1. 4/12/2018 6:44 PM
Financial Markets

2. Financial Intermediaries
Financial Markets
Indirect Finance
Financial Intermediaries
Funds
Funds
Funds
Lenders
Savers
Households
Business
Governments
Foreigners
Borrowers
Spenders
Households
Business firms
Governments
Foreigners
FinancialMarkets
Funds
Funds
Direct Finance
Interactive guide to capital markets

3. Means to Reduce Risk (E.g. Insurance)
What Do Financial Markets Provide?
Payment Mechanisms
Investment Opportunities
Funds to Borrow
Means to Reduce Risk (E.g. Insurance)
How the Economic Machine Works:

4. Key Role of Financial Intermediaries
Address the ‘conflict of preferences’ between borrowers and lenders.
FINANCIAL INTERMEDIARIES CONSIDER PREFERENCES FOR
Liquidity/
Maturity
Risk
Financial intermediaries can help to address the ‘conflict of preferences’ between borrowers and lenders. Think about the preferences for:
Risk
Liquidity/Maturity
Volume/Size
Volume/
Size

5. Gain Benefits How do Financial Intermediaries Gain Benefits? Expertise
Reputation and Trust
Gain Benefits
Economies of Scale
Pooled Resources

6. Types of Financial Institutions
Banking Sector
retail, corporate, investment
finance houses, savings and loans, credit unions
Long Term Savings
Pension and insurance funds
Risk Spreaders
Mutual funds, investment trusts
Risk Takers
Private equity, hedge funds
Broker
Acts as a agent on behalf of a client
Assists in buying/selling securities
Can provide (indirect) access to markets
Broker‐Dealer
can also trade for their own account
may be a market maker
Inter‐Dealer Broker
Facilitates trades between broker‐dealers and other financial institutions rather than individuals

7. Key Features About Equity
Raising Capital
Bank loans
Bonds
Equity
Key Features About Equity
If it’s the first time the company has done this, we call it a ‘new issue’
If the company already has shareholders, it may approach them with the opportunity to buy more shares in the company, called a rights issue
The reward for the shareholders by way of income is the dividend

8. Classification of Capital Markets
Debt
Equity
Short Term (Money Markets)
Long Term Bonds
Shares
Capital Markets is not the same as Financial Markets

9. Classification of Financial Markets
Capital Markets
Foreign Exchange
Debt
Equity
Commodity
Derivatives
Short term (Money Markets)
Long term Bonds
Shares
Agriculture, Metals, Energy

10. Primary and Secondary Markets
Primary Markets
Secondary Markets
When a financial instrument is first issued and offered for sale this is known as the primary market
The market in which funds are first raised
Throughout the life of the instrument there is the possibility of buying and selling
This is the secondary market
No new funds are raised through secondary market deals but profits (and losses!) can be generated
The existence of a secondary market encourages investment in the primary market

11. Over‐the‐counter (OTC)
Exchange Traded and OTC Markets
Over‐the‐counter (OTC)
Exchange Traded
Physical or virtual
Products are standardized (e.g. stocks, bonds, futures)
Heavily regulated
Transaction costs tend to be low
Trades between two parties on a private basis
Custom products
Lacks transparency

12. The Role of the Central Bank

13. Central Bank Activities
Supervision of the Banking System
Advising the Government on Monetary Policy
Issue of Banknotes
Acting as Banker to the Other Banks
Acting as Banker to the Government
Raising Money for the Government
Controlling the Nation’s Currency Reserves
Acting as ‘Lender of Last Resort’
Liaison with International Bodies

