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MindMap Gallery Monetary Finance
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Monetary Finance
Textbook map, including currency and monetary system, financial institutions, interest and interest rates, financial markets and their components, monetary policy, bank supervision, etc.
Edited at 2023-12-19 19:22:22
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Monetary Finance
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- Outline
Monetary Finance
Currency and Monetary System
monetary function
value scale
means of mobility
store of value
means of payment
monetary system
silver standard
gold and silver bimetallism
parallel standard
Bimetallism and the phenomenon of bad money driving out good money (Gresham's Law)
Limping standard (silver coins cannot be minted freely)
gold standard
gold coin standard
gold coins in circulation
gold nugget standard
Bank notes in circulation
Full amount limited exchange for gold nuggets
rich man system
gold exchange standard
Bank notes in circulation
Can only exchange foreign currency
Also known as virtual gold standard
credit currency system
Credit money that cannot be redeemed is the main currency
The right to issue banknotes is monopolized by the state
Unlimited legal tender currency, last resort means of payment
Gold withdraws from circulation and paper money standard system
Financial Institutions
Theoretical basis for existence
Reduce transaction costs
economies of scale
Professional operating advantages can reduce costs
Exclusive access to the results of information production
Alleviating information asymmetry
Collect information professionally and confidentially
Alleviating free-riding, plagiarism, and credibility problems caused by information asymmetry
Spread and transfer risk
Professional technology monitoring risks
Economies of scale allow it to remain solvent in the event of a default
Can provide diversified investment products
risk sharing
Share risks for investors through asset conversion and earn risk compensation
Design your own lower-risk assets suitable for investors and help investors convert high-risk assets into assets that match their risk preferences
Coordinate liquidity preferences
There is generally a problem of inconsistent liquidity preferences between the supply and demand sides of funds.
Short-term borrowing and long-term lending coordinate liquidity preferences
System composition
managerial
Central bank (also deposit type)
business type
Classification
depository financial institution
commercial Bank
savings institution
credit union
Grameen Bank
contractual financial institution
insurance company
Pension or retirement fund
investment financial institutions
Finance Company (Financial Company)
investment bank
"Broker"
Fund management company
Corporate Funds (Mutual Funds, Mutual Funds)
Contractual funds (trust funds, unit trust funds)
open-end fund
closed-end fund
Public funds and private funds
policy financial institutions
Agricultural policy financial institution (Agricultural Development Bank)
Import and export policy financial institution (Export-Import Bank)
Economic development policy financial institutions (specialized banks, development banks)
non-bank financial institutions
trust investment company
Financial leasing company
Financing guarantee company
Interest and interest rates
Main factors affecting interest rate changes
nation
national economic policy
international interest rate levels
market
price level
economic cycle
central bank discount rate
loan capital supply and demand (Treasury bond supply and demand)
average profit margin
interest rate determination theory
classical interest rate theory
Interest rates are determined by savings and investments
is a theory of real interest rates
is a partial equilibrium theory
Use traffic analysis methods
liquidity preference theory
Bs-Bd=Md-Ms
Interest rate is a monetary phenomenon
Stock analysis
Friedman's comprehensive money supply theory
Liquidity effect, income effect, price effect and expected inflation effect (Affects money demand and thus interest rates) Three images (distinguished based on liquidity effect size and expected speed)
Income, prices, inflation expectations❗️❗️
Neoclassical interest rate theory (loanable funds theory)
Increase in money supply Savings = money hoard Investment
Ignoring the respective equilibrium of the two markets
Using both flow and stock analysis
IS-LM model theory
general equilibrium theory
bond supply and demand interest rate theory
Fisher effect (⚠️Inflation expectations rise causing Bs⬆️Bd⬇️, causing bond prices to fall and i to rise)
Procyclicality of interest rates (economic expansion rate 📈; contraction rate 📉) Bs changes faster than Bd
interest rate structure
risk structure
Default (credit) risk
tax differences
fluidity
Term structure (the most important factor is substitutability)
pure expectations theory
Completely replaceable; explains phenomena 1 and 2
Long-term interest rates are equal to the arithmetic average of expected short-term interest rates over the period
Risk appetite: Neutral
market segmentation theory
Completely irreplaceable; explains 3 phenomena
Risk Appetite: Extremely Risk Averse
liquidity premium theory
Can not be completely replaced; explains phenomena 1, 2, and 3
risk aversion
three facts
Interest rates of different maturities fluctuate together over time
When i is low, the yield curve tends to slope upward; when i is high, the yield curve tends to slope upward.
