Financial Markets and institutions
Introduction
Y = C + I + G + (X – M)
Y – T = C + I + G – T + (X – M)
Y – T – C = I + (G – T) + (X – M)
S = I + (G – T) + (X – M)
How to get the surplus (savings) to where it is needed (debt in all its forms + equity)
Financial plumbing of the economy
The economic system makes sure that S can equal I. Savings can equal investments. We give to
institutions that don’t have enough money.
Endogenous system:
- Time dependent
- Geography dependent (there is no unified system in the EU!)
The Belgian Financial system
The financial system has been created by all the systems of today. It’s not gods creation. It’s not the
same system as 20 years ago. It does change, it’s time dependent. If you work in the financial system
you have to reschool all the time.
The fiinancial system of europe is not the same as the UK as the US as China … We will focus on the
financial system of Europe
ON AVERAGE: er is geen algemeen systeem, het is afhankelijk van alle grenzen in een land
è Language barriers, consumor habits are different in all europe countries
How does the economic system look like? This happens just in one country only.
Shadow bank (begrip)
Gemaakt na de crisis in 2008-2009 to produce a risk in the system
1
,2 countries: A & B
Starting point: money in the hands of economic agents (consumers, corporations, governments,
institutional players). This money is used to transact (buying or selling). Therefore financial
intermediaries and/or auctions (exchanges/capital markets) are necessary just as payment systems.
These payment systems (settlement mechanisms like for instance Euroclear for securities) are currently
going through an important change as a result of financial and technical innovations (Fin. Tech.
evolutions). Financial Intermediaries can be divided into two subclasses: commercial banks and shadow
banks.
This system has to be regulated. Within the banking union of the EU, the ECB and the National Central
Banks are the prime regulators. In Belgium we have developed the Twin peaks model (NBB /FSMA).
Transactions also happen between countries (or between banks within a given country). This happens
mostly in the (international) capital markets. These markets can be physical places or they can be
decentralised between banks (over the counter).
(Standard) Derivatives require the intervention of Central Clearing Parties (CCP).
The international financial system is also influenced by supranational authorities like the Bank for
International Settlements (BIS) or by self regulation (ISDA/ESMA). There are as well a number of
institutions that provide advice or that follow up on specific markets (BIS, Financial Stability Board).
à Banking system
à Professional parties do use capital markets extensively (mainly derivatives/bonds)
à Limited use of the capital market to raise funding
à Digital systems
This typecasting is not specific for the Belgium market. It holds in essence for the entire European
financial market., The specific numbers differ of course for the different countries.
Options, equity, stocks
Equity issuane è very small number in vergelijking met andere
The banking system is way more important than capital market system.
We are a banking market all the time!!
Systems are becoming more and more digital. Mensen gebruiken meer en meer hun gsm om transacties
te doen. ”My bank is my phone”
è Everything is becoming digital
2
,Chapter 1: Money & creation of money
1.1 Origin and characteristics
a. Definition
• A product that is generally accepted in exchange for goods and services, i.e. it is a means
of exchange
• based on convention. It is an explicit or implicit agreement.
o Explicit: by law
o Implicit: whatever the economic agents agree to use as means of exchange
At first sight money is something extremely evident: it is Euro, Us dollar, etc… When money is defined
based upon its features, it is much less evident which good can be considered as money. The defining
characteristic of money is its capacity to be generally accepted a means of payment. It is this feature
that makes it stand out from other goods.
This implies that money does not to equal "coins”, issued by a central authority, nor does it imply that
all legal tender issued by central banks act as money in the economy.
Money is a convention. It is based upon trust. One accepts a given good as money, because one assumes
that others will accept it too. It represents general purchasing power.
Law can of course enforce the use of a given good as money. However if the trust in the de facto validity
in exchanges is lacking with the public than even legal obligations can not enforce the use of the legal
tender outside of the officially controlled circuit. For all free transactions other means of payment will be
used.
Gresham’s law captures part of this idea “bad money drives out good money”.
b. Function
• Means of exchange. (to create an exchange)
• Investment.
• Unit of account. (u use it to express value)
• (Standard for future payments.)
Money has several functions:
The basic and prime function of money is to act as an intermediary good in exchanges and trades. In
developed market economies a generally accepted means of payment is a necessary condition for the
economy to thrive.
When trust in the use of the good chosen to act as money increases, then it will also be considered as a
vehicle that captures value and that stores purchasing power. Money will be considered as a savings
instrument, next to other stores of value.
