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Finance mind map
Basic knowledge, summarizing monetary policy, currency and monetary system, money supply and its equilibrium, interest rates, derivative financial markets, Financial Institutions, Credit etc.
Edited at 2024-01-16 23:13:13
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Finance mind map
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finance
Monetary Policy
feature
Macro, adjust aggregate demand, indirect control, long-term continuous
ultimate goal
Price stability (primary goal), economic growth, full employment, balance of payments, financial stability
relationship between ultimate goals
Unite
full employment and economic growth
contradiction
Stable prices and full employment Full employment and balance of payments Balance of payments and economic growth
Both unified and contradictory
Stabilizing prices and economic growth Stabilize prices and balance of payments
The choice of the ultimate goal of my country’s monetary policy at this stage
The ultimate goal: to maintain currency stability and thereby promote economic growth
Intermediary goals: long-term interest rates, money supply, bank credit scale
Operational targets: short-term interest rates, base currency, deposit reserves
Principle: measurable, controllable, relevant
monetary policy tools
The “Three Magic Weapons” of General Monetary Policy Tools
Statutory deposit reserve policy (8.4% is the average deposit reserve ratio for cash)
Regulatory mechanism
Upgrade for overheating, downgrade for depression
advantage
Easy to operate and powerful
shortcoming
Strong force, reverse offset
rediscount policy
means
1. Rediscount rate 2. Discount varieties
Regulatory mechanism
During recessions, banks lower their rediscount rates, Commercial banks are encouraged to rediscount, and the market money supply increases. Money market interest rates fall, stimulating investment
advantage
Optimize capital structure
shortcoming
Central bank passive The announcement effect of adjusting the rediscount rate is relative Frequent adjustments will cause excessive short-term fluctuations in market interest rates.
Innovation in my country's Rediscount Policy
Standing Lending Facility (SLF) Mortgage Supplementary Lending Policy Tool (PSL) Medium-Term Lending Facility Policy Facility (MLF) Short-Term Liquidity Adjustment Facility (SLO) Temporary Liquidity Facility (TLF)
open market business
Regulatory mechanism
Overheated, sell securities to recover money
advantage
Most commonly used, active, reverse operation or simultaneous operation, fine-tuning
shortcoming
The central bank has a high degree of independence The financial market must be quite developed and securities types Complete categories and reaching a certain scale
Overheating: Two mentions and one sale Depression: Two cuts and one buy
Selective Monetary Policy Tools
Consumer credit control, securities market credit control, real estate credit control, preferential interest rates, prepaid import deposits
Supplementary Monetary Policy Tools
direct credit control
Loan limits, interest rate limits, liquidity ratios, direct intervention
indirect credit control
Moral advice, window guidance
Currency and Monetary System
Essence: general equivalent
Four stages of monetary form
simple accident - enlargement - general value - monetary value
Monetary Functions (Mastery)
Measure of value, means of circulation, means of payment, means of storage, world currency
The most basic: (Flow A) Value: Conceptual Currency Circulation: Pay with one hand and deliver with one hand Payment: Deferred Storage: full value (notes are stored in a hoard) Renminbi: CNY (not a world currency)
Monetary level division (M₂-M₁=quasi-currency: potential currency)
Basis: Liquidity (liquidity without loss) IMF division
M ₀: Cash in circulation
(Narrow) M₁: M₀ Current deposits of enterprises and institutions, deposits of government agencies, organizations and troops, and credit card balances held by individuals.
(Guangdong) M₂: M₁ Savings deposits (personal demand deposits) Time deposits of enterprises and institutions Trusts Other deposits
IMF VS🇨🇳 (bold)
Individuals withdraw money to buy things: increase remains unchanged Enterprises withdraw money to buy things: increase unchanged
M₃: M₂ Financial bonds, commercial papers, large transferable time deposit certificates, etc.
