FIN2001 – FINANCIAL MARKETS AND

INSTITUTIONS

Lecturer: Phan Đặng My Phương,

Ph.D [email protected]
Faculty of Banking, UD-DUE
 Chapter
1
Overview of
the Financial
System
2
CONTENT

Financial System

Financial Markets

Financial Institutions=intermediary-Định chế tài chính

• Sustainable Finance

Central Bank

3
Materials

Chapter 2, 9, 10; Financial Markets and Institutions, 9th Edition;

Federic S. Mishkin, Stanley G. Eakins; Pearson (2018).

4
 1.1 The financial system
 Financial system consists of financial markets, financial
instruments(công cụ tài chính) and financial institutions
which interact to facilitate( tạo điều kiện) the flow of
funds (dòng tiền)through( chạy qua) the financial system.
 There are two basic mechanisms( cơ chế) by which
funds flow through the financial system:

Direct financing: where funds flow directly through
financial markets-direct

Indirect financing: where funds flow indirectly through
financial institutions-indirect in the financial
intermediation market.
5
How funds flow through the financial system

6
 The financial system

How funds flow through the financial system:

– The system moves money from lender‐savers( người
cho vay-người tiết kiệm) to borrower‐
spenders( người đi vay-người chi tiêu).
• Lender-savers = surplus spending units-đơn vị chi
tiêu thặng dư (SSU).
– For example, households, some businesses and
state and local governments.
• Borrower‐spenders = deficit spending units-đơn vị chi
tiêu thâm hụt (DSU).
– For example, businesses and the Commonwealth
 The financial system
1. DSU sell F.Insti.. In F. Market to raise fund=>True
2. In the

• The flow of funds through financial system:

 The financial system

• Direct financing:
‒ The lender‐savers and the borrower‐spenders
deal(giao dịch) ‘directly’ with one another( trực
tiếp với nhau).
‒ Borrower‐spenders sell securities( chứng khoán),
such as shares( cổ phiếu) and bonds( trái phiếu), to
lender‐savers in exchange for money.
• Securities can be referred to as( được xem là)
financial instruments and financial claims.
‒ Typical minimum direct transaction size is $1 million.
‒ Provide the lowest possible cost.
 The financial system

• Direct financing:
– Major buyers and sellers are( người mua và
người bán là):
• Commercial( thương mại) banks
• insurance and finance companies(CT tài
chính và bảo hiểm)
• large business companies
• Government
• hedge funds( quỹ phòng hộ)
• some wealthy individuals.
 The financial system

• Direct financing (using the market):

‒ To raise finance-Huy động tài chính:
• companies can issue( phát hành) their own
securities in the financial market
• particularly in the capital( vốn) market.

– Typically companies need help from experts-

chuyên gia to organise, issue and sell
securities in the market.
 Financial markets

• In financial markets, people buy and sell

financial instruments, such as:
– stocks
– bonds
– futures contracts
– mortgage-backed securities( chứng
khoán đảm bảo bằng thế chấp).
1.2 Financial market
1. Functions(chức năng) of financial market:
 Function of channeling funds( Dẫn vốn)
 Function of encouraging saving and investment.
 Function of raising the financial asset’s liquidity( Tính thanh
khoản của tài sản)
 Financial markets play an important role in the economy.
Financial markets allow funds to move from people

who lack productive investment opportunities to people who

have such opportunities.
Financial markets are critical for producing an
efficient allocation of capital, which contributes to higher
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production and efficiency for the overall economy
1.2 Financial market
1.2.2 Structure of financial market

Debt( công cụ nợ) and equity( vốn cổ
phần) markets

Primary and secondary markets-(Sơ cấp
và thứ cấp)

Exchanged and Over-the-counter Markets

Money and capital markets(Tiền tệ và
vốn)

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 1.2.2 Structure of financial market
1.Debt and equity markets: A firm or an
individual can obtain funds( đầu tư/huy động) in a financial
market in two ways:
 Issuing debt(nợ) instruments: bonds(trái phiếu) or mortgage

Short-term, intermediate-term(trung hạn) and long-term
instruments.
 Issuing equities(công cụ vốn): common stock-cổ phiếu
 Advantage of holding equities is that equity holders
benefit directly from any increases in the corporation’s
profitability or asset value.-gg dịch
 Disadvantage of owning a corporation’s equities rather than

its debt is that an equity holder is a residual claimant-gg dịch 15

 1.2.2 Structure of financial market
1.2.2.2 Primary and secondary markets
 A primary market( nôm na là tt giao dịch những chứng
khoán được phát hành lần đầu) is a financial market in
which new issues of a security, such as a bond or a stock,
are sold to initial buyers by the corporation or
government agency borrowing the funds
 A secondary market( GD những CK phát hành trc kia) is a
financial market in which securities that have been
previously issued can be resold.
 Secondary market:
 makes the financial instruments more liquid
 determines the price of the security that the issuing firm sells
in the primary market
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 1.2.2 Structure of financial market
1.2.2.3 Exchanges and Over-the-counter markets
 An exchanges market is a place where buyers and sellers of
securities (or their agents or brokers) meet in one
central location to conduct trades.( tập trung tại 1 nơi nhất
định)
 An over-the- counter (OTC) market, in which dealers at
different locations who have an inventory of
securities stand ready to buy and sell securities “over the
counter” to anyone who comes to them and is willing to
accept their prices.( dựa trên hệ thống vận hành)
 over the- counter dealers are in computer contact

