WEEK 4- MONEY AND EUROPEAN BANKING
MONEY is an asset that can purchase goods and services.
Intrinsic value: actual value of the paper note
Nominal: 10,20,50 euros etc.
SEIGNORAGE: Difference in value btw nominal value – intrinsic
value: profit of the central bank printing money.
Functions of money: AS A MEDIUM OF EXCHANGE, AS A STORE
OF VALUE AND AS A UNIT OF ACCOUNT.
Definitions of money supply M0 – M1 – M2 – M3
M0= banknotes + coins
M1= + cash in circulation
M2 = + checkable bank deposits
M3= + assets that are less liquid.
Financial markets: savers and borrowers meet to achieve best
possible deals through financial intermediaries, such as banks.
The other part of financial markets involves individual lenders. This
part includes the bond markets borrowers issue bonds, acquired
by savers.
Stock markets: borrowers are private corporations that raise money
by offering ownership in the form of shares or stocks.
Financial markets perform 1- Intermediation: financial institutions
2- Maturity transformation: short, such as bank deposits and bonds
vs. long such as bank loans).
3- Risk taking (unreliable borrowers)
Banks: receive deposits, offer loans and manage wealth.
Insurance companies are financial institutions as well.
Bonds are debts issued by firms and governments for a set
maturity at an explicit interest rate.
STOCKS are ownership titles to firms and have no maturity.
,Essential qualities of a financial markets: BREADTH AND
DEPTH
The ability to buy and sell bonds or shares results from the depth of
the market: it relies on the continuing presence of a very large
number of investors, from individuals to banks, funds and insurance
companies.
MARKET BREADTH describes the variety of instruments and issuers
available to investors.
Breadth and depth grow with market size.
Financial markets allow every saver to collocate themselves in any
point of the risk-return curve.
The interest rate is, thus, the sum of the price of the maturity
premium and the risk premium.
Because of more DIVERSIFICATION- bigger variety of assets, larger
markets allow savers to hold less risk.
Characteristics of financial economies
- Scale economies: the financial industry is subjected to
massive scale economies the more borrowers and lenders,
the easier to match the needs of both b and L.
- Networks: financial markets tend to become even larger
because financial institutions and markets are seen as a
network of borrowers and lenders.
- Asymmetrical information: the borrower always knows
more about his own riskiness than the lender. Lenders are very
careful and refuse to take unknown risks or ask for very large
risk premia.
EU POLICY ON CAPITAL MARKET INTEGRATION
Only with the 1986 single European act, the full mobilization of all
forms of assets was achieved within European nations.
With European integration
Banks expanded customership beyond initial borders
Increased relationships with one another
Cross border deposits and loans among banks quadrupled
, The creation of the euro was accompanied by further
integration of all financial market components until 2008.
Regulation, supervision and resolution.
In order to reduce risks for banks.
Core principles of regulation, globally accepted. In eu,
regulations revolve around the ‘four freedoms’, which rest on
strong externalities and returns to scale .
Supervision is kept at the national level vs centralised
supervision. Returns to scale imply that banks are likely to
become multinational; cannot be imperfectly supervised.
Resolutions: when a bank fails. Management of liabilities
sometimes banks get nationalised.
THE BANKING UNION (2014) involves three building blocks:
1. The single rule book - regulations
2. The single supervision mechanism
3. The single resolution mechanism (fund filled with
money from banks in case of failures)
Membership in the banking union is compulsory for the
members of the eurozone and open to eu countries.
WEEK 5 – FISCAL POLICY AND THE STABILITY AND
GROWTH PACT
FISCAL POLICY consists in using taxes, government transfers
and purchase of goods and services to boost economy.
RECESSIONARY GAP: happens when aggregate output is
LOWER than potential output. Therefore, there is a need to
INCREASE AGGREGATE DEMAND by shifting the ADCURVE to
the right.
Therefore, the government needs to implement an
EXPANSIONARY FISCAL POLICY:
+ PURCHASE of goods and services
MONEY is an asset that can purchase goods and services.