Quasi-currency: personal deposits and time deposits, savings deposits and others within one year (securities company margin)
monetary system
Metal currency standard system
silver standard
🌟Gold and Silver Bimetallism
parallel standard
bimetallism
Gresham's Law: Bad money drives out good money
limp standard
🌟Gold Standard
Gold coin standard (the most typical)
gold nugget standard (raw gold standard)
Gold exchange standard (virtual gold standard)
Not honoring the credit currency standard
Features: Diversity, Gold Demonetization, Creditification
Can easily lead to inflation
Development: from moralization to commercialization to securitization
Money supply and its equilibrium
money demand
theory
Marx's Theory of Money Demand
M=PQ/V
The necessary amount of money to implement the means of circulation (M) = total value of commodities (PQ) / circulation velocity of the currency of the same name (V)
determining factors
Price level (proportional to the value level of goods in circulation) Velocity of circulation (inversely proportional to the velocity of currency of the same name), the number of commodities in circulation
classical quantity theory of money
Macroscopic Perspective: Fisher’s Cash Transaction Quantity Theory (Transaction Equation)
MV = PT (changes in money supply (M) will cause the same proportional change in the general price level (p)) M: The average amount of money in circulation during a certain period T: The total transaction volume of goods and services (full employment) P: General price level (weighted average of various commodity prices) V: Money circulation velocity
Focus: Pay more attention to the quantity and speed of monetary expenditures Determinants of money demand emphasized: Focus on currency’s means of exchange, functions
(Motivation) Micro Perspective: Cambridge School’s Cash Balance Quantity Theory
Md = kPY (there is always a relatively stable proportional relationship between nominal money demand and nominal income level) Y: Total income P: Price level k: Proportion of wealth held in the form of money to nominal total income Md: Money demand
Focus: Pay more attention to the ratio of stock to income (nominal versus nominal, actual versus actual) Determinants of Money Demand Emphasized: Focus on Money Treated as an Asset
Keynes's Liquidity Preference Theory
Formula: L = L₁(Y) L₂(i) = M₁ M₂ = L(Y,i)
motivation
Transaction motivation (proportional to income) Prevention motivation (proportional to income) Speculative motives (interest rates are inversely proportional)
liquidity trap
When interest rates are low and bond prices are high, The demand for money is infinite and monetary policy is invincible.
Friedman's permanent income hypothesis
stable and predictable
money supply
Formation mechanism
The central bank releases base money (high-power money, strong money)
B = R C (Base currency = bank deposit reserves, cash in circulation) basic deposit ❌
Generalized reserves: statutory reserves, excess reserves, cash on hand
Commercial banks create deposit money
Deposit currency
Original deposit (cash deposited in bank)
Derived deposits (deposits created by banks through transfers for loans, discounts, and investments)
Total deposits = original deposits Derived deposits = original deposits * money multiplier)
The amount of expansion depends on factors
A D=A × 1 / r
(D: Total amount of derived deposits A: Original deposits r: statutory deposit reserve 1 / r: deposit multiplier)
Influencing factors
Statutory reserve ratio (r): K = 1/r Cash leakage rate (c): K = 1 / (r c) Excess reserve ratio (e): K = 1 / (r c e)
Cash leakage rate (c) Statutory reserve ratio (r) Excess reserve ratio (e)
Time deposit ratio [t = Dt (total time deposits) / Dd (total demand deposits)] and time deposit reserve ratio (rt): K = 1 / (r c e t × rt)
macro model
basic model
Ms = m × B (Ms: total supply of money m: money multiplier B: base money)
m₀ = c / (c r e rt × t) m₁ = (c 1)/ (c r e rt × t) m₂ = (c 1 t)/ (c r e rt × t)
interest rate
The nature of interest
price of borrowed capital
Classification of interest rates🌟
According to the actual income level reflected: nominal interest rate, real interest rate
Fisher effect: real = nominal ➖ inflation rate
Depending on the size and status of the role: base interest rate, differential interest rate
Base rate: multiple interest rates coexist and play a decisive role
Depending on whether the interest rate is adjusted or changed during the loan period: fixed interest rate, floating interest rate
Fixed rate: suitable for open and small
Floating interest rates: scientific and reasonable
According to the method of decision: official interest rate (legal interest rate, determined by the central bank or the government), market interest rate, public interest rate (non-governmental institutions)
Interbank lending rate LPR (market-based interest rate, based on the MLF (Medium-term Lending Facility) loan market quotation rate) Private lending interest rate
The length of time is different
Annual interest rate (%) month day
applied area
international interest rates
LIBOR, SIBOR, NIBOR, HIBOR
domestic interest rate
SHIBOR
Calculation of interest
Simple interest method: S = P (1 r·n)
Compound Interest Method Sum of principal and interest: F = P (1 r )ⁿ Interest: I = F - P
Compound interest m times a year: r/m
Present value: P = F/(1 r)ⁿ
Final value: F = P(1 r )ⁿ
Nominal yield = Coupon interest ÷ Par amount
Spot yield = interest ÷ market price
yield to maturity
The most accurate measure of interest rates
P = ∑C / (1 y)ᵗ M / (1 y)ⁿ
Failure to hold to maturity and holding time for more than one year: P = ∑C / (1 y)ᵗ Pn / (1 y)ⁿ
Failure to hold to maturity and the holding period does not exceed one year: Holding period yield ⁼ [coupon interest (selling price - buying price)] / bond buying price
Interest rate determination and marketization
interest rate determination theory
Marx (profit, part of surplus value)
Interest rate change range: 0 - average interest rate
Classical School (price of capital used)
The supply of capital is determined by the amount of savings, which is an increasing function of interest rates; The demand for capital is determined by investment, which is a decreasing function of the interest rate.
