week 5 Flashcards
functions of money
medium of exchange
means of storing wealth
means of evaluation
means of establishing value of future claims and payments
ideal attributes of money
durability
divisibility
transportability
non counterfeirability
evolution of bank deposit money
evolution of coinage
goldsmiths and the origins of bank notes
bank deposit money
role of financial sector
expert advice
expertise in channelling funds
maturity transformation-e.g. lend for longer periods of time than they borrow
risk transformation-subdividing different financial instruments and spreading risk
transmission of funds-means of transmitting payments
types of banks
retail banks: retail deposits and loans
wholesale banks: wholesale deposits and loans
universal banks: conducting retail and wholesale banking
balance sheet
liabilities and assets
sterling liabilities
sight deposits : [current accounts]
time deposits : notice of withdrawal [saving accounts]
certificates of deposit : large amounts withdrawals [CDs]
repos (sale and repurchase agreements): between banks / CD
Known repos: Gilt repos [government bonds]
capital and other funds [stocks/shares]
sterling assets
cash and balances un central bank
-recieve interest based on bank/repo rate
short term loans
-market loans
short term loans
bills of exchange
-firms (commercial)
-gov (treasury)
-bank bills (commercial banks)
liquidity ratio
liquid assets/ total assets
maturity gap
maturity (loans)- maturity (deposits)
securitisation
selling assets to other MFI before maturity date
secondary marketing
Special Purpose Vehicles (SPVs): sell assets to intermediaries
The intermediary funds the purchase with security bonds: Collateralised Debt Obligations (CDOs)
moral hazard
temptation to take more risks when knowing that someone else will cover if needed e.g. banks would take risks as they know they could issue SPVs or the gov could intervene and save if needed
the central bank
-note issue
-acts as a bank
-operates monetary policy
operates monetary policy
inflation rate targeting
open market operations (OMOs)
operational standing facilities
reserve averaging
quantitative easing and monetary policy
central bank continued
-provider of liquidity to banks
-oversees the activities of banks and other financial institutions
-operates exchange rate policy and manages reserves
financial institutions
macroprudential regulation
Financial Policy Committee (FPC)
Prudential Regulation Authority (PRA)
Financial Conduct Authority (FCA)
bank wants to increase liquidity
purchase from banks treasury bills which had yet to reach maturity
monetary base (H)
cash in circulation outside central bank (coins and notes)
broad money
deposits
credit creation
commercial banks can themselves expand the amount of bank deposits, hence the money supply
bank deposit multiplier
1/L
L:liquidity ratio
money multiplier
m= change ms/change mb (monetary base)
=change deposit + change cash / change reserves+ change cash
mb ms
MB: monetary base
MS: total broad money supply
creation of credit in real world
banks liquidity ratio may vary
customers may not take up all credit on offer
banks may not operate a simple liquidity ratio
firms and households might hold different amount of extra cash
causes of increases in money supply
central bank action
banks reduce liquidity ratio
households and firms choose to hold less cash
inflow of funds from abroad
public sector deficit
exogenous
independent of demand for money(traditional monetary theory)
The supply of money curve: exogenous money supply
Money supply determined independently of the demand for money and interest rates
The supply of money curve: endogenous money supply
Money supply depends (in part) on the demand for money and interest rates
demand for money
transactions and precautionary demand for money L1
speculative (assets) demand for money L2
transactions and precautionary demand for money L1
L1 liquidity preference- active balances
-frequency of pay
-periodic
-interest
speculative (assets) demand for money L2
L2 idle balances- expectations
total demand for money
L1 + L2
equilibrium in money market
-equilibrium rate of interest
-effects of change in money supply or demand on rate of interest
effects of changes in money supply
-effect on interest rate
-effect on exchange rate
-effect on imports and exports
