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Money and the Economy
Money competes with other assets.
Tangible assets are lasting physical objects.
Financial assets are claims to immediate or future cash payments
(bank deposits, bonds,shares of stocks)
Assets are what individuals, firms, and other participants in
the economy own.
People hold their wealth in various assets depending on the
needs and rewards (rates of return)
Money and the Financial System:
Money is transferred from savers to borrowers. Financial
Institutions act as intermediaries in transferring money from
savers to borrowers.
Financial Institutions charge intermediation fee (interest rate
or brokers commission, trust fee,etc.) for the transaction.
Financial Intermediation Process
Savers Financial
Institutions
Borrowers
Households
Firms
Government
Banks
Stockbrokers
Mutual FundCos.
Trust Cos.
Households
Firms
Government
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Services Provided by the Financial System
Risk Sharing
Hold several assets/Create a Portfolio Diversification
Liquidity A particular asset can be exchanged for other assets
or for goods and services
Information Gathering of information Communication of
information
Bank Intermediation Products: Traditional Deposits:
Current Account (CA): A deposit account for the purpose of
quickly providing access to funds anytime. Because of convenience,
CAs do not normally bear interest. Withdrawing of funds via writing
of checks
Savings Deposits (SA): Depositors set aside a portion of their
liquid funds and earn interest. Withdrawing of funds via ATM sites
or thru a bank branch
Time Deposits (TD): A deposit that has a specific maturity date.
Withdrawal can be done at maturity date.
Securities: Private and Government Securities
Financial Intermediation
Interest Rates:
Compensation to the lender for allowing the use of funds. The
fee paid by the borrower for the privilege of using the funds.
Reserve Requirement:
Funding Treasury Lending
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a bank regulation that sets the minimum reserves each bank must
hold to customerdeposits.
designed to satisfy withdrawal demands of clients. normally in
the form of currency stored/deposited with a central bank
and/or
investments in government securities
Basic Formula:
Nominal Rate---------------------------------(1-Reserve
Requirement)
Formula Including Earnings on Reserves:
Nominal Rate Earnings on
Reserves---------------------------------------------------
(1-Reserve Requirement)
Reserve Requirement for Commercial Banks and Universal
Banks:
Statutory/Legal Reserves : 8.00%Liquidity Reserves : 11.00%
----------19.00%
Reserve Cost Computation
Illustration:
Nominal Cost : 5.00%Reserve Requirement : 19.00%
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5.00%--------------(1 19 .00%)
6.17283951% or 6.17%
Transfer Pool Funds
Reservoir of excess funds from any surplus units of the Bank
Serves as the source of funds from deficient units around the Bank
Price attached to it is the Transfer Pool Rate (TPR)
Transfer Pool Rates (TPR)
Price attached to the reservoir/pool of excess funds from any
surplus units of the Bank
Surplus Units earn interest at TPR as if it were another
asset/outlet Deficient Units borrow from the pool at TPR
Transfer Pricing:
Removes market risk exposure from Business Units. Provides
business units with consistent and predictable spreads. Promotes
Management accountability