S = I, the interest rate reaches the equilibrium level; S > I, the supply of funds is greater than the demand for funds, and interest rates fall; S < I, the supply of funds is less than the demand for funds, and interest rates rise.
Keynesian liquidity preference (price of using money)
Money supply determines interest rates, transactions are directly proportional to income, and speculation is inversely proportional to interest rates.
Loanable funds interest rate
Supply of Loanable Funds: Savings Real Money Supply Loanable Funds Demand: Investors Money Demand
Interest rate risk structure:
Default Risk
fluidity
Income Tax Policy
Interest rate marketization reform ideas
Foreign currency first, currency second, local currency loan first, deposit first, large and long amount first, then small and short amount.
Breakthrough
Liberalize interbank lending market interest rates
The role of interest rates
microscopic
Adjustment of corporate credit demand and adjustment of personal financial assets
Macro
Adjustment of the total amount and structure of investment, adjustment of savings and consumption, Regulate currency circulation and capital turnover, and promote the conversion of media currency capitalization
Interest rates are in sync with the economic cycle
yield curve
The relationship between bond yield to maturity and bond duration
Financing model
TO T handover operation handover
transfer operating rights
BOT construction and operation transfer
Transfer operation stage
Credit
meaning
Lending behavior with repayment of principal and interest
credit form
Business credit (the most basic)
meaning
Commodity transactions, both parties are enterprises, direct credit
example
Credit sales between enterprises (most typical), cash in advance, deferred payment
limitation
Scale, direction, term, credit objects, decentralization and instability
Bank credit (most important)
meaning
Bank provides, productive, bank has responsibility as intermediary, indirect credit
advantage
Breaking the limitations of commercial credit
complementary and irreplaceable
national credit
form
Domestic debt and external debt
tool
Treasury bonds - the safest and most liquid. Treasury Bills (gilts) – within one year
consumer credit
meaning
Available to consumers only
Way
Sales on credit, installment payments, consumer loans, credit card overdrafts
feature
Non-production, long term, high risk
Financial market
constitute
main body
government
fund seekers
Financial Institutions
Most active traders
resident
capital provider
enterprise
Important entities in hedging
central bank
It is also a regulatory agency
object
Financial tool
treaty, written document
Financial instruments are the carrier of financial markets
feature
Term, liquidity, profitability, risk
The relationship between
Term and liquidity are inversely related
Liquidity and risk are directly proportional
Risk and return are directly proportional
Term is directly proportional to risk
Term is directly proportional to profitability
intermediary
The purpose is to get a commission
Function
Financial intermediation
The most important and basic
Resource allocation
Flow to maximum benefit, high utilization rate
Risk diversification and management
economic adjustment
Transactions and Pricing
reflect economic performance
barometer
financial market types
Divided according to the length of transaction period
currency market
capital market
stock market
Bond Market
Medium and long-term credit (fund market)
financial derivatives market
Classification according to the issuance and circulation of financial instruments
Issuance market (primary market, primary market)
Public placement and private placement
Initial Public OfferingIPO
Circulation market (secondary market)
Sale and transfer
Divided according to whether the trading venue is fixed or not
Visible market, intangible market
Stock exchange (North, Shanghai, Shenzhen)
Futures exchanges (Dalian, Zhengzhou, Shanghai, CFFEX, Guangzhou)
According to the delivery period of financial instruments
Spot market, futures market
specific tools
Bonds, bills, foreign exchange, stocks, gold
Financing
directly, indirectly
currency market
feature
It has quasi-currency properties in the short term, with strong liquidity, low risk, low returns, sensitive to interest rates, and large transaction volume.