The yield curve is almost always upward sloping
yield curve
Definition; shape and explanation; function
Factors affecting interest rates
short term
central bank monetary policy
medium term
real economy growth rate
long
Savings and Investments: Savings are greater than investments ➡️Interest rates rise as the price of funds rises
Financial markets and their components
currency market
Classification
interbank lending market
Interoperability of transactions
The short-term nature of financing terms
The bulk and unsecured nature of the transaction amount
The reference and policy guidance of lending rates
An invisible market with easy transactions
bill market
Commercial paper
Bank acceptance bill market
short-term financing bill market
Treasury bill market
Public tender issuance, discount issuance
Treasury bills: solve the short-term imbalance of fiscal revenue and expenditure, and the treasury repays
Central banks generally operate openly in the secondary market
Large Negotiable Certificates of Deposit Market
Anonymous, cannot be withdrawn in advance, transferable
Reason: Regulation Q’s restrictions on deposit interest rates
Impact: Expand the channels for banks to take active liabilities and change their business philosophy
Transfer full price = Net price = full price - interest on the previous part
repurchase agreement market
Forward repurchase, reverse repurchase
Pledge-type repurchase (only transfer of possession, not ownership), buy-out repurchase (transfer of ownership)
Pledge-type repurchase is a transaction in which a person in need of funds pledges securities to raise the required funds, specifically. . . Repo rate. .
Buyout. . . The temporary disposition of securities to raise funds. . .
effect
1. Mainly short-term financing 2. The interest rate generated often has the nature of a benchmark interest rate 3. Monetary policy implementation channels
feature
Mainly institutional investors; the threshold is relatively high
Low risk and high liquidity
capital market
primary market
Financing; market for issuance; prices are generally low
Issuance system: United States: registration system, formal review; Medium: approval system, substantive review
Features
Abstract or intangible market, buying and selling is not limited to a fixed place, and can be done privately on the stock exchange
It is a market for securities brokers
Buying and selling is a one-time transaction, and the price is determined by the issuing company
Can convert savings into capital
Distribution method
1⃣️
IPO
direct issue
indirect issuance (In most cases, this is the issuance method entrusted to a financial institution)
Underwriting (determine underwriting) Most used
Agency sales (effort selling)
Assisted sales (balance underwriting)
Private issuance (fixed placement) (private placement)
internal rights issue
private placement
Establishing a Company by Initiation
Public & private placement
Secondary market
effect
Provide and enhance liquidity
Provide pricing standards (price discovery) for the primary market, and the stock price index can reflect the entire socioeconomic situation
means of transaction
Financing and securities lending transactions (credit transactions, margin transactions)
Financing (short buying, long buying on margin): borrow money to buy first and then sell
Securities lending (short selling, short selling on margin): Borrow securities to sell first and then buy
You only pay a certain percentage of margin to the securities company, and the securities company provides funds or securities for trading.
Secondary market stock price index
Dow Jones Index
Standard & Poor's
🇬🇧Financial Times Stock Index
Hong Kong Hang Seng Index
Shanghai Composite/Shenzhen Composite Index
On-site and OTC are two organizational forms of the secondary market.
