ZH 1

Banking and Finance
1 An Overview
of the Financial System
Zoltán Gál, full professor; Klaudia Rádóczy , lecturer

Department of Finance & Accounting
Course Requirements
• Course material:
– Most of presented during the classes
– all slides will be uploaded to the Moodle
– additional readings
• Textbook:
– Mishkin, F.C.: The Economics of Money, Banking and
Financial Markets, Pearson 2016 (11th edition) (pp.47-524 )
• Suggested book:
– Lawrence J. Gitman: Principles of Managerial Finance, Addison - Wesley 10th Edition
http://wps.aw.com/aw_gitman_pmf_11
– Banks in the changing world of financial intermediation MC Kinsey report (2018)
https://www.mckinsey.com/industries/financial-services/our-insights/banks-in-the-changing-world-of-financial-
intermediation
– Arner D. et. al. (2015). The evolution of fintech: a new post-crisis paradigm. Research Paper No. 2016-62. The
University of New South Wales (UNSW) and the University of Hong Kong, UNSW Law .
https://hub.hku.hk/bitstream/10722/221450/1/Content.pdf
Validated course – same requirements for students (PTE and Erasmus)

21/02/2022 2
Lessons weekly: Tuesday 14:30-17:30, Classroom: A 308
Contact with the lecturers:
Zoltán GÁL:
Tuedsday: 13:00 – 14:00
Location: Room 409 in the Main (green) Building
Email: galz@ktk.pte.hu
Klaudia RÁDÓCZY
Monday 13:00-14:00
Room: B217
Email: radoczy.klaudia@ktk.pte.hu
3
(or by appointment done through Lívia Tóth)
Assesment and Grading Policy
• Class Participation:
– maximum of 25% absence is allowed; otherwise the semester can not be approved.
(Medical reasons for absence are accepted.)
Name of the Weigh Type Details Retake Req. Related

element t opportunity * CILOs
Midterm exam 25% exam A written exam based on one retake yes 1,2, 4, 5, 6,
selected chapters 1-6, opportunity
Final exam 45% exam A complex written exam one retake yes 1,2,3,4, 5,6,7,
based on all chapters opportunity 8,9,10,
Case studies/team 15% case Case study no no 7,8,9,10,
works studies presentations (team
works), reaction
papers
Analytical/practical 15% analytical Numerical exercises no no 4,5,7
execrcises tasks
• Midterm exam 25%

• contains some multiple-choice and true-false questions,
• Case studies, team works with presentation 15%
• Analytical excercises 15%
• Final exam 45%
• the final contains short and long essays, small calculations
– a student is required to achieve at least 50%+ (pass) of each part of the assessment
in order to receive a pass in aggregate
4
The final mark awarded will be determined by the percentage given (as
below):
Upper
Lower bound
bound Grade
1 0,00% 50,00% fail
2 51% 65,00% pass
3 66% 74,00% fair
4 75% 86,00% good
5 87% 100,00% excellent
21/02/2022 5
Term scedule
1. An Overview of the Financial System
(02.01)
2. What Is Money? (02.08)
3. Understanding interest rates (02.15)
4. The Stock Market and related theories

(02.22)
5. Economic Analysis of Financial Structure

and risk management (03.01)
Guest Lecture: József Szalay
6. Money supply and Bank Management

(03.08)
MIDTERM (03.22)
7. Development & structure of banking

industry (Commercial & investment
banking) (03.29)
8. Financial Regulations and central

banking (04.05)
9. International financial markets and IFCs

(04.12)
10.Financial innovations and Digitalization

of banking (FinTech challenges) and ESG
finance (04.26)
Guest Lecture – József Czímer
21/02/2022 6
11. Financial crisis (05.03)
Team works and group presentations
(TEAMS, NEPTUN, MOODLE+LIBRARY+CREATING GROUPS!-contact
person/class representatives)
• Each group (consists of max. 4 students) has to deliver 15-20 minutes

