FINANCE AND

BANKING

By: TRAN THI THU NHUNG

 TABLE OF CONTENTS

• Chapter 1: INTRODUCTIONS TO MONEY, BANKING AND

FINANCIAL MARKETS
• Chapter 2: DIRECT FINANCE
• Chapter 3: INDIRECT FINANCE
• Chapter 4: FUNCTIONS OF MONEY AND EVOLUTION OF
THE PAYMENTS SYSTEM
• Chapter 5: ECONOMIC ANALYSIS OF FINANCIAL
STRUCTURE
• Chapter 6: BANKING AND THE MANAGEMENT OF
FINANCIAL INSTITUTIONS
• Chapter 7: THE BANKING INDUSTRY
• Chapter 8: FOREIGN EXCHANGE MARKET
THE WHOLE PICTURE
 THE WHOLE PICTURE
Categorizations of financial markets:
- Debt and Equity Markets
- Primary and Secondary Markets
- Exchanges and Over-the-Counter Markets
- Money and Capital Markets
 FINANCIAL MARKET INSTRUMENTS
Money market Capital market
instruments: instruments:
* United States Treasury Bills * Stocks
* Negotiable Bank Certificates of * Mortgages
Deposit
* Corporate Bonds
* Commercial Paper
* US Government Securities
* Banker’s Acceptances
* Repurchase Agreements * US Government Agency
* Federal (Fed) Funds
Securities
* State and Local Government
Bonds
* Consumer and Bank
Commercial Loans
 INDIRECT FINANCE
Types of Depository Institutions Investment
Intermediaries
Financial •Savings and Loans •Finance companies
Associations
Intermediaries •Mutual Savings Banks
•Mutual funds
•Credit Unions •Money market mutual
•Commercial Banks funds
•Contractual Savings
Institutions
•Life Insurance Companies
•Fire and Casualty Insurance
Companies
•Pension Funds and
Government Retirement Funds
 MONEY

• Meaning of money
• Functions of money
• Evolution of the payment system
 BANKING

• Development of the banking system

• Evolution of the banking industry
• The bank balance sheet
• Basic banking
• General principles of bank management
 CHAPTER 1
WHY STUDY FINANCIAL MARKETS?
• Definitions
- financial markets
- the stock market
- the foreign exchange market
- an interest rate
- the foreign exchange rate
- a security
- a common stock
- a bond -
 CHAPTER 1
WHY STUDY FINANCIAL MARKETS?

Financial markets

Foreign exchange
Bond market Stock market
market
 CHAPTER 1
WHY STUDY FINANCIAL MARKETS?
• The Bond market
- A bond: a debt security that promises to make payments periodically
for a specific period of time.
- Function of the bond market: enable corporations and governments
to borrow to finance their activities.
• Interest rates
- An interest rate: the cost of borrowing
- Types of interest rate: mortgage interest rates, car loan rates, bond
interest rates, and so on.
- Importance of interest rates: influence on decisions of individuals,
financial institutions, business, and the overall economy.
 CHAPTER 1
WHY STUDY FINANCIAL MARKETS?
VIETNAM BANKS RAISE LENDING INTEREST RATES TO
NEARLY 20%
“Commercial banks in Vietnam have raised interest rates for
medium and long-term loans in dong to almost 20% per
annum, the one-year record high, as a result of the dong
fund shortage.”
• How are you influenced by this increase in interest
rates as you are a manager of a company/ a flat
owner – who borrow money from the bank?
 CHAPTER 1
WHY STUDY FINANCIAL MARKETS?

The stock exchange

- A common stock represents a share of ownership
in a corporation. It is negotiable
- Function of the market: (1) helps corporations to
raise funds; (2) helps shareholders to buy or sell
their stocks whenever they want to do so; (3) can
bring profits for business owners/shareholders.
 CHAPTER 1
WHY STUDY FINANCIAL MARKETS?