Category 5️⃣
Treasury Bills (gilts)
effect
Large quantity to meet the short-term capital turnover needs of government departments
A tool used by the central bank to adjust interest rates in the circulation market
Features
High security
Treasury bill interest rate is the risk-free rate
Strong liquidity
Interest is tax-free
Bill market (acceptance and discount)
discount
discount
clients and firms
rediscount
between commercial banks
rediscount
Commercial banks and central banks
Issue price/actual discount amount = face amount - discount interest Discount interest = face amount × annual discount rate × (term/360)
repurchase agreement market
Positive repurchase (sell first and then buy, get money for financing), reverse repo (buy first and then sell, release funds)
feature
Short term
Repurchase object
treasury bills
Commercial paper
Large negotiable certificate of deposit
Repurchase essence
collateralized short-term lending
Repurchase effect
Financing Methods Open Market Business Instruments
interbank lending market
Among financial institutions, currency lending and short-term financing can only be used to make up for temporary bank shortages, bill balances, and investment or fixed asset loans are prohibited.
feature
Short term
Mainly overnight positions
Wide range of participants
Individuals and businesses prohibited
The main transaction is excess reserves
credit lending
Large Negotiable Certificate of Deposit Market
VS traditional time deposit certificate (such as passbook)
Anonymous, negotiable and transferable
The denomination is fixed and larger
Interest rates can be fixed or floating, and are generally higher than traditional
It cannot be withdrawn in advance and can only be transferred in the secondary market.
Central Bank❤️
Origin and development
The necessity of the central bank: unify the requirements for the issuance and circulation of bank notes, Unify domestic clearing and clearing requirements for centralized credit, The need to act as a bank’s lender of last resort, Meet the needs of government financing and unified financial industry supervision
Evolved from commercial bank - Bank of England Established by government design (the establishment of the Federal Reserve in 1914) Complex banks replaced single banks - People's Bank of China 1948
Properties (special)
The core of a country’s financial system
Not for profit
Not conducting ordinary business
relative independence
Carrying out macro-control of the national economy
Function
issuing bank
The only one to issue RMB or digital currency
bank of bank
Centralize deposit reserves, act as lender of last resort, and organize nationwide liquidation
government bank
Act as an agent for the treasury, manage government funds, and provide credit (loans) to the government
Institutional type
unitary central bank system
Unitary central bank system (China), dual central bank system (United States)
Composite central bank system, transnational central bank system (Euro area)
quasi-central banking system
Hong Kong SAR, China (Standard Chartered Bank, HSBC, Bank of China)
central bank independence
Independence is relative
Subject to the operation of the large economic and social system It is an integral part of the entire macro-control system. Activities must be carried out under state authorization
maintain a certain degree of independence
Avoid monetization of fiscal deficits that could lead to inflation Avoid reducing the stability of monetary policy and causing financial volatility Avoid local government intervention and ensure the effective implementation of monetary policy
business
On-balance sheet business
Liability business (more passive)
Currency issuance business (main liability business)
acting treasury
Centralized deposit reserves
Issuance of central bank bonds
Asset business (more proactive)
Refinancing business rediscount business
Belongs to the loan category, but is only a mortgage loan
Securities trading business
Positive repurchase and reverse repurchase to regulate the economy
Reserve asset business
Gold foreign exchange reserve business (last resort)
Off-balance sheet business (intermediate business)
Payment and clearing business
Other business
Payment and Settlement System (CNAPS) of the People's Bank of China
commercial Bank
nature
With the goal of profit maximization, commercial banks are special financial enterprises
Business principles
Safety principle (premise), liquidity principle (condition), profitability principle (purpose)
Function
Credit intermediaries (most basic and primary), payment intermediaries, financial services, credit creation
Credit creation (generated based on credit intermediary and payment intermediary)
Credit creation is the creation of credit instruments, rather than the creation of capital
organizational system
external organizational system
Single banking system (used only in some areas of the United States) Holding company system (United States)
bank holding company
Holding companies formed to absorb smaller banks
chain banking system
Do not establish a holding company and directly purchase small banks
Head office branch system (mainly represented by the United Kingdom and widely used by most countries, including my country)
internal organizational system