presentation using illustrations (PPT) with critical arguments. The
main findings and the arguments should be summarized in 2-3 pages
reaction paper with references. Feel free to collect additional
materials related to the topic (besides the textbooks, links and
attached pdf materials). The questions are orientating you towards
the main focus of your presentation.
• Each sub-topic should be presented by 2 groups consequently so they
can clash their opinions.
• When submitting both the presentation and the paper, the names of
the members of the group and the percentage of their contribution
must be indicated on the first page/worksheet. Instructors may award
a maximum of 100 points for the group's performance. The points
awarded for the group's work will be multiplied by the number of
group members and the resulting score will be weighted by the
percentages provided by the students in 7
Team works topics
What Is Money? (02.08)
1 Cashless society
2 CRYPTOCURRENCIES: are they future money or just investment assets?
Development & structure of banking industry (Commercial & investment banking) (03.29)
3 Comparison of US and European continental banking system. Types of

intermediaries (commercial, investment, private, Islamic banksetc.). The
two tier banking system of Hungary since 1987.
4 Digital banking and Fintech
5 Future of Bank branches or branchless banking
Financial Regulations and central banking (04.05)
6 Role of central banks in crisis management (FED, ECB, MNB): new

monetary policy tools
International financial markets and IFCs (04.12)
7 International capital flows: trends, assets and directions;
8 The role of foreign direct investment (FDI) in Eastern and Central Europe.
Can we catch up with FDI?
9 International Financial Centres and Offshore financial centres
Financial innovations and Digitalization of banking (FinTech challenges) and ESG finance (04.26)
10 ESG finance and Green banking and green investments
11 Financial innovations: FinTech eco system and its impact on the financial
sector
12 Evolution of the payment system and the main innovations in payment
Financial crisis (05.03)
13 Comparison of the the Great Crash, the Financial Crisis of 2008, Eurozone
crisis and Covid crisis with its impact on the financial sector(chapter 12)
14 Financial crisis in the developing and emerging markets (currency crisis,
21/02/2022 debt crisis 8
Personal Introduction
Introduce Yourself!
• Where are You from?

• What did You study before ? (technical college, other college or
training)
• Where would you like to work? What kind of job would You like to
have? What are Your future professional plans?
And one more….

How would You invest your money, if/when You win the lottery?
21/02/2022 9
Why Study Money, Banking, and Financial Markets?
1. To examine how the workings of financial markets such as bond, stock
and foreign exchange markets affect your everyday life
2. To examine how financial institutions such as banks, and other financial
companies work
3. To examine the role of money in the economy
Learning objectives:
• Recognize the importance of financial markets in the economy.
• Describe how financial intermediation and financial innovation affect
banking and the economy.
• Introduction to the new stage of financial innovation: Digitalization and
the role of FinTech and block chain
• Identify the basic links among financial markets, the business cycle, and
economic variables.
• Understand the reasons and management of different financial crisis
• Explain the importance of financial globalization, international financial
system, international capital flows and exchange rates in a global 10
economy.
FRAMEWORKS OF FINANCE & FINANCIAL
MARKETS
1. Financial globalization
2. Financialization
(INTRO)
21/02/2022 11
The importance of financial markets in the economy
• Difficult to say exactly (see World Bank about 190 countries)
• Estimated financial services market to be $26.5 trillion by 2022,
growing at 6% p.a., with the biggest dynamism in mobile and online
(Fintech sector growth 2018/2017 +80%!!!)
21/02/2022 Zeller: Banking & Finance 12

Size of the global financial markets
21/02/2022 13
Growth rate of (international) finance (asset classes)
detached from the growth of the real economy?
1100
1000
900
Growth rate: 1995=100
800
700
600
500
400
300
200
100
0
1995 2000 2005 2007 2009 2012
International banking assets (CB)
International debt securities (CB)
Cross listed foreign firms turnovers (cross listing)
GDP (Global)
Export (Global)
Derivatives (Mrd USD)
Daily FX turnovers (Mrd USD)
14
Growth dynamic of finance detached from the
growth of the real economy
Ratio of FX daily turnover to Export daily turnovers

