory agencies were introduced by federal government after the Great Depression. ◦ Government regulatory agencies provide wide-ranging financial regulation - rules and supervision. ◦ Government regulatory agencies examine the systems a bank uses to manage its risk. ◦ The 2007-2009 financial crises has led governments to consider greater regulation. 1-7
- 8. Six Parts ofthe Financial System 6. Central banks ◦ Central banks began as large private banks to finance wars. ◦ Central banks control the availability of money and credit to ensure low inflation, high growth and stability of financial system. ◦ Today’s policymakers strive for transparency in their operations. 1-8
- 9. Five Core Principlesof Money and Banking 1. Time has value. 2. Risk requires compensation. 3. Information is the basis for decisions. 4. Markets determine prices and allocation resources. 5. Stability improves welfare. 1-9
- 10. Five Core Principlesof Money and Banking A. Core Principle 1: Time has value ◦ Time affects the value of financial instruments. ◦ Interest is paid to compensate the lenders for the time the borrowers have their money. ◦ Chapter 4 develops an understanding of interest rates and how to use them. 1-10
- 11. Five Core Principlesof Money and Banking B. Core Principle 2: Risk requires compensation ◦ In a world of uncertainty, individuals will accept risk only if they are compensated. ◦ In the financial world, compensation comes in the form of explicit payments: the higher the risk the bigger the payment. 1-11
- 12. Five Core Principlesof Money and Banking C. Core Principle 3: Information is the basis for decisions ◦ The more important the decision, the more information we gather. ◦ Collection and processing of information is the foundation of the financial system. 1-12
- 13. Five Core Principlesof Money and Banking D. Core Principle 4: Markets determine prices and allocate resources. ◦ Markets are the core of the economic system. ◦ Markets channel resources and minimize the cost of gathering information and making transactions. ◦ The better developed the financial markets, the faster the country will grow. 1-13
- 14. Five Core Principlesof Money and Banking E. Core Principle 5: Stability improves welfare. ◦ A stable economy reduces risk and improves everyone's welfare. ◦ Financial instability in the autumn of 2008 triggered the worse global downturn since the Great Depression. ◦ A stable economy grows faster than an unstable one. 1-14
- 15. Financial Institutions Firmsthat provide access to the financial markets, both ◦ to savers who wish to purchase financial instruments directly and ◦ to borrowers who want to issue them. Also known as financial intermediaries. ◦ Examples: banks, insurance companies, securities firms, and pension funds. Healthy financial institutions open the flow of resources, increasing the system’s efficiency. 3-15
- 16. Financial institutions arebusinesses which offer multiple services in banking and finance. The services customers receive may include savings and checking accounts, loans, investments, and financial counseling. The benefits consumers gain by using financial institutions includes convenience, cost savings, safety, and
- 17. The Role ofFinancial Institutions To reduce transaction costs by specializing in the issuance of standardized securities. To reduce the information costs of screening and monitoring borrowers. ◦ They curb asymmetries, helping resources flow to most productive uses. To give savers ready access to their funds. 3-17
- 18. Financial intermediationand leverage in the US have shifted away from traditional banks and toward other financial institutions less subject to government regulations. ◦ Brokerages, insurers, hedge funds, etc. These have become known as shadow banks. ◦ Provide services that compete with banks but do not accept deposits. ◦ Take on more risk than traditional banks and are less transparent. 3-18
- 19. The riseof highly leveraged shadow banks, combined with government relaxation of rules for traditional banks, permitted a rise of leverage in the financial system as a whole. ◦ This made the financial system more vulnerable to shocks. Rapid growth in some financial instruments made it easier to conceal leverage and risk- taking. 3-19
- 20. The financialcrisis transformed shadow banking. ◦ The largest US brokerages failed, merged, or converted themselves into traditional banks to gain access to funding. The crisis has encouraged the government to scrutinize any financial institution that could, by risk taking, pose a threat to the financial system. 3-20
- 21. The Structure ofthe Financial Industry We can divide intermediaries into two broad categories: ◦ Depository institutions, Take deposits and make loans What most people think of as banks ◦ Non-depository institutions. Include insurance companies, securities firms, mutual fund companies, etc. 3-21
- 22. The Structure ofthe Financial Industry 1. Depository institutions take deposits and make loans. 2. Insurance companies accept premiums, which they invest, in return for promising compensation to policy holders under certain events. 3. Pension funds invest individual and company contributions in stocks, bonds, and real estate in order to provide payments to retired workers. 3-22
- 23. The Structure ofthe Financial Industry 4. Securities firms include brokers, investment banks, underwriters, and mutual fund companies. ◦ Brokers and investment banks issue stocks and bonds to corporate customers, trade them, and advise customers. ◦ Mutual-fund companies pool the resources of individuals and companies and invest them in portfolios. ◦ Hedge funds do the same for small groups of wealthy investors. 3-23
- 24. The Structure ofthe Financial Industry 5. Finance companies raise funds directly in the financial markets in order to make loans to individuals and firms. ◦ Finance companies tend to specialize in particular types of loans, such as mortgage, automobile, or business equipment. 3-24
- 25. The Structure ofthe Financial Industry 6. Government-sponsored enterprises are federal credit agencies that provide loans directly for farmers and home mortgagors. ◦ Guarantee programs that insure loans made by private lenders. ◦ Provides retirement income and medical care through Social Security and Medicare. 3-25
- 26. Nondepository Financial Institutions Are financial intermediaries that do not accept deposits but do pool the payments of many people in the form of premiums or contributions and either invest it or provide credit to others. Nondepository institutions include pension funds, securities firms, government- sponsored enterprises, and finance companies.