Decision-making system, execution system, supervision system
business
On-balance sheet business
Liability business
Deposit business (most important) passive
Personal deposits (savings deposits)
in principle
Deposits are voluntary, withdrawals are free, deposit interest is kept confidential for depositors
Classification
demand deposit
compound interest
Quarterly Interest Settlement (No. 20)
Living, you can’t control the interest rate by yourself when setting a fixed price
time deposit
Whole deposit and round withdrawal (common) zero deposit and round withdrawal, whole deposit and zero withdrawal, principal deposit and interest withdrawal
Other deposits
Fixed and living expenses, education savings (for fourth grade students and above, interest tax-free), personal notifications, and margin deposits
unit deposit
Basic deposit account (only one)
General deposit account (can only deposit but not withdraw)
Dedicated deposit account (such as five insurances and one fund for employees)
Temporary deposit account (no more than 2 years)
Active liability business
Interbank borrowing
Interbank lending, remortgage, rediscount
Borrow from central bank
Refinance, remortgage, and rediscount
Other liabilities
Asset business
Loans (most important)
Term (short, medium (1-5 years), long-term loan), whether to mortgage (credit, guarantee (mortgage of real estate, pledge of movables and rights), guarantee) Risk level [good loans (normal, special mention), non-performing assets (substandard, doubtful, loss)]
personal loan
Variety, convenience, flexibility, low capital
Equal principal and interest (principal and interest equal to principal and interest)
Principal increases, interest decreases
Equal amount of principal
The principal remains unchanged and the interest increases
Housing, consumption, business, credit card overdraft
Housing provident fund loans have a maximum term of 30 years
corporate loan
Liquidity, fixed assets, syndicate (syndicate)
Bond investment (securities investment)
Cannot invest in trusts, cannot invest in enterprises, etc.
cash assets
Cash on hand, cash in collection Deposits (reserves) deposited with the central bank, deposits deposited with banks
Discounted bills
General off-balance sheet business (credit card)
Intermediary business (traditional, low risk)
Payment and settlement business, consulting business Bank card business, agency business, trust business
Features
Does not directly use its own funds and does not directly bear risks
Accept entrustment and charge service fee
diverse
business
Payment settlement
Three votes and one remittance (money order, cashier's check, check remittance), clearing
Cashier's check: Local, the issuer is also the payer and the payee
Money order: different place, issuer, payee, payee
leasing business
Operational (renting a house), financing (asking an agent to rent the equipment to me, and finally buying it)
Agency business
Collection and payment agency, bank agency, securities agency, insurance agency
Bank card business
credit card debit card
Credit limit – up to overdraft
Financial management business
Financial advisor, comprehensive financial management, traditional financial management, wealth management
electronic banking
Online banking, mobile banking, self-service terminals (ATM)
Off-balance sheet in a narrow sense (innovation, high risk)
Guarantee business
Bank acceptance draft, standby letter of credit, letter of guarantee business
Commitment business
Note issuance facilities, loan commitments
Financial derivatives business
Futures, options, swaps, swaps
theory
Asset management theory (emphasis on liquidity first)
Liability management theory (actively borrowing funds to increase bank income)
Comprehensive asset and liability management theory (reasonably arrange the asset and liability structure while looking for new sources of funds)
Financial Institutions
Business principles
Safety, Liquidity, Profitability
type
financial regulator
financial operating agency
Classified according to business nature: commercial financial institutions, policy financial institutions
Divided according to whether they belong to the banking system: bank financial institutions, non-bank financial institutions
Classified according to whether they accept deposits: deposit-taking financial institutions, non-deposit-taking financial institutions
Function
Realize financial integration (indirect financing, direct financing) and facilitate payment and settlement (third-party payment) Provide diversified financial services, complete resource allocation, and reduce transaction costs Improve information asymmetry (adverse selection, moral hazard), spread and transfer risks (risk transfer and management)
my country’s financial institution system
Core (Central Bank) Subject (commercial bank)
One committee, one bank, two meetings and one bureau
General Administration of International Financial Regulation People's Bank of China (First Bank) State Administration of Foreign Exchange (First Bureau) People's Bank of China
Securities and Futures Commission (non-bank institutions)
Financial Institutions
Development financial institutions, securities banking institutions, insurance banking institutions, and other banking financial institutions
policy bank