the OTC market is very competitive
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 1.2 Structure of financial market
1.2.3.4 Money and capital markets
 The money market is a financial market in which only
short-term debt instruments (generally those with
original maturity of a one year or less) are traded.
( công nợ ngắn hạn thông tường kỳ hạn dưới năm)
 The capital market is the market in which longer term debt
(generally with original maturity of more than one
year) and equity instruments are traded.( công cụ nợ
dài hạn và vốn cổ phần.)-BUỒN NGỦ QUÁ.)

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 1.3 Financial Intermediaries( Trung gian tài chính)
Trung gian tài chính là thị trường đctc
1.3.1 Functions of financial intermediaries
intermediaries
 Transaction cost: Financial transaction costs reduce
because:

Expertise( chuyên môn hóa cao)

economies of scale( quy mô ktees)
 Risk sharing:chia sẻ rủi ro

Asset(tài sản) transformation

Diversification( Đa dạng hóa đầu tư)
 Asymmetric information do bất đối xứng thông tin

Adverse selection(lựa chọn đối nghịch)

Moral hazard( rủi ro đạo đức)

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1.3 Financial Intermediaries
1.3.2 Types of financial intermediaries:

Depository Institutions: Định chế nhận tiền gửi

Commercial Banks

Savings and Loan Associations (S&Ls) and Mutual
Savings Banks-

Credit Unions-Liên hiệp tín dụng

Contractual Savings Institutions-Tiết kiệm theo hợp
đồng.

Life Insurance Companies-Công ty bảo hiểm nhân thọ

Fire and Casualty Insurance Companies

Pension Funds and Government Retirement Funds
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1.3 Financial Intermediaries
1.3.2 Types of financial intermediaries (cont.)
 Investment Intermediaries

Finance Companies

Mutual Funds-quỹ tương hổ

Money Market Mutual Funds

Investment Banks

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Types of financial intermediaries

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1.4 Sustainable Finance
 Introduction to Sustainable Finance
 Environmental, Social, and Governance (ESG) Criteria
 Benefits of Sustainable Finance
 Challenges in Implementing Sustainable Finance
 Role of Stakeholders in Sustainable Finance

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1.4.1 What is Sustainable Finance?
 Definition
 Sustainable finance integrates( tích hợp) environmental, social, and
governance (ESG) factors into financial decision-making.
 Importance: vai trò
 Focuses on long-term investments in sustainable projects, promoting
economic growth while reducing environmental
pressures(Sustainable finance).

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1.4.2 ESG Criteria in Sustainable Finance
 Environmental: Climate change mitigation,
biodiversity preservation, and pollution prevention.
 Social: Issues like inequality, inclusiveness, labor relations, and
human rights.
 Governance( quản trị): Management structures,employee
relations,and executive-điều hành remuneration-thù
lao(Sustainable finance).

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1.4.3 The Benefits of Sustainable Finance
 Environmental: Reduces greenhouse gas emissions,
promotes renewable energy, and supports sustainable land and
water use.
 Economic: Opens up new green industries, drives innovation,
and leads to resource efficiency and cost savings.
 Social: Ensures inclusive growth(đảm bảo tăng trưởng),
improves quality of life, and addresses social inequalities-giải
quyết bất bình đẳng xã hội(Sustainable finance).

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1.4.4 Challenges in Sustainable Finance
 Need for greater transparency-tính minh bạch and
standardization(nâng cao tiêu chuẩn hóa) in ESG
reporting.
 Lack of education and awareness about ESG issues.
 Short-term focus in the financial industry conflicts with the
long-term perspective required(Sustainable finance).MT
ngắn hạn>< MT dài hạn

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1.4.5 Stakeholders( các bên liên quan) in Sustainable Finance

 Investors(Nhà đầu tư): Influence corporate-công ty behavior by

demanding sustainable investments.
 Businesses: Adopt sustainable models and
transparent(minh bạch ) ESG reporting to attract
investment.
 Governments: Facilitate(Tạo đk) growth through policies,
regulations(quy định), and incentives(ưu đãi).
 Civil Society(Xã hội): Raise awareness and advocate for
stronger sustainable finance practices

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 1.5 Central Bank
1.5.1 Functions(chức năng) of a modern
central bank
 Currency issuer(phát hành tiền):
 Has the monopoly rights of issuing currency notes.

 Controls the availability of money and credit.

 The Banker’s bank(ngân hàng mẹ):

 Guarantees that sound banks can do business by lending to them, even

during crises.
 Operates a payment system for interbank payment.

 Regulates and oversees financial institutions to ensure confidence in their

soundness.
 The Government’s bank:
 Hold accounts for the government and manage its financial transactions.

 Provide advice to the government on fiscal matters and economic policies.