14. KEY PECULIARITIES OF MONETARY POLICIES
Monetary Policy
Monetary Policy
Fiscal Policy
Relates to government tax and spending
Relates to the supply of money
KEY PECULIARITIES OF MONETARY POLICIES
MANAGED
ROLE OF CENTRAL BANKS
KEY CONSIDERATIONS
CONTROL MECHANISMS
In developed nations this is normally managed by an independent central bank.
Set the monetary policy or
Implement a government set policy
Price Stability – controlling inflation
Economic growth
Employment
Exchange Rates
Interest rates are a major mechanism for control
Fiscal policy rates to government tax and spending
Monetary Policy relates to the supply of money
In developed nations this is normally managed by an
independent central bank.
Central banks may be free to set the policy, or only
how choose how to implement a government set policy.
While economic growth, employment, exchange rates, etc may all be considerations, price stability (i.e. controlling inflation) is often seen as key.
Interest rates are a major mechanism for control

15. Let us consider the European Central Bank
Banknotes
Let us consider the European Central Bank
Key Function
controls the issue of
Banknotes
Coins
MODERN PAYMENT MODES
Cash
Cheques
Standing Orders
Consider the European Central Bank
The central bank controls the issue of banknotes and possibly, but not necessarily, coins also.
Most payments these days do not involve cash but cheques, standing orders, direct debits, credit cards, mobile payments, and so on.
Nevertheless, cash is important as banks’ cash holdings are a constraint on the creation of credit.
Direct Debits
Mobile Payments
why is controlling issue of cash important?
Cash is important as banks’ cash holdings are a constraint on the creation of credit.

16. For whom does the central bank acts as a banker?
Bankers to the Other Banks
For whom does the central bank acts as a banker?
Other Banks in the Economy
Holding Accounts with International Bodies
World Bank
“Other banks hold non‐interest‐bearing reserves with it in proportion to their deposits”
Central Bank
WHAT PURPOSE DOES THIS SERVE?
The central bank will act as banker to the other banks in the economy, as well as holding accounts with international bodies like the International Monetary Fund (IMF) and the World Bank
It is a common habit for the central bank to insist that the other banks hold non‐interest‐bearing reserves with it in proportion to their deposits
Apart from helping the bank to make a profit, these serve as an instrument of control over the money supply 1
Helps the bank make a profit 2
Serves as an instrument of control over the money supply

17. Acts as the government’s banker
Bankers to the Government
Acts as the government’s banker
Receives
Pays Out
Revenues for taxes or other income.
Money for the government’s expenditure.
Government
Central Bank
Lenders
Funds
Funds
Normally, a central bank acts as the government’s banker.
It receives revenues for taxes or other income and pays out money for the government’s expenditure
Usually, it will not lend to the government but will help the government to borrow money by the sales of its bills and bonds
Bills and Bonds
Bills and Bonds

18. Raising Money for the Government
While the Treasury or Ministry of Finance sometimes handles government issues, it is much more common for the central bank to control this and to settle payments through the accounts that banks and financial institutions have with it
Over time, the debt grows and is not, in any real sense, ever ‘paid off’.
Does this matter?
The first point is that, for any individual, how serious debt is depends on their income.
Inflation is also a key factor
Finally, to whom is the money owed?

19. Acting As Lender of Last Resort
Acting as lender of last resort not only refers to the role of the bank as a periodic rescuer of banks in trouble, it also refers to the fact that the central bank will help the other banks temporarily when they meet problems with their liquidity
During 2008, the US, the UK and all European central banks and governments engaged in widespread liquidity support schemes in order to support their banking systems

20. Liaison with International Bodies
Central banks will liaise with other international financial bodies like the IMF and the International Bank for Reconstruction and Development (IBRD), usually called the World Bank.
They also liaise with and take part in discussions at the Bank for International Settlements (BIS) in Basel
Regular meetings between G7, G10 and G20

21. Inflation is the key target for central banks.
Position of Central Bank Today
Inflation is the key target for central banks.
How do we Measure Inflation?
Accountability is Another Current Issue.
Do We Need a Central Bank?
Questions:
How do we measure inflation?
Accountability is another current issue.
Do we need a central bank?

22. Thank you
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