Intrinsic value: actual value of the paper note
Nominal: 10,20,50 euros etc.
SEIGNORAGE: Difference in value btw nominal value – intrinsic
value: profit of the central bank printing money.
Functions of money: AS A MEDIUM OF EXCHANGE, AS A STORE
OF VALUE AND AS A UNIT OF ACCOUNT.
Definitions of money supply M0 – M1 – M2 – M3
M0= banknotes + coins
M1= + cash in circulation
M2 = + checkable bank deposits
M3= + assets that are less liquid.
Financial markets: savers and borrowers meet to achieve best
possible deals through financial intermediaries, such as banks.
The other part of financial markets involves individual lenders. This
part includes the bond markets borrowers issue bonds, acquired
by savers.
Stock markets: borrowers are private corporations that raise money
by offering ownership in the form of shares or stocks.
Financial markets perform 1- Intermediation: financial institutions
2- Maturity transformation: short, such as bank deposits and bonds
vs. long such as bank loans).
3- Risk taking (unreliable borrowers)
Banks: receive deposits, offer loans and manage wealth.
Insurance companies are financial institutions as well.
Bonds are debts issued by firms and governments for a set
maturity at an explicit interest rate.
STOCKS are ownership titles to firms and have no maturity.
,Essential qualities of a financial markets: BREADTH AND
DEPTH
The ability to buy and sell bonds or shares results from the depth of
the market: it relies on the continuing presence of a very large
number of investors, from individuals to banks, funds and insurance
companies.
MARKET BREADTH describes the variety of instruments and issuers
available to investors.
Breadth and depth grow with market size.
Financial markets allow every saver to collocate themselves in any
point of the risk-return curve.
The interest rate is, thus, the sum of the price of the maturity
premium and the risk premium.
Because of more DIVERSIFICATION- bigger variety of assets, larger
markets allow savers to hold less risk.
Characteristics of financial economies
- Scale economies: the financial industry is subjected to
massive scale economies the more borrowers and lenders,
the easier to match the needs of both b and L.
- Networks: financial markets tend to become even larger
because financial institutions and markets are seen as a
network of borrowers and lenders.
- Asymmetrical information: the borrower always knows
more about his own riskiness than the lender. Lenders are very
careful and refuse to take unknown risks or ask for very large
risk premia.
EU POLICY ON CAPITAL MARKET INTEGRATION
Only with the 1986 single European act, the full mobilization of all
forms of assets was achieved within European nations.
With European integration
Banks expanded customership beyond initial borders
Increased relationships with one another
Cross border deposits and loans among banks quadrupled
, The creation of the euro was accompanied by further
integration of all financial market components until 2008.
Regulation, supervision and resolution.
In order to reduce risks for banks.
Core principles of regulation, globally accepted. In eu,
regulations revolve around the ‘four freedoms’, which rest on
strong externalities and returns to scale .
Supervision is kept at the national level vs centralised
supervision. Returns to scale imply that banks are likely to
become multinational; cannot be imperfectly supervised.
Resolutions: when a bank fails. Management of liabilities
sometimes banks get nationalised.
THE BANKING UNION (2014) involves three building blocks:
1. The single rule book - regulations
2. The single supervision mechanism
3. The single resolution mechanism (fund filled with
money from banks in case of failures)
Membership in the banking union is compulsory for the
members of the eurozone and open to eu countries.
WEEK 5 – FISCAL POLICY AND THE STABILITY AND
GROWTH PACT
FISCAL POLICY consists in using taxes, government transfers
and purchase of goods and services to boost economy.
RECESSIONARY GAP: happens when aggregate output is
LOWER than potential output. Therefore, there is a need to
INCREASE AGGREGATE DEMAND by shifting the ADCURVE to
the right.
Therefore, the government needs to implement an
EXPANSIONARY FISCAL POLICY:
+ PURCHASE of goods and services