(market maker’s market)
constitute
stock exchange
over the counter market
Classification
stock market
common stock
preferred stock
Bond Market
Government Bonds
financial bonds
corporate bonds
Several yield distinctions of bonds
Simple interest yield to maturity = [(face value - issue price) / term annual interest] / issue price
Current yield = annual interest/issue price
Holding period return = [(selling price - issue price)/n years of interest)]/issue price
effect
Meet the long-term investment needs of industrial and commercial enterprises Meet the government’s fiscal deficit needs
Features
Many subjects
Lower risk, higher return
Basic elements
Transaction entities (4)
Enterprise units are the largest fund demanders; Individual residents are the largest providers of funds
Trading partners
Transfer of rights to use monetary funds
Realized with the help of financial instruments as a carrier
trading tools
Financial instruments,,, also known as financial assets❗️❗️
Trading price
interest rate, exchange rate
Trading places
Tangible Intangible
basic skills (Rongyoufenxinduo)
Financial intermediation
direct/indirect financing
Convert savings into investment
Optimize capital allocation
The pricing mechanism automatically guides the rational allocation of funds
Spread and transfer risks disperse transfer
Diversifying risk relies on portfolio diversification
Transferring risks by relying on financial derivatives transactions
Information transfer function
Micro: Provide trading information to trading entities
Macro: directly or indirectly reflects the economic performance
economic adjustment
The place where macro management authorities carry out macro control
Monetary Policy
ultimate goal
Classification
Price stability (usually the most important)
It is not inconsistent with other goals in the long term, so universality is the primary long-term goal.
Short-run price stability and full employment conflict
Full employment
Phillips Curve
The lower the unemployment rate, the higher the inflation rate
The unemployment rate equals the natural rate of unemployment, which means full employment
The unemployment rate at which the labor supply and demand market is balanced in the long run is the natural rate of unemployment.
Natural rate of unemployment (voluntary unemployment)
frictional unemployment
structural unemployment
Economic Growth
Okun's law
The employment rate increases by 1% and Y increases by 2%
Working overtime or increasing work intensity
Increase the number of secondary jobs
⚠️Full employment and economic growth are consistent❗️
Balance of payments (static (1 year)/dynamic (certain period))
intermediary target
Selection criteria for intermediary targets
Testability
Controllability
Correlation
Target
Near-term intermediary goals
Short-term market interest rates (interbank lending rates)
Advantages: Data is easy to obtain, and all three characteristics are good
Disadvantages: There is a lag in how interest rates work😨 Procyclical, policy effect is not obvious
Legal ratio/bank reserves
Advantages: Data is easy to obtain, and all three characteristics are good
Disadvantages: Not as relevant as base currency B
base currency
Advantages and Disadvantages: Strong correlation, poor controllability
forward intermediary target
long term interest rate
Advantages: Strong in all three qualities
Disadvantages: Difficulty in selecting representative long-term interest rates😨 Procyclical, policy effect is not obvious
exchange rate
Money supply MS – poor correlation
❗️The existence of financial innovation makes it more difficult to measure money
monetary policy tools
China
General policy tools (quantitative type❗️)
accuracy rate
Only this changes the composition of the basic monetary structure and affects the money supply by affecting the money multiplier.
Rediscount and refinance
open market operations
repurchase transaction
Helps resolve temporary illiquidity, hedging and bidirectionality
spot trading
One-time release/shrink liquidity
central bank bills
Selective policy tools (There is no discount for coupon redemption)
consumer credit control
Securities market credit control
Real Estate Credit Control
preferential interest rate
Prepaid import deposit
Carbon-backed monetary instrument
Direct credit control (administrative order or other means to intervene in credit activities)
interest rate ceiling
credit quota
Required liquidity ratios for commercial banks
direct intervention
Indirect credit control (indirect methods affecting credit activities)
Moral advice (interview advice or issuing notices and instructions)
Window guidance
Influence the asset utilization and liability operations of financial institutions through symposiums, briefings, announcements and other non-legally binding forms.