120
104:1
100
83:1
80
70:1
60
50:1
40
20
10:1
2:1
0
1973 1980 1990 1995 2004 2012
15
Finance is detached from the real economy
Increasing gap between the daily FX turnover and

Market price
daily export Növekvő szakadék a napi devizapiaci forgalom és a

világkereskedelmi forgalom között
Profit rate
16
Financial globalization – evlutionary process with
geographical spread
1. 1870 – 1914 First Financial Globalization (Gold Standard, free trade, FDI, capital
flows generally followed the trade flows)
2. 1970s –1999 Second Financial Globalization (Result of Oil shock and Break-up of the
Bretton Woods system, re- integration of CEE)
3. 1999 – 2008 Third Financial Globalization (integration of emerging coutries,
financialization, securitization/mortgage finance )
4. 2008- World of (financial) uncertainties: indebted economies, offshore wealth
concentration; NEW CHALENGES TO THE TRADITIONAL FINANCIAL SYSTEM
FINANCIALIZATION FINTECH REVOLUTION
Concepts of Financial Globalization
Definitions:
• A complex integration process of domestic
financial system/market of a particular country
with the international financial institutions and
into international financial markets
• International capital flows, including foreign
direct investments (FDI), banking capital and
portfolio investments (equity and debts) between
countries which bring about them closer and more
interrelated
• Liberalisation of balance of payments
transactions
Flows in the Age of Industry 4.0
The rise of digital flows
IT innovations: internet, big data, cloud

Global data flows 2,8 Tr $-al increased GDP-t (3% of GDP growth,2014)
Trade (3.5%), Migration (2%), FDI (1,6%) flows 11%
FDI stocks as % of GDP (FDI stock),

2002, 2014 Cross border broadband data flows
De-globalization? International capital flows/GDP, 1980-2015
Financialization
(of everyday life)
• Epstein (2005) – „Financialization means the increasing

• role of financial motives, financial markets, financial
• actors and financial institutions in the operation of domestic and
international economies.”
– Kripner (2005) – Stockhammer (2004) „Financialisation is also a
pattern of accumulation in which profits accrue primarily through financial
channels rather than commodity production”
• Lapavitsas (2009) - “financialization has to be understood more
deeply, as a systemic transformation of capitalism, …”
• Sokol (2013) Credit-based housing regime became an important
pillar of a financialized regime of accumulation
– Credit-debt relation – is one of the core elements of contemporary
financialization and it is at the epicentre of the crisis
– Financialization: https://www.youtube.com/watch?v=mNVo8ZHXY7s
Financialization
• Aalbers, 2014: Financialisation not only structurally transformed the
financial sector but corporate, public (governmental) and households as
well.
• Aalbers (2015):Transfer from “productive” capital to “non-productive”
capital, which results in the restructuring of the corporate field (SHV)
• Engelen, 2008, Pike–Pollard, 2010: financialization is considered as the
appearance of neo-liberalism. This is characterized by the strengthening of
financial interests, the institutions and actors representing it.
• The role of financial markets is dominant and privileged:
– Savings in financial instruments have higher and faster returns
– Financialization also negatively influenced the real sector investments (crowding out,
extraction effect).
– Consumption financed from traditional savings was replaced by consumption financed
from debt and asset price inflation.
– Financialization has also dramatically increased income inequalities: income transfers
between profits and wage income! (productivity growth continued but this was not
followed by wage growth)
– New social class were born: financiers (financial executives, wage + bonus, manager,
communications and information monopoly).
23
Trends in financialization
Loans to households as a % of
Loans to non financial corporation their gross income (1980-
as % of total loans(1980-2008), % 2008), %
Incomes of US households from