Agricultural Development Bank of China, Export-Import Bank of China
feature
Not for profit, maintain capital and make small profits
Sources of funds
Government appropriation, issuance of financial bonds, borrowing from the central bank, inter-bank lending, and does not accept deposits
Function
advocate, choose, supplement, serve
Business principles
Security does not matter
development finance institutions
Based on national credit and market performance as the pillar, it is both a policy business and a commercial business
Commercial bank (subject)
Large state-owned commercial banks, national joint-stock commercial banks, rural banks City commercial banks, housing savings banks, rural commercial banks, rural cooperative banks
Private Banks
Zheshang Bank (Alipay), WeBank (WeChat)
Derivative financial markets
Forward market (over-the-counter)
feature
OTC, non-standardized contracts, transfer risk
Futures market (on-exchange trading), swap market
feature
on-site, standardized
Hedging transactions can be taken before the delivery date to close out the futures position (close the position)
Daily settlement (mark-to-market)
Function
Hedging
Anchoring prices in spot and futures markets
price discovery
speculation
Enter a long position (commit to buy) in anticipation of a rise
arbitrage
options market
Division of rights based on options
Call option (right to buy)
Current market price > exercise price
Put options (puts)
market price<exercise price
The buyer has limited losses and unlimited gains
Divided according to option delivery time
American options (optional) European Options (Regulations)
Medium and long-term credit, fund market
constitute
Fund classification
feature
Collective investment, trust investment, financial intermediary, securities investment, indirect investment
Bond Market
bond debt certificate
Institution, denomination, term, interest rate
bond type
Government bonds, financial bonds, corporate bonds
Short term, medium term (1-10 years), long term
Convertible (stock) and non-convertible
Fixed and floating interest rates
Interest and discount (zero interest)
Credit and guarantee (including mortgage, pledge and guarantee)
bond issuance
Pricing
price
Issue at par (issue price equal to face value) Issuance at a premium (issue price is greater than face value) Issuance at a discount (the issue price is lower than the face value, and the coupon rate is lower than the market interest rate)
Classification
home market
foreign market
Issued by foreigners in their own country in their own currency
Foreigners issue bonds in China
Panda 🐼
Foreigners issue bonds in the United States
Yankee 🐓
Foreigners issue bonds in the UK
Bulldog 🦮
Foreigners issue bonds in Japan
Samurai 🧙
Foreigners issue bonds in Spain
Matador 🐂
European market
Issued by foreigners in a third-party currency in their home country
Way
direct issue
indirect issuance
Offtake and underwriting
underwriting
full amount
balance
consignment
Try your best to sell
Tender issuance
Features
Repayment, liquidity, profitability, safety (treasury bonds>financial bonds>corporate bonds>stocks)
bond yield calculation
my country's bond market
exchange
interbank
main body
(Extended) Commercial Bank Counter
stock market
Documents of ownership, securities that receive dividends and dividends
feature
Profitability (the most basic feature)
Source: Joint stock companies and stock circulation
risk
Liquidity
Transferable, non-refundable
permanent
It cannot be returned to the company and can only be sold on the securities market to recover the principal.
participatory
All shareholders can attend the shareholders' meeting and participate in decision-making
Classification
Different shareholders’ rights
common stock
Participation rights, distribution rights, residual property claim rights, preemptive stock options
preferred stock
Priority in fixed dividends, priority in repayment, and restrictions on participation in operating decisions
Classified according to the country and identity of the holder
A shares
RMB subscription, domestic
B shares
Foreign currency subscription, overseas
H shares
Hongkong
N shares
New York
S shares
Singapore
Classified according to whether it is registered: registered shares, bearer shares
stock issuance market
Depending on the issuer
Cemetery offering (public offering) Private placement (non-public offering)
Depending on whether the issuer entrusts an intermediary
Indirect distribution [consignment, underwriting (Balance, full underwriting)] direct issue
Issue at par (issue price equal to face value) Issuance at a premium (issue price is greater than face value) Mid-price issue (between face value and market price)
stock circulation market
On-exchange market, OTC market
Stock Prices and Yields
The market price of the stock (issue price, circulation price) Stock rate of return % = selling price - purchase price Dividends during the holding period / purchase price ✖️ term P/E ratio = market price per share / after-tax earnings per share of the previous year (integer) Stock value = expected earnings per share × price-to-earnings ratio
Financial Risk and Regulation (Learn)
Financial risk
concept
Refers to the possibility of losses in assets and income due to uncertain changes in various factors in financial activities.