The foreign exchange market

- Definition: a place where the conversion of
currencies take place.
- Foreign exchange rate: the price of one country’s
currency in terms of another’s.
- A change in exchange rates has a direct effect on
consumers’ decisions.
 CHAPTER 1
WHY STUDY BANKING AND FINANCIAL
INSTITUTIONS?
Financial institutions include:
- banks
- insurance companies
- mutual funds
- finance companies
- investment banks
 CHAPTER 1
WHY STUDY BANKING AND FINANCIAL
INSTITUTIONS?
Banks:
- commercial banks
- savings and loan associations
- mutual savings banks
- credit unions
Banks accept deposits and make loans
Types of bank deposits: checking accounts, savings
accounts and others
 CHAPTER 1
WHY STUDY BANKING AND FINANCIAL
INSTITUTIONS?
Financial innovation:
- ATM (automatic teller machine)
- E-finance (new means of delivering
financial services electronically)
 CHAPTER 1
WHY STUDY MONEY AND MONETARY
POLICY?
Definitions:
- money: anything generally accepted in payment for
goods and services or in the payment of debts
- money supply: is the total amount of money available in
an particular point in time.
- aggregate output: the total production of goods and
services.
- business cycle: the upward or downward movement of
aggregate output produced in the economy.
- recessions: periods of declining aggregate output.
 CHAPTER 1
WHY STUDY MONEY AND MONETARY
POLICY?
Definitions:
- aggregate price level: the average price of
goods and services in an economy.
- inflation: a continual increase in the price level.
- inflation rate: the rate of change of the price
level.
- unemployment rate: the percentage of the
available labor force unemployed.
 CHAPTER 1
WHY STUDY MONEY AND MONETARY
POLICY?
Conclusions:
- There is a positive association between inflation
and the growth rate of the money supply.
- As the money growth rate rises, the interest rate
may rise with it.
- As the aggregate output falls, the unemployment
rate may rise.
 CHAPTER 1
WHY STUDY MONEY AND MONETARY
POLICY?
Macro-economic policies
- Monetary policy:
+ money supply
+ interest rates
- Fiscal policy:
+ government spending
+ taxation
 CHAPTER 2
DIRECT FINANCE
 CHAPTER 2
DIRECT FINANCE

Functions of financial markets

 Channeling funds from lender-savers to
borrower-spenders
 Bringing profits & benefits for both lenders
and borrowers
 Promoting economic efficiency
 CHAPTER 2
DIRECT FINANCE

Categorizations of financial markets:

- Debt and Equity Markets
- Primary and Secondary Markets
- Exchanges and Over-the-Counter Markets
- Money and Capital Markets
 CHAPTER 2
DIRECT FINANCE
Debt and Debt markets Equity markets
Equity - Debt instruments: bond - Equities: common
Markets or mortgage stock
- Maturity of a debt - No maturity date
instrument:
+ short-term (< a year)
- Periodic payments
+ intermediate-term ( one – (dividends) to
ten years) shareholders
+ long-term (> ten years)
- Regular intervals paid
by the borrower
 CHAPTER 2
DIRECT FINANCE
Primary Primary Markets Secondary Markets
and - New/fresh securities - Outstanding securities
Secondary - Not well known to - Well known to the
Markets the public public
- Underwriting - Brokers and dealers
securities by have crucial role
investment bank - Make the financial
instruments more liquid
- Help a corporation to
-The price of new
acquire new funds
securities is determined
in the secondary markets
 CHAPTER 2
DIRECT FINANCE
Secondary Exchanges OTC markets
markets - One central - No single
location location but via
- Examples: computer links
+ The New York - Examples:
Stock Exchange + The US
+ The Chicago Government Bond
Board of Trade Market
 CHAPTER 2
DIRECT FINANCE
Money Money Markets Capital Markets
and -Short-term debt -Long-term debt and
Capital instruments equity instruments
Markets - More liquid -Less liquid securities
securities with smaller - Preferential to
fluctuations in prices financial
- Preferential to banks intermediaries
and corporations for (insurance companies
temporarily surplus or pension funds)
funds
 CHAPTER 2
DIRECT FINANCE
 CHAPTER 2
DIRECT FINANCE
 CHAPTER 2
DIRECT FINANCE
Money market instruments
• US Treasury bills:
- short-term debt instruments
- issued by The Treasury to finance the temporary
shortage in the state budget.
- maturities: in 3, 6, and 12 months
- no interest payments
- initially sold at a discount
- the safest and most liquid of all the money market
instruments
 CHAPTER 2
DIRECT FINANCE
• Negotiable Bank Certificates of Deposit
- sold by a bank to depositors
- annual interest; the original purchase price at
maturity.
• Commercial paper
• Banker’s Acceptances
• Repurchase Agreements
• Federal (Fed) Funds
 CHAPTER 3
INDIRECT FINANCE
 CHAPTER 3
INDIRECT FINANCE
 CHAPTER 3
INDIRECT FINANCE