- 27. Insurances Companies Insurancecompanies may be classified as 1. Life insurance companies, which sell life insurance, annuities and pensions products. 2. Non-life or general insurance companies, which sell other types of insurance.
- 28. There arealso smaller non depository institutions, such as pawnshops that make loans based on the value of property such as jewelry, electronics, or other valuable items. Pawnshops charge much higher fees than other lending institutions.
- 29. Mutual Fund An investmentwhich is comprised of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market securities and similar assets.
- 30. Brokerage Houses Stock brokersassist people in investing, online only companies are called 'discount brokerages', companies with a branch presence are called 'full service brokerages' or 'private client services.
- 31. Investment company Generally,an "investment company" is a company (corporation, business trust, partnership, or limited liability company) that Issues securities and Is primarily engaged in the business of investing in securities.
- 32. Depository institutions Figure 13.3.Where Our Money Is Deposited
- 33. Banks A bankis a commercial or state institution that provides financial services, including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit.
- 34. 1. Central Bank A Central Bank, Reserve Bank or Monetary Authority, is an entity responsible for the monetary policy of its country or of a group of member states, such as the European Central Bank (ECB) in the European Union, the Federal Reserve System in the United States of America,
- 35. 1. Central Bank Its primary responsibility is to maintain the stability of the national currency and money supply, but more active duties include controlling subsidized-loan interest rates, and acting as a “lender of last resort” to the banking sector during times of financial crisis
- 36. 2. Commercial Banks A commercial bank accepts deposits from customers and in turn makes loans, even in excess of the deposits; a process known as fractional-reserve banking. Some banks (called Banks of issue) issue banknotes as legal tender.
- 37. Size, structure and composition From1985 to 2016 the number of banks decreased as a result of merges and acquisitions.
- 38.
- 39. Large banks 5,3 2 1,1 0,7 0,9 Sales REAL ESTATE53% C&I OTHER CREDIT CARD CONSUMER
- 40. 3. Investment Banks Help companies and governments and their agencies to raise money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets (both equity and debt), as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions.
- 41. 4. Saving Banks A saving bank is a financial institution whose primary purpose is accepting savings deposits. It may also perform some other functions.
- 42. 5. Micro FinanceBanks For the purpose of poverty reduction program, such kind of banks are working in the different countries with the contribution of UNO or World Bank.
- 43. 6. Islamic Banks Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse.
- 44. 9. Leasing Companies A lease or tenancy is the right to use or occupy personal property or real property given by a lessor to another person (usually called the lessee or tenant) for a fixed or indefinite period of time, whereby the lessee obtains exclusive possession of the property in return for paying the lessor a fixed or determinable consideration (payment).
- 45. Federal Reserve System Established to supervise and regulate member banks All national banks are required to join the Federal Reserve System Banks that join the system are called “member banks”
- 46. The functions ofthe Central Banks Cashes checks for banks Makes loans to banks Wires money Collect checks for banks Supervise all national banks Supervises other members of the system Raises and lowers interest rates Attempts to control inflation
- 47. Money Supply Abank holds on to only a fraction of the money that it takes in—an amount called its reserves—and lends the rest out to individuals, businesses, and governments. In turn, borrowers put some of these funds back into the banking system, where they become available to other borrowers. The money multiplier effect ensures that the cycle expands.
- 49. Conclusion Financial institutionsserve as financial intermediaries between savers and borrowers and direct the flow of funds between the two groups.