(Stipulate the amount of loan increase or decrease every quarter and require implementation)
Originated in Japan (Moral advice is called window guidance in Japan➡️Window guidance is very common in Japan)
Unconventional monetary policy tools
Forward Guidance
Expand the size of the central bank’s balance sheet
quantitative easing monetary policy
twist operation
Changing the structure of central bank balance sheets
Standing Lending Facility
medium term lending facility
mortgage supplement loan
short-term liquidity adjustment tool
monetary policy transmission mechanism (Paths related to Ps all go through nominal interest rates)
Keynesian monetary policy transmission mechanism
Partial equilibrium analysis of interest rate transmission channel
general equilibrium analysis
Modern Monetary School Mechanism It is also a quantitative tool transmission channel
Ms📈➡️Expenditure E📈➡️I📈➡️Y📈 (The money supply is inherently stable and directly affects spending)
Asset price channel transmission mechanism Price tools mainly affect exchange rates, interest rates, and asset prices This will further affect public consumption and investment behavior and expectations.
Money price (interest rate) channel (Both are real interest rates falling📉)
Real interest rate channel (conventional) (constant inflation)
Ms⬆️👉The nominal interest rate ir fell👉The real interest rate in fell👉I rose➡️Y⬆️
Inflation rate channel (unconventional) (monetary policy is still effective at the zero lower bound)
Ms ⬆️👉Expected inflation rises👉Real interest rates in fall👉I rise➡️Y ⬆️
Other asset price channels
exchange rate channel
Affects net exports NX (expansion leads to depreciation of the local currency)
Tobin's q theory
The increase in stock price Ps affects Tobin's q (the company's market value increases ❗️❗️), which in turn affects I
wealth effect channel
Ps↑→W (wealth)↑→C↑
credit channel transmission mechanism Main credit channels for quantitative instruments
bank credit channels; Theoretical basis: equilibrium credit rationing theory
Ms↑→D (bank deposit)↑→L (loan)↑→I↑➡️Y🔝
Balance sheet channels (both cash flow and value channels)
company
Ms📈➡️Ps↑→Enterprise net worth↑→Corporate adverse selection and moral hazard decline→L (loan)↑➡️I📈➡️Y📈
Ms📈➡️Nominal interest rate ir falls→Corporate cash flow↑→Corporate solvency rises➡️Corporate adverse selection and moral hazard decline→L↑
Unexpected price level ↑ → Corporate net worth ↑ → Corporate adverse selection and moral hazard decline → L↑
personal
Ps↑→The value of household financial assets⬆️➡️Possibility of encountering financial distress↓→Consumer durable goods and housing expenditure↑➡️Y rises
Nominal interest rates ir fall → household cash flow increases ➡️ possibility of financial crisis ↓ → consumer durables and housing expenditures ↑➡️Y📈
path meaning
Monetary policy has a greater impact on small and medium-sized enterprises
Bank credit path: Monetary policy remains effective even with liquidity traps
Bank credit path: countries with more developed indirect financing have more effective monetary policies
Factors affecting the effects of monetary policy
time lag effect
internal time lag
Understanding time lag
Decision lag
intermediate time lag
External lag (effect lag)
Banking Supervision
regulatory theory
social interest theory
High degree of fragmentation of public interests and market failure
hypothesis
complete government information
full credit to the government
The government serves society as a whole
financial risk theory
Payments crisis has knock-on effects
Commercial banks are special high-risk organizations
The instability of the bank’s inherent capital structure: large amounts of liabilities, small amounts of equity
Facing eight major risks and deadline mismatch threats
Financial markets are prone to failure, bank risks have negative externalities, and run risks are contagious
Investor Interest Protection Theory
Information asymmetry
Complex principal-agent relationship
Individuals cannot afford the high regulatory costs
Individuals do not have superb supervision skills
Individual supervision is easy to free ride and has no motivation
regulatory supply and demand theory
regulatory supply
Regulatory needs: I hope regulators will strengthen regulatory restrictions and allow others to enter the market
public choice theory
regulatory model
prudential regulatory system
Supervision link
Market access regulation
Approval system
Set up barriers to entry to prevent adverse selection
Business scope supervision
Audit inspection of business processes
inspect on the spot
Unannounced on-site inspection
Prevent financial institutions from concealing the truth after learning about the inspection, but the regulatory cost will be higher
off-site inspection
capital adequacy
Asset quality
Operation and management level
profitability level
fluidity
to problematic financial institutions
Refund
take over
acquisition or merger
Liquidation
government safety net
Deposit insurance system - first in 🇺🇸
reimbursement method
Acquisition and takeover method (more expensive)