Functions of financial
intermediaries

Transaction costs Risk sharing Information costs

 CHAPTER 3
INDIRECT FINANCE

Transaction costs:
- The time and money spent in carrying out
financial transactions
- Financial intermediaries can reduce
transaction costs
 CHAPTER 3
INDIRECT FINANCE
Risk sharing:
- Risk: uncertainty about the returns investors will
earn on assets
- Asset transformation : financial intermediaries
create and sell assets with less risk and purchase
other assets with more risk
- Diversification: investing in a collection
(portfolio) of assets.
 CHAPTER 3
INDIRECT FINANCE
Asymmetric Information: Adverse Selection
and Moral Hazard
- Adverse selection: the problem created by
asymmetric information before the
transaction occurs
- Moral hazard: the problem created by
asymmetric information after the
transaction occurs
 CHAPTER 3
INDIRECT FINANCE
REGULATION OF THE FINANCIAL SYSTEM
 Increasing information available to investors
 Ensuring the soundness of financial intermediaries
- restrictions on entry
- disclosure
- restrictions on assets and activities
- deposit insurance
- limits on competition
- restrictions on interest rates
 QUESTIONS FOR DISCUSSION
• Why is a share of IBM common stock an asset for
its owner and a liability for IBM?
• Some economists suspect that one of the reasons
that economies in developing countries grow so
slowly is that they do not have well-developed
financial markets. Does this argument make
sense?
• The U.S. economy borrowed heavily from the
British in the 19th century to build a road system.
What was the principal debt instrument used?
Why did this make both countries better off?
 QUESTIONS FOR DISCUSSION
• “Because corporations do not actually raise any
funds in secondary markets, they are less
important to the economy than primary markets.”
Comment.
• If you suspect that a company will go bankrupt
next year, which would you rather hold, bonds or
equities issued by the company? Why?
• Discuss some of the manifestations of the
globalization of the world capital markets?
 QUESTIONS FOR DISCUSSION
• How can adverse selection problem explain why
you are likely to make a loan to a family member
than to a stranger?
• Why might you be willing to make a loan to your
neighbor by putting funds in a savings account
earning a 5% interest rate at the bank and having
the bank lend her the funds at a 10% interest rate
rather than lend her the funds yourself?
• How does risk sharing benefit both financial
intermediaries and private investors?
 QUESTIONS FOR DISCUSSION
• Why do loan sharks worry less about moral hazard
in connection with their borrowers than some
other lenders do?
• If there were no asymmetry in the information that
a borrower and a lender had, could there still be a
moral hazard problem?
• If you are an employer, what kinds of moral
hazard problems might you worry about with your
employees?
 CHAPTER 4
FUNCTIONS OF MONEY AND EVOLUTION OF
THE PAYMENTS SYSEM
The fountain Circle of Money
(Kreislauf des Geldes) in
Aachen, Germany. The figurines
show different persons dealing
with money, while the rotating
water symbolizes the circle of
money. Sculptured by Karl-
Henning Seemann, sponsored by
the Sparkasse Aachen.
 CHAPTER 4
FUNCTIONS OF MONEY AND EVOLUTION OF
THE PAYMENTS SYSEM
* Meaning of money
* Functions of money
* Evolution of the
payments system
 CHAPTER 4
FUNCTIONS OF MONEY AND EVOLUTION OF
THE PAYMENTS SYSEM
• Money: anything is generally accepted in payment
for goods and services or in the payment of debts.
• Currency: one type of money consisting of paper
money and coins, (narrower in meaning).
• Wealth: the total collection of pieces of property
including bonds, stocks, art, land, furniture, cars,
and houses, etc, (broader in meaning).
• Income: a flow of earnings per unit of time.
 CHAPTER 4
FUNCTIONS OF MONEY AND EVOLUTION OF
THE PAYMENTS SYSEM
FUNCTIONS OF MONEY
• Medium of Exchange: used to pay for goods and
services.
• Unit of Account: used to measure the value of
goods and services in terms of money.
• Store of Value: a repository of purchasing power
over time.
• Standard of Deferred Payment:
 CHAPTER 4
FUNCTIONS OF MONEY AND EVOLUTION OF
THE PAYMENTS SYSEM
Medium of Exchange - the most important function
 Money promote economic efficiency by:
- eliminating much transaction costs
- encouraging specialization
 To be accepted as a medium of exchange, money
must have other functions of unit of account and
store of value as well.
 CHAPTER 4
FUNCTIONS OF MONEY AND EVOLUTION OF
THE PAYMENTS SYSEM
Types of money
 Commodity money: any
good that serves as a
medium of exchange, such
as gold, silver, copper, etc
 Token money: a means
of payment whose
purchasing power greatly
exceeds its cost of
production
 CHAPTER 4
FUNCTIONS OF MONEY AND EVOLUTION OF
THE PAYMENTS SYSEM
Types of money:
• Commodity money: any commodity is used for the exchange
purpose
• Fiat money: token money that is issued by the command of
the sovereign (commonly paper money)
• Fiduciary money: any bank assures the customers to pay in
different types of money and when the customers can sell the
promise or transfer it to somebody else – it is called
fiduciary money, ex: checks, banknotes, demand deposits in
which withdrawals can be performed via checks, bank drafts,
using ATMs, through online banking.
• Money Supply: consists of currency (banknotes and coins)
and demand deposits
 CHAPTER 4
FUNCTIONS OF MONEY AND EVOLUTION OF
THE PAYMENTS SYSEM
 CHAPTER 4
FUNCTIONS OF MONEY AND EVOLUTION OF
THE PAYMENTS SYSEM
EVOLUTION OF THE PAYMENTS SYSTEM
Commodity money
Fiat money
Checks
Electronic payment
 CHAPTER 6
BANKING AND THE MANAGEMENT OF
FINANCIAL INSTITUTIONS
 THE BANK BALANCE SHEET
 BASIC BANKING
 GENERAL PRINCIPLES OF BANK
MANAGEMENT
 CHAPTER 6
BANKING AND THE MANAGEMENT OF
FINANCIAL INSTITUTIONS
EQUOATION OF THE BALANCE SHEET

