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STAT10410 Fund Business Theory > Money and the Financial System > Flashcards

Money and the Financial System Flashcards

1
Q

What are the four purposes of money

A

Medium of exchange
Means of storing wealth
Means of evaluation
Means of establishing value of future claims and payments

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2
Q

What is the role of banks in the economy

A 
Facilitate moving money
Risk transformation
Maturity transformation
Expert advice
Transmission of funds
Expertise in channelling funds
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3
Q

What are the three levels of money

A

Narrow money
Intermediate money
Broad money

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4
Q

What is Narrow money M1

A

currency in circulation with the public and overnight deposit

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5
Q

What is Intermediate money M2

A

M1 + deposits with agreed maturity up to two years + deposit redeemable up to three month’s notice

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6
Q

What is Broad Money M3

A

M2+ repos+ money market funds and paper + debt securities with residual maturity up to two years

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7
Q

Define MFI

A

Monetary financial institution - Deposit taking institutions including central banks, credit institutions, other deposit taking corporation and money market funds

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8
Q

Explain the two types of credit institution

A

Retail banking -Branch, telephone, postal and internet banking for individual and business at published rate of interest and charges
Wholesale banking - where banks deal in large-scale deposits and loans mainly with companies and other banks and financial institutions. Interest rates and charges may be individual and negotiable

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9
Q

What are a banks assets

A

Cash including reserve balances
Market loans - especially for retail banks
Bills of exchange
Reverse repos
Advances - short term loans ex: overdraft
Investments

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10
Q

Define assets

A

Possession or claims held on others

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11
Q

Define market loans

A

Loans made to other financial institutions

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12
Q

Define bills of exchange

A

A certificate promised to repay a stated amount on a certain date (usually 3 months from issue). No interest is paid but sold at a discount and redeemed at a face value

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13
Q

Define reverse repo

A

When assets are purchased under a sale and repurchase agreement, these become an asset of the purchaser

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14
Q

What are liabilities of a bank

A 
Sight deposits
Time deposits
Sale and repurchase agreements  
Certificates of deposits  
Capital
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15
Q

Define liabilities

A

All legal claims for payment that outsiders have on an institutions

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16
Q

Define sight deposit

A

Deposits that can be withdrawn on demand without penalty

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17
Q

Define time deposit

A

Deposits that require notice of withdrawal or where a penalty is charged for withdrawals on demand

18
Q

Define certificate of deposit

A

Certificates issued by banks for fixed ter, interest bearing deposits. They can be resold by the owner to another party

19
Q

Define sale and repurchase agreement

A

An agreement between two financial institutions whereby one in effect borrows from another by selling its assets agreeing to buy them back at a fixed price and on a fixed date

20
Q

Define a maturity gap

A

The difference in the average maturity of loans and deposits - banks should very much consider this - banks get a benefit from the maturity gap and additional maturity.

21
Q

Define the liquidity ratio

A

The proportion of a bank’s total assets held in liquid form

22
Q

Explain profitability key idea from banks perspective

A

Interest higher on lending than deposit

23
Q

Explain liquidity from a banks perspective and the key ideas

A

Ease at which an asset can be converted to cash without loss
The more liquid an asset the less profitable
Cash is least profitable asset you can hold

24
Q

What is the role of central banks

A

Issues notes
Operates banking functions
Agent of government policy
Provides liquidity

25
Q

Define discount and repo market

A

Banks borrowing from central banks

26
Q

Define parallel money market

A

Interbank markets, Inter company Deposit markets, foreign currency market, commercial paper market

27
Q

Define secondary markets

A

Where an asset is sold before maturity to another institution or individual. Anywhere an asset is getting sold before maturity to another institution or individual not involved in the primary transaction

28
Q

Explain securitisation

A

Where future cash flows (ex: from interest rate of mortgage payments) are turned into marketable securities ex: bonds

29
Q

What is the securitisation chain

A

Lender sells assets to SPV
SPV sells secured assets to bond holders
Bond holder gives cash to SPV
SPV gives proceeds form notes to lenders

30
Q

What does SPV stand for

A

Special purpose vehicle

31
Q

Explain the bank deposits multiplier in context of credit creation

A

Number of times greater the expansion of bank deposits is than the additional liquidity in banks that caused it: i/L (inverse of the liquidity ratio)

32
Q

Define the money multiplier in context of credit creation

A

The number of times greater the expansion of money supply is than the expansion of the monetary base that caused it

33
Q

How do liquidity ratios work in the real world

A

As you receive more deposit your liquidity ratio will change. Liquidity ratio will not be constant over time
Banks may not operate a simple liquidity ratio - may not be one ratio for everything - different portfolios or commercial loans vs residential roles or credit card advances may have different views on the liquidity ratio

34
Q

What increases supply of money

A

Banks reduce liquidity ratio
Non-bank private sector chooses to hold less cash - putting it back into the financial system means there’s more money
A public sector deficit - government spending
Inflow of funds from abroad

35
Q

Define exogeneous money supply

A

money supply that does not depend on the demand for money but is set by the authorities - not dependent on interest rates

36
Q

Define endogenous money supply

A

Money supply that is determined (at least in part) by the demand for money

37
Q

Explain the transaction motive for holding money

A

Require balances of money to conduct transactions(medium of exchange)

38
Q

Explain the Precautionary motive for holding money

A

to deal with unforeseen circumstances or uncertainty over timing of receipt/payments ex; if my car breaks I have money available for unexpected events

39
Q

Explain the speculative motive for holding money

A

using money as an asset when ex: Anticipating a fall in the value of other assets categories (means storing value)

40
Q

What determines the demand for money

A

Money national income
Frequency at which people are paid
Financial institutions
Speculation about future returns on assets

41
Q

What effect foes money supply increasing have on the key economic indicators

A

Interest rate goes down so investment increases while saving decreases
Demand for foreign assets increases so exchange rate decreases
This means exports increase and imports decrease
Aggregate demand increases overall and GDP and Prices rise

STAT10410 Fund Business Theory (22 decks)

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