Direct capital injection from the government (to avoid risk contagion)
Lender of last resort system
Badgett Rule (Penalty Interest)
Problems with the government safety net
New information asymmetry❗️❗️❗️
Moral hazard (too big to fail)
(Depositors lack regulatory incentives)
Banks may misuse money from new loans
Basel Capital Accord
Ba I
Capital Classification
Core Tier 1 capital (can be permanently occupied) (Can be used to absorb losses incurred during business operations)
common stock capital
capital reserve
Surplus reserve
undistributed profit
Supplementary capital (other tier one capital)
preferred stock
perpetual bond
Tier 2 capital (can be tied up over a longer period of time) (capital to absorb certain losses)
Tier 2 capital bonds
Proposed capital adequacy ratio (2, 4, 8)
Capital adequacy ratio = total bank capital ➗ weighted risk assets
Capital adequacy ratio
Only for credit risk, there is regulatory arbitrage❗️
BA II
three pillars
Minimum capital requirements
Supervision by regulatory authorities and requirements for internal control systems
Strengthen information disclosure and introduce market discipline
Information disclosure
half a year
quarter
after major events
Disclosure of core information and additional information
advantage
Capital adequacy ratio calculation adds market risk and operational risk
Risk weighted assets = credit risk weighted assets ➕ (market risk capital ➕ operational risk capital) ✖️12.5
Added off-balance sheet assets❗️
Established a unified banking regulatory framework
shortcoming
procyclical
Highly dependent on credit ratings
BA III
Improved various standards (core capital from 4 to 6)
1% Systemically Important Banks
Added liquidity risk
2.5% countercyclical adjustment factor
Proposed modifications to micro-prudential principles and liquidity indicators and macro-prudential
Liquidity coverage ratio LCR= High-quality liquid asset reserves➗Net capital outflows in the next 30 days
Net Stable Financing Ratio NSFR= Available stable funds ➗ Stable funds required for business
Reserve capital requirement 2·5%❗️❗️❗️❗️❗️❗️❗️
central bank
Function
issuing bank
bank of bank
government bank
balance sheet
Any increase in central bank assets will lead to an increase in base money, Generally, financial companies’ deposits increase
Asset business
foreign assets
foreign exchange reserves
monetary gold
SDR
other foreign assets
debt
debt to the government
Just buy government bonds
Claims on other depository corporations
Discount loans and the like
Liability business
Reserve currency, approximately equal to base currency B
Currency issuance ❗️ (don’t forget to mix it up)
CashC
cash in stock
Financial company deposits
❗️This is generally understood as deposit reserves (statutory ➕excess)
Also note that ⚠️R in high-energy currency is reserves, and C is only cash Reserves R = Commercial bank deposit reserves ➕ Cash on hand
Non-financial institution deposits
Financial corporate deposits not included in reserve currency
Issuance of central bank bills
foreign liabilities
government deposits
nature
special financial institution
business
object
Target (monetary policy objective)
special state agencies
Administrative means (mainly economic means)
Administrative approach (indirect, flexible)
Have a certain degree of independence
Factors affecting base currency B (International 2, Domestic 2)
balance of payments
Exchange rate system and policy
financial balance
monetary policy operations
Do you support central bank independence and why?
commercial Bank
Function
Credit intermediary
payment intermediary
credit creation
economic adjustment
Financial Services
Organizational system (external organization)
single banking system
Advantages: anti-monopoly; easy to operate and manage
Disadvantages: high cost; poor ability to resist risks; not conducive to improving bank competitiveness
Head office branch system
Advantages: scale effect; risk diversification; convenient for independent bank management and central bank supervision
Disadvantages: easy to monopolize; difficult to manage internally; prone to chain reactions during crises
bank holding company
Started to avoid restrictions on the establishment of branches
chain banking system
agency banking system
Related Business
balance sheet
Liability business
Deposit business
Traditional liability business passive liabilities
demand deposit
checking account
NOW
MMDAs
savings balance
Customers are mainly resident individuals; passbook deposit receipts; check transfers are not allowed
time deposit
Less liquid than savings accounts
The term is fixed, and there is a penalty for early withdrawal.
ps: non-transactional deposits (the latter two do not support direct issuance of checks)
Innovation in deposit business
Innovative debt business active liabilities
Large negotiable certificates of deposit (CDs)
Anonymous, cannot be withdrawn in advance
Transferable, usually within one year
Both fixed and floating interest rates are available, generally higher than the deposit interest rate for the same period.
