Session 1 - Introductory

Introduction to Money, Banking and Financial Institution (Part 1)

Rationale of studying Money, Banking, and Financial Markets: Reasons of studying Financial
Institutions and Banking, Reasons of studying Money and Monetary Policy
WHY STUDY FINANCIAL MARKETS?
Financial markets
Financial markets, markets in which funds are transferred from people who have an excess of
available funds to people who have a shortage.
• Financial markets such as bond and stock markets are crucial to promoting greater economic
efficiency by channelling funds from people who do not have a productive use for them to those
who do.
• Well-functioning financial markets are a key factor in producing high economic growth and poorly
performing financial markets are one reason that many countries in the world remain desperately
poor.
• Activities in financial markets also have direct effects on personal wealth, the behaviour of
businesses and consumers, and the cyclical performance of the economy.
WHY STUDY FINANCIAL MARKETS?
The Bond Market and Interest Rates

The Stock Market
A security (also called a financial instrument) is a claim on the issuer
A common stock (typically just called a stock)
s future income or assets (any financial claim or piece of property
represents a share of ownership in a corporation.
that is subject to ownership). A bond is a debt security that promises
It is a security that is a claim on the earnings and
to make payments periodically for a specified period of time. The
assets of the corporation. Issuing stock and selling
bond market is especially important to economic activity because it
it to the public is a way for corporations to raise
enables corporations and governments to borrow to finance their
funds to finance their activities.
activities and because it is where interest rates are determined.
The stock market, in which claims on the earnings
An interest rate is the cost of borrowing or the price paid for the
of corporations (shares of stock) are traded, is the
rental of funds There are many interest rates in the economy
most widely followed financial market in almost
mortgage interest rates, car loan rates, and interest rates on many
every country that has one (that s why it is often
different types of bonds.
called simply the market ).
WHY STUDY FINANCIAL INSTITUTIONS AND BANKING ?
Structure of the Financial System
The financial system is complex, comprising many different types of private sector financial institutions, including banks,
insurance companies, mutual funds, finance companies, and investment banks, all of which are heavily regulated by the
government.
If an individual wanted to make a loan to PHP or KDS, for example, they would not go directly to the president of the
company and offer a loan. Instead, they would lend to such companies indirectly through financial intermediaries,
institutions that borrow funds from people who have saved and in turn make loans to others.
Banks and Other Financial Institutions Financial Innovation

Banks are financial institutions that accept deposits and make We study financial innovation because it
loans. Included under the term banks are firms such as chartered shows us how creative thinking on the
banks, trust and mortgage loan companies, and credit unions and part of financial institutions can lead to
caisses populaires. Because banks are the largest financial higher profits. By seeing how and why
intermediaries in our economy, they deserve the most careful financial institutions have been creative in
study. the past, we obtain a better grasp of how
However, banks are not the only important financial institutions. they may be creative in the future
Indeed, in recent years, other financial institutions such as
insurance companies, finance companies, pension funds, mutual
funds, and investment banks have been growing at the expense of
banks, and so we need to study them as well.
WHY STUDY MONEY AND MONETARY POLICY?
Money is defined as anything that is generally accepted in payment for goods or services or in the repayment of debts.
Money is linked to changes in economic variables that affect all of us and are important to the health of the economy.
The average price of goods and services in an economy is

Evidence suggests that money plays an called the aggregate price level or, more simply, the price
important role in generating business cycles, level (a more precise definition is found in the web appendix
the upward and downward movement of to this chapter). Inflation, a continual increase in the price
aggregate output produced in the economy. level, affects individuals, businesses, and the government. It
Business cycles affect all of us in immediate is generally regarded as an important problem to be solved
and important ways and is often at the top of political and policymaking agendas.
Because money can affect many economic variables that Fiscal policy involves decisions about government
are important to the well-being of our economy, spending and taxation. A budget deficit is the excess
politicians and policymakers throughout the world care of government expenditures over tax revenues for a
about the conduct of monetary policy, the management particular time period (typically a year), while a
of money and interest rates. The organization budget surplus arises when tax revenues exceed
responsible for the conduct of a nation s monetary policy government expenditures.
is the central bank.

Session 1 - Introductory

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Session 1 - Introductory

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Introduction to Money, Banking and Financial Institution (Part 1)

The Bond Market and Interest Rates

Banks and Other Financial Institutions Financial Innovation

The average price of goods and services in an economy is

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