 Manages the country’s foreign exchange reserves
3
0
1.5.2 Objectives(mục tiêu) of a modern
central bank
 Low, stable inflation(lạm phát thấp)
 High, stable growth
 Financial system stability
 Stable interest rate(lãi suất)
 Stable exchange rate(tỷ giá hối đoái)

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 1.5.3 Tools of monetary policy( chính sách
tiền tệ)
 Open market operations-nghiệp vụ tt mở
 Discount lending-cho vay chiết khấu
 Reserve requirement-dự trữ bắt buộc

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 1.5.3 Tools of monetary policy
 Open market operations – OMO: refers to the buying and
selling of government securities in the open market in order to
expand or contract the amount of money in the banking system,
facilitated by central banks.
 An open market purchase leads to an expansion of reserves and
deposits in the banking system and hence to an increase in the
money supply.
 An open market sale leads to a contraction of reserves and
deposits in the banking system and hence to a decline in the
money supply. 3
3
 Open Market Operation
 The most important monetary policy tool.
 The central bank’s purchase or sale of bonds in the open market
 The primary determinant of changes in reserves in the banking
system and interest rates
 Monetary base: the Fed’s monetary liabilities plus the U.S.
Treasury’s monetary liabilities (Treasury currency in circulation,
primarily coins)
 Two types of open market operations:
 Dynamic open market operations: are intended to change the level
of reserves and the monetary base
 Defensive open market operations: are intended to offset
movements in other factors that affect reserves and the
monetary base 3
4
 Open Market Operation
 An open market purchase leads to an expansion of reserves
and deposits in the banking system and hence to an
expansion of the monetary base and the money supply.

 An open market sale leads to a contraction of reserves and

deposits in the banking system and hence to a decline in
the monetary base and the money supply

3
5
Manipulating Supply
Manipulating supply
 1.5.3 Tools of monetary policy
 Discount lending: The central bank provides loans to banking
institutions through its discount window.
 A discount loan leads to an expansion of banking reserves,
which can be lent out as deposits, thereby leading to an increase
in the money supply.
 When a bank repays its discount loan and so reduces the total
amount of discount lending, banking reserves decreases along
with a decline in money supply.

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 Discount policy
 The facility at which banks can borrow reserves from the
Federal Reserve is called the discount window.
 The Fed’s discount loans to banks are of three types:

 Primary credit: plays the most important role in monetary policy

o
Healthy banks are allowed to borrow all they
want at very short maturities (usually overnight)
 Secondary credit: is given to banks that are in financial trouble
and are experiencing severe liquidity problems
 Seasonal credit: is given to meet the needs of a limited number of
small banks in vacation and agricultural areas that have a
seasonal pattern of deposits

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Discount policy
 A discount loan leads to an expansion of reserves, which
can be lent out as deposits, thereby leading to an expansion
of the monetary base and the money supply.
 When a bank repays its discount loan and so reduces the
total amount of discount lending, the amount of reserves
decreases along with the monetary base and the money
supply.

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 1.5.3 Tools of monetary policy
 Reserve requirement is the amount of funds that financial
institutions must hold at the central bank in order to back their
deposits.
 A rise in reserve requirements means that banks must hold more
reserves at central bank and lower banks ’ ability to lend, thereby
leading to a decline in the money supply.
 A reduction in reserve requirements means that banks are required
to hold less, thereby leading to an increase in the money supply.
 Reserve requirements have rarely been used as a monetary policy
tool because raising them can cause immediate liquidity problems
for banks with low excess reserves. 4
1
 Reserve requirement
 Reserve requirement is the amount of funds that
financial institutions must hold at the Fed in order to back their
deposit.
 A rise in reserve requirements leads to a decline of the monetary
multiplier and the money supply.
 A reduction leads to an expansion in the monetary multiplier
and the money supply
 Reserve requirements have rarely been used as a monetary
policy tool because raising them can cause immediate liquidity
problems for banks with low excess reserves.

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The Federal Reserve System
https://www.federalreserve.gov/
Structure of the Federal Reserve System:

Established in 1913 according to Federal Reserve Act

The Federal Reserve System includes the following
entities:

The Federal Reserve District banks

The Board of Governors of the Federal Reserve
System

The Federal Open Market Committee (FOMC)

The Federal Advisory Council

2,800 member commercial banks

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Federal Reserve Banks

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1.4.5 The State Bank of Vietnam
https://sbv.gov.vn

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Is the financial system
changing?
• Digital currencies – Many
• Does not require
intermediaries.

Blockchain
Technology

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 Summa
ry markets facilitate the transfer of
 Financial
funds from surplus units to deficit units.
Because funding needs vary among deficit
units, various financial markets have been
established. The primary market allows for the
issuance of new securities, and the secondary
market allows for the sale of existing
securities.
 Securities can be classified as money market
(short- term) securities or capital market
(long-term) securities. Common capital
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market securities include bonds,
Questio
n Explain the
 meaning of surplus units
and deficit units. Provide an example
of each. Which types of financial
institutions do you deal with? Explain
whether you are acting as a surplus
unit or a deficit unit in your
relationship with each financial
institution.
 Distinguish between primary and
secondary markets. Distinguish
between money and capital markets. 48