BANK2011 Banking and the Financial System Semester 1 2024 PDF

BANK2011 Banking and the Financial System Semester 1 2024 The University of Sydney Page 1 Welcome to BANK2011 UoS Coordinator Dr Lantian Liang – Office: Codrington Building H69 Room 544 – Email: [email protected] – Consultation hour: Thursday, 2:00-3:00 pm 2-hour lecture plus 1-hour tutori...

BANK2011 Banking and the Financial System Semester 1 2024 The University of Sydney Page 1 Welcome to BANK2011 UoS Coordinator Dr Lantian Liang – Office: Codrington Building H69 Room 544 – Email: [email protected] – Consultation hour: Thursday, 2:00-3:00 pm 2-hour lecture plus 1-hour tutorial weekly – Tutorials will start in Week 2 The University of Sydney Page 2 Assessment Report 1 Due: 29 March 2024 25% Report 1 50% Report 2 Due: 3 May 2024 Report 2 Final exam 25% Final exam Formal exam period Weightings The University of Sydney Page 3 Learning activities Preparation for class – Readings – Homework problems Required text – Cecchetti, S.G. and Schoenholtz, K.L. (2021), Money, Banking and Financial Markets, 6th edition, McGraw Hill Online support – Canvas (https://canvas.sydney.edu.au) The University of Sydney Page 4 Week 1 Introduction BANK2011 Banking and the Financial System The University of Sydney Page 5 Learning Objectives 1. 2. List and explain the six parts of the financial system. Identify the five core principles of money and banking. The University of Sydney Page 6 Introduction – – Every financial transaction has a story. There is a complex web of interdependent institutions and markets making up the foundation of daily financial transactions: 1. The Six Parts of the Financial System. 2. The Five Core Principles of Money and Banking. The University of Sydney Page 7 Six Parts of the Financial System 1. 2. 3. 4. 5. 6. Money To pay for purchases and store wealth. Financial Instruments To transfer resources from savers to investors and to transfer risk to those best equipped to bear it. Financial Markets To buy and sell financial instruments. Financial Institutions To provide access to financial markets, collect information & provide services. Regulatory Agencies To provide oversight for financial system. Central Banks To monitor financial Institutions and stabilise the economy. The University of Sydney Page 8 Six Parts of the Financial System 1. Money – Money has changed from gold/silver coins to paper currency to electronic funds. – Cash can be obtained from an ATM anywhere in the world. – Bills are paid and transactions are checked online. The University of Sydney Page 9 Six Parts of the Financial System 2. Financial instruments – Transfers resources from savers to investors. – Buying and selling individual stocks used to be only for the wealthy. – Today we have mutual funds and other stocks available through banks or online. – Putting together a portfolio is open to everyone. The University of Sydney Page 10 Six Parts of the Financial System 3. Financial Markets – Allow the buying and selling of financial instruments easily. – Went from being in coffee houses and tavern to well organised markets like the New York Stock Exchange. – Now transactions are mostly handled by electronic markets. This has reduced the cost of processing financial transactions making the way for a much broader array of financial instruments available. The University of Sydney Page 11 Six Parts of the Financial System 4. Financial Institutions – Provide all the services of the financial system like providing access to financial markets and gathering information. – Banks began as vaults, developed into institutions that accepted deposits and gave loans, and evolved to today’s financial supermarket. The University of Sydney Page 12 Six Parts of the Financial System 5. Government regulatory agencies – Make sure the elements of the financial system operate safely and reliably. – Government regulatory agencies were introduced by federal government after the Great Depression. – They provide wide-ranging financial regulation, rules, and supervision; and examine the systems a bank uses to manage its risk. – The 2007-2009 financial crisis has led governments to strengthen regulation, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act. The University of Sydney Page 13 Six Parts of the Financial System 6. Central banks – They monitor and stabilise the financial system. – Central banks began as large private banks to finance wars. – Central banks control the availability of money and credit to promote low inflation, high growth and stability of financial system. – Today’s policymakers strive for transparency in their operations. – The financial crisis of 2007-2009 has led the U.S. central bank to try many new policy tools. The University of Sydney Page 14 Five Core Principles of Money and Banking 1. 2. 3. 4. 5. Time has value. Risk requires compensation. Information is the basis for decisions. Markets determine prices and allocate resources. Stability improves welfare. The University of Sydney Page 15 Five Core Principles of Money and Banking Core Principle 1: Time has value – Time affects the value of financial instruments. – Interest is paid to compensate the lenders for the time the borrowers have their money. The University of Sydney Page 16 Five Core Principles of Money and Banking Core Principle 2: Risk requires compensation – In a world of uncertainty, individuals will accept risk only if they are compensated. – In the financial world, compensation comes in the form of explicit payments: the higher the risk the bigger the payment. The University of Sydney Page 17 Five Core Principles of Money and Banking Core Principle 3: Information is the basis for decisions – The more important the decision, the more information we gather. – Collection and processing of information is the foundation of the financial system. The University of Sydney Page 18 Five Core Principles of Money and Banking Core Principle 4: Markets determine prices and allocate resources – Markets are the core of the economic system. – Markets channel resources and minimise the cost of gathering information and making transactions. – In general, the better developed the financial markets, the faster the country will grow. The University of Sydney Page 19 Five Core Principles of Money and Banking Core Principle 5: Stability improves welfare – A stable economy reduces risk and improves everyone’s welfare. – Financial instability between mid-2007 and early-2009 triggered the worst global downturn since the Great Depression. – A stable economy grows faster than an unstable one. – One of the main roles of central banks is stabilising the economy. The University of Sydney Page 20 Sources of Economic and Financial News and Data – Daily – – – – The Wall Street Journal Financial Times Bloomberg Yahoo! Finance – Weekly – The Economist – Bloomberg Business Week The University of Sydney – Data – Federal Reserve Economic Data (FRED) from St. Louis Fed – Bureau of Labor Statistics – Bureau of Economic Analysis – The Federal Reserve Board website Page 21 Homework problems – CS chapter 1 – Problems 6, 9, 10, 15, 17, 18 – Data exploration problems 1-3 The University of Sydney Page 22