Classification
Basel Committee Classification
Credit risk (default)
Loans are the main risk
market risk
Two rates and two prices: interest rates, exchange rates, stock prices, commodity prices
It is a systemic risk (must be borne)
operational risk
Internal procedural issues, system issues, employee issues, external events
Includes legal risks but excludes reputational and strategic risks
Universal, non-profit
Liquidity risk
Unable to meet customer demand (loans or withdrawals), a run occurs..
Comprehensive risk, caused by multiple reasons, may infect other banks
country risk
between international transactions
The same country does not exist
Reputation risk
Negative comments affect confidence
Legal Risk
Violation of legal provisions is an operational risk
strategic risk
Strategic goals, business strategies, lack of resources, and difficulty in ensuring quality
Can it be dispersed?
Systemic risk (non-diversifiable risk)
Risks common to financial markets as a whole that cannot be diversified or hedged through investment diversification
Economic cycle fluctuations, policy risks, market risks, interest rate risks, purchasing power risks, exchange rate risks
unsystematic risk
Is a risk that is unique to a certain industry or business and can be diversified through investment diversification
Financial analysis, credit risk, operating risk, contingencies
Risk Management
process
identify
Perceived risk category
Analyze internal factors
Measurement
monitor
control
Strategy
dispersion
Diversification, Markowitz’s “correlation coefficient is not 1” and “a large number of portfolio assets”
Hedging
Asset return volatility is negatively correlated
transfer
insurance transfer
To the deposit insurance company (maximum compensation of 500,000)
Not insurance
Guarantee, letter of credit to third party
avoid
Refuse or withdraw, be passive, not take the lead
compensate
Risk premium before loss occurs, rarely used
capital management
capital
Classification
book capital
Accounting capital: paid-in capital, capital reserve, surplus reserve, undistributed profits
regulatory capital
Necessary to cover risks
expected loss
Economic capital (risk capital)
To deal with unexpected losses in the future, calculate the risk and should hold it as the last line of defense
effect
Provide financing
Absorption and digestion losses
Overly restrictive
Basel
Bayi
Unified definition of regulatory capital
core and subsidiary
Establish an asset risk measurement system
Give risk weights 0, 10%, 20%, 50%, 100%
Determine capital adequacy regulatory standards
Pakistan 2 (New World First Bus)
Pillar One: Minimum Capital Requirements
Not less than 8% 4%
Pillar Two: External Regulation
Pillar Three: Market Discipline
Information disclosure
Basan
Strengthen capital adequacy ratio
Capital Classification
Level 1: Dominance
Level 2: Bankruptcy and liquidation
Enhance metrology
Raise capital adequacy standards
Total capital adequacy ratio 8%
Capital adequacy ratio = total capital/risk-weighted assets
Core Level 1: 4.5%
Level 1: 6%
Reserve capital 2.5%
Countercyclical capital 0-2.5%
Systemically important banks plus capital 1%-3.5%
Introducing leverage ratio regulatory standards
Establish liquidity risk quantification supervision standards
my country’s capital regulation
capital definition
Core Tier 1 Capital (the most core)
Tier 1 capital
Tier 2 capital
capital deductions
regulatory requirements
Minimum capital requirements
Capital adequacy ratio 8%
Core level 5%
Level 6%
second level
Reserve capital 2.5%
Countercyclical 0-2.5%
Core Tier 1 Capital
third level
Systemic importance plus capital 1%
Core Tier 1 Capital
Systemically important banks 11.5% Non-systemically important banks 10.5%
Capital Adequacy Ratio Management
molecular countermeasures
Tier 1 capital
Most commonly used: issuing common stock and increasing retained earnings
Tier 2 capital
Excess loan loss provisions, subordinated debt, convertible bonds
Denominator strategy
Downsize
Restructuring
Financial Supervision
unified regulatory system
Separate supervision system
incomplete regulatory system
Leading type (unilateral)
Brazil is typical
Bimodal (two ends)
Australia is typical
regulatory rating
Camel rating CAMEL
Capital adequacy, asset quality, management level, profitability level, liquidity
Tip: Actual monitoring
Tip: Eliminate symptoms without hesitation
The IMF’s main business: providing financial facilities to member countries