The starting point for deposits is relatively high, mostly in round amounts.
Transferable Payment Order Account NOW
No interest is paid on demand deposits
Account opening restrictions🚫: individuals👤 or non-profit organizations
Payment order, no limit on the number of times
Super transferable payment command super-NOW
Payment order, no limit on the number of times
There are minimum deposit and average balance restrictions🚫
Account opening restrictions🚫: individuals👤 or non-profit organizations
Money Market Deposit Accounts MMDAs
No account opening restrictions, no interest rate caps, but restrictions🚫Maximum 6 payments per month
Automatic transfer service ATS
Current deposit account➕Transfer to savings account
Current deposit account minimum limit🚫
Agreement deposit AA
Savings or Checking Account Minimum 🚫
The remainder is transferred to MMDA
Borrowing business
Borrow from central bank
Loans between financial institutions
financial bonds
Loans from international financial markets
Asset business (2⃣️3⃣️ can all create currency)
1⃣️Cash asset business
cash in stock
Interbank deposits
Cash in transit
Deposit at central bank
2⃣️Securities investment business
Purpose
Earn interest income
Diversified investments spread risks
Improve asset liquidity
Reasonable tax avoidance
3⃣️Loan business
secured loan
Mortgage, pledge loan
guaranteed loan
Credit Loans
discount loan
General off-balance sheet business (Off the balance sheet, but affecting the bank’s current profits and losses)
Off-balance sheet business in a narrow sense (you must also be a party) (Closely related to the business on the balance sheet) (risky contingent assets/liabilities) (There are requirements for bank capital) (included in risk-weighted assets)
Commitment class
loan commitment
Standing ready to provide loans up to a certain limit upon customer request and charging a commitment fee
standby loan commitment
Generally June, no more than one year at most
Revolving Loan Commitment
Convenience of bill issuance
Also known as bill financing arrangement, a medium-term revolving financing guarantee agreement with legal effect
Ensure that customers can periodically issue short-term bills in the name of commercial banks and obtain long-term financing effects through short-term financing.
The bank promises to be responsible for purchasing all the notes that the borrower fails to sell on time or to provide backup credit obligations as stipulated in the agreement.
Sources of long-term, low-cost financing for the company, trading houses or additional income
Financial guarantee
letter of credit
At the request of the importing party, issue to the exporting party
standby letter of credit
Pay as soon as you see the letter of credit Borrower ➡️Beneficiary
Bank Guarantee
The borrower will pay if the borrower fails to perform Applicant ➡️Third person
Bill acceptance
The money order is stamped and promised. . .
Provide credit protection
Expand the scope of bill circulation
Trade finance
Short-term financing business
Financial derivatives business
Intermediary business (acting as a middleman) (It has nothing to do with on-balance sheet business❗️❗️) (no risk) (No requirement for bank capital) (Not included in risk-weighted assets)❗️
consult
lease
acting
trust
Settlement
bank card
Management
Business management principles❗️
Security ⚠️ (most important)
In business operations such as granting loans and investing
Able to recover principal and interest on time
Avoid various adverse factors, especially the ability to avoid loss of principal❗️
fluidity
content
The principle that banks can meet customers’ expressed needs at any time
The principle of meeting customers’ necessary loan needs at any time
🆚Comparison
currency liquidity
Refers to the ability of assets to transform into real purchasing power without losing monetary value.
Determined by the convenience of asset realization and the cost of realization
International Reserve Structure Management Principles
Liquidity is the most important❗️Security and profitability are second.
Profitability
floating theme