Total assets = total liabilities + capital

• Liabilities: Sources of bank funds

• Assets: Uses of funds
 CHAPTER 6
BANKING AND THE MANAGEMENT OF
FINANCIAL INSTITUTIONS
LIABILITIES
 Checkable deposits: bank accounts that allow the owner
of the account to write checks to third parties such as
demand deposits, NOW accounts, money market deposit
accounts (MMDAs)
 Non-transaction deposits: can’t write checks but higher
interest rates, consist of savings accounts and time deposits
(CDs)
 Borrowings: funds borrowed from Fed, the Federal Home
Loan banks, other banks, and corporations
 Bank capital: the bank’s net worth – by selling new equity
(stock) or from retained earnings
 CHAPTER 6
BANKING AND THE MANAGEMENT OF
FINANCIAL INSTITUTIONS
ASSETS
 Reserves: deposits in an account at the Fed
 Cash items in process of collection: deposits from a check written on
an account at another bank.
 Deposits at other banks: deposits of small banks held at larger banks
in exchange for services
 Securities: an important income-earning assets, including U.S.
government and agency securities, local government securities, other
securities
 Loans: liabilities for individual or corporation receiving it, less liquid
with highest return to the bank.
 Other assets: bank buildings, computers, and other equipments
 CHAPTER 6
BANKING AND THE MANAGEMENT OF
FINANCIAL INSTITUTIONS
Basic operation of a bank:
 Selling liabilities with one set of characteristics (a
combination of liquidity, risk, size and return)
 Using the proceeds to buy assets
 Providing a set of services: check clearing, record
keeping, credit analysis, etc.
 CHAPTER 6
BANKING AND THE MANAGEMENT OF
FINANCIAL INSTITUTIONS
GENERAL PRINCIPLES OF BANK MANAGEMENT
 Liquidity management: the acquisition of sufficiently
liquid assets to meet the bank’s obligations to depositors.
 Asset management: pursuing low level of risk for assets
acquired with low rate of default; diversifying assets
holdings.
 Liability management: acquiring funds at low costs.
 Capital adequacy management: decisions on the amount
of capital the bank should maintain & acquisition of the
needed capital.
 CHAPTER 6
BANKING AND THE MANAGEMENT OF
FINANCIAL INSTITUTIONS
Please write any your own ideas on how a financial
institution deals with liquidity management:
 CHAPTER 6
BANKING AND THE MANAGEMENT OF FINANCIAL
INSTITUTIONS

Please write any your own ideas on how a financial

institution deals with Asset management
 CHAPTER 6
BANKING AND THE MANAGEMENT OF FINANCIAL
INSTITUTIONS

Please write any your own ideas on how a financial

institution deals with Liability management
Please write any your own ideas on how a financial
institution deals with Capital adequacy management
Thank you for your
attention!