Money plays also the roll of unit of account of purchasing power. The relative value of goods is not
directly determined but it is represented in terms of money. Comparisons of value do happen in money
terms.
The unit of account function, finally, is not limited to the current moment, but is also used for transactions
that are spread out over time. This leads to the time value of money (and the existence of interest rates).
Why €5 ??? è good money heeft verschillende karakteristieken mogelijk
3
, c. Characteristics
• Valuable in comparison to its weight.
• Durable.
• Divisible.
• Standardised quality.
• Easily recognisable.
• Stable Purchasing power
(note the difference between stable and predictable).
How does a €5 note compare to a bar of gold? è It’s not practical, the money itself doesn’t matter it
doesn’t need to bother u
Money has not been invented like that. Its development happened really gradually based upon some
sort of survival of the fittest. Throughout time the functions of money pointed to characteristics that an
ideal means of payment needs to possess. The trust in the stability of its value and the ease of use can
be split into more concrete features. (How do the following products score on these features: fruit,
diamonds, art, old timers, equity, bitcoin)?
d. Evolution
• Barter trade.
• Commodities used as “money”.
• Precious metals
• Means of payment: coins (minted) or paper money.
• Legal tender (fiat money)
• Fiduciary money.
• E-money – cryptocurrencies
Fiat Money
Fiat money is what a government determines as money. (i.e., fiat). That means, the government declares
fiat money to be legal tender, which requires all people and firms within the country to accept it as a
means of payment. This does not mean however that the fiat money needs to be accepted by a merchant.
There is always a freedom of contract. For instance does a merchant have to accept cash? Cash (bills or
coins) is legal tender, but the merchant can decide to accept only electronic payments. In this case he
accepts commercial bank money.
Fiduciary Money
Fiduciary money takes value thanks to the confidence of the public that it will be generally accepted as
a medium of exchange, that it has purchasing power. The issuer of fiduciary money promises to exchange
it back for a commodity or fiat money if requested by the bearer. The value of the money token > the
physical value of the money token (e.g. a 50 euro banknote)
Commercial Bank Money
Commercial bank money can be described as claims against financial institutions that can be used to
purchase goods or service. It is money on a sight account at the bank. It can be converted into fiat
money or into central bank money.
4
Introduction
Y = C + I + G + (X – M)
Y – T = C + I + G – T + (X – M)
Y – T – C = I + (G – T) + (X – M)
S = I + (G – T) + (X – M)
How to get the surplus (savings) to where it is needed (debt in all its forms + equity)
Financial plumbing of the economy
The economic system makes sure that S can equal I. Savings can equal investments. We give to
institutions that don’t have enough money.
Endogenous system:
- Time dependent
- Geography dependent (there is no unified system in the EU!)
The Belgian Financial system
The financial system has been created by all the systems of today. It’s not gods creation. It’s not the
same system as 20 years ago. It does change, it’s time dependent. If you work in the financial system
you have to reschool all the time.
The fiinancial system of europe is not the same as the UK as the US as China … We will focus on the
financial system of Europe
ON AVERAGE: er is geen algemeen systeem, het is afhankelijk van alle grenzen in een land
è Language barriers, consumor habits are different in all europe countries
How does the economic system look like? This happens just in one country only.
Shadow bank (begrip)
Gemaakt na de crisis in 2008-2009 to produce a risk in the system
1
,2 countries: A & B
Starting point: money in the hands of economic agents (consumers, corporations, governments,
institutional players). This money is used to transact (buying or selling). Therefore financial
intermediaries and/or auctions (exchanges/capital markets) are necessary just as payment systems.
These payment systems (settlement mechanisms like for instance Euroclear for securities) are currently
going through an important change as a result of financial and technical innovations (Fin. Tech.
evolutions). Financial Intermediaries can be divided into two subclasses: commercial banks and shadow
banks.
This system has to be regulated. Within the banking union of the EU, the ECB and the National Central
Banks are the prime regulators. In Belgium we have developed the Twin peaks model (NBB /FSMA).
Transactions also happen between countries (or between banks within a given country). This happens
mostly in the (international) capital markets. These markets can be physical places or they can be
decentralised between banks (over the counter).
(Standard) Derivatives require the intervention of Central Clearing Parties (CCP).
The international financial system is also influenced by supranational authorities like the Bank for
International Settlements (BIS) or by self regulation (ISDA/ESMA). There are as well a number of
institutions that provide advice or that follow up on specific markets (BIS, Financial Stability Board).
à Banking system
à Professional parties do use capital markets extensively (mainly derivatives/bonds)
à Limited use of the capital market to raise funding
à Digital systems
This typecasting is not specific for the Belgium market. It holds in essence for the entire European
financial market., The specific numbers differ of course for the different countries.
Options, equity, stocks
Equity issuane è very small number in vergelijking met andere
The banking system is way more important than capital market system.
We are a banking market all the time!!
Systems are becoming more and more digital. Mensen gebruiken meer en meer hun gsm om transacties
te doen. ”My bank is my phone”
è Everything is becoming digital
2
,Chapter 1: Money & creation of money
1.1 Origin and characteristics
a. Definition
• A product that is generally accepted in exchange for goods and services, i.e. it is a means
of exchange
• based on convention. It is an explicit or implicit agreement.
o Explicit: by law
o Implicit: whatever the economic agents agree to use as means of exchange
At first sight money is something extremely evident: it is Euro, Us dollar, etc… When money is defined
based upon its features, it is much less evident which good can be considered as money. The defining
characteristic of money is its capacity to be generally accepted a means of payment. It is this feature
that makes it stand out from other goods.
This implies that money does not to equal "coins”, issued by a central authority, nor does it imply that
all legal tender issued by central banks act as money in the economy.
Money is a convention. It is based upon trust. One accepts a given good as money, because one assumes
that others will accept it too. It represents general purchasing power.
Law can of course enforce the use of a given good as money. However if the trust in the de facto validity
in exchanges is lacking with the public than even legal obligations can not enforce the use of the legal
tender outside of the officially controlled circuit. For all free transactions other means of payment will be
used.
Gresham’s law captures part of this idea “bad money drives out good money”.
b. Function
• Means of exchange. (to create an exchange)
• Investment.
• Unit of account. (u use it to express value)
• (Standard for future payments.)
Money has several functions:
The basic and prime function of money is to act as an intermediary good in exchanges and trades. In
developed market economies a generally accepted means of payment is a necessary condition for the
economy to thrive.
When trust in the use of the good chosen to act as money increases, then it will also be considered as a
vehicle that captures value and that stores purchasing power. Money will be considered as a savings
instrument, next to other stores of value.
Money plays also the roll of unit of account of purchasing power. The relative value of goods is not
directly determined but it is represented in terms of money. Comparisons of value do happen in money
terms.
The unit of account function, finally, is not limited to the current moment, but is also used for transactions
that are spread out over time. This leads to the time value of money (and the existence of interest rates).
Why €5 ??? è good money heeft verschillende karakteristieken mogelijk
3
, c. Characteristics
• Valuable in comparison to its weight.
• Durable.
• Divisible.
• Standardised quality.
• Easily recognisable.
• Stable Purchasing power
(note the difference between stable and predictable).
How does a €5 note compare to a bar of gold? è It’s not practical, the money itself doesn’t matter it
doesn’t need to bother u
Money has not been invented like that. Its development happened really gradually based upon some
sort of survival of the fittest. Throughout time the functions of money pointed to characteristics that an
ideal means of payment needs to possess. The trust in the stability of its value and the ease of use can
be split into more concrete features. (How do the following products score on these features: fruit,
diamonds, art, old timers, equity, bitcoin)?
d. Evolution
• Barter trade.
• Commodities used as “money”.
• Precious metals
• Means of payment: coins (minted) or paper money.
• Legal tender (fiat money)
• Fiduciary money.
• E-money – cryptocurrencies
Fiat Money
Fiat money is what a government determines as money. (i.e., fiat). That means, the government declares
fiat money to be legal tender, which requires all people and firms within the country to accept it as a
means of payment. This does not mean however that the fiat money needs to be accepted by a merchant.
There is always a freedom of contract. For instance does a merchant have to accept cash? Cash (bills or
coins) is legal tender, but the merchant can decide to accept only electronic payments. In this case he
accepts commercial bank money.
Fiduciary Money
Fiduciary money takes value thanks to the confidence of the public that it will be generally accepted as
a medium of exchange, that it has purchasing power. The issuer of fiduciary money promises to exchange
it back for a commodity or fiat money if requested by the bearer. The value of the money token > the
physical value of the money token (e.g. a 50 euro banknote)
Commercial Bank Money
Commercial bank money can be described as claims against financial institutions that can be used to
purchase goods or service. It is money on a sight account at the bank. It can be converted into fiat
money or into central bank money.
4