financial sectors was 10% in 1950/60s
and reached 40% by the 1990s
Consequences of financialization: Shift between
capital & labour incomes in the USA
Labour incomes Capital income capital/labour income(%) Financial/
(BnUSD) (Mrd USD) non-
financial
profit (%)
1973 662 275 41,5 20,1
1979 1261 570 45,2 19,7
1989 2650 1143 43,1 26,2
2000 5009 2100 41,9 39,3
2007 6797 3553 51,8 44,6
Forrás: Economic Report of the President, 2012, B-28., B-92. táblázat http://www.gpo.gov/fdsys/pkg/ERP-2012/content-detail.html
• Demand gap (Gap between the income and consumption) financialisation

fuelled (over)consumption.
• Crisis: Financial sector is no longer willing to finance loan and asset
bubbles on the same extent;
• Financialization imposes huge burdens on the entire economic / social
system (bail outs of financial institutions) :
• private and sovereign debt,
• a dramatic decline in lending
• further growth in demand gap and income disparities have been
sustained
Consequences of financialization: Global inequalities
„The richest 10% owns 50% of national

wealth and the 22%-of incomes in
Hungary” (OECD, 2014)
Consequences of financialization:
End of small–holder US capitalist dream: Wealth forms/share of

inequalities between the top 0.01% & top 90% of population
21/02/2022
FINANCE & FINANCIAL MARKETS
28
What IS Financial System and Financial Market?
Finance represents the processes that transfer money among
businesses, individuals (households), and governments.
Financial system:
• A financial system is a set of institutions, such as banks, insurance
companies, and stock exchanges, that permit the exchange of funds.
• Borrowers, lenders, and investors exchange current funds to finance
projects, either for consumption or productive investments, and to
pursue a return on their financial assets.
• The financial system also includes sets of rules and practices that
borrowers and lenders use to decide which projects get financed, who
finances projects, and terms of financial deals.
• Financial systems exist on firm, regional, and global levels (see map).
Sub-systems of the Financial system :
1. Financial markets
2. Monetary system
3. Fiscal systems
4. Regulatory system 29
Global Financial Assets: geographical distribution, 2003
2007
Geographical distribution of global financial assets and depth of financial markets,
2003, 2007
Financial depth: financial assets / GDP
30
Financial system (cont.)
An effective financial system must possess three characteristics:

– Monetary systems that provide an efficient
medium for exchanging goods and services
– Facilitate capital formation (investment)* whereby excess
capital
from savers is made available to borrowers (investors)
– Efficient and complete financial markets which provide for the
transfer of financial assets (such as stocks
and bonds), and for the conversion of such assets
into cash
Gross Fixed Capital Formation =Bruttó állóeszköz felhalmozás
21/02/2022 31
What are the financial markets?
1. Financial markets are markets in which funds are
transferred from people and firms who have an excess of
available funds to people and firms who have a need of
funds
2. International financial markets: markets in which
financial market participants in different countries
trade financial instruments moving across borders is
called.
– The international financial market is not a single
market, but a group of interconnected markets
connecting the markets of individual countries,
where there is some international element in the
exchange of (foreign) assets and cross border
investment in the forms of international capital
flows. 32
What is Finance?
Financial system
• Markets INTERNATIONAL ENVIRONMENT,
INTERNATIONAL INSTITUTIONS
• Instruments PARLIAMENT,
ACTS,REGULATIONS
• Rules, acts, regulations
• Institutes STATE BUDGET
• People SUPERVISORY
INSTITUTIONS,
AUTHORITIES
• Techniques CENTRAL BANK
• Money and
capital connections in the economy FINANCIAL
INSTITUTIONS
21/02/2022 33
DIRECT FINANCE
21/02/2022 34
Flows of Funds Through the Financial System
Finance represents the processes that transfer money among
businesses, individuals, and governments.
Direct finance
• Borrowers turn directly to lenders offering

different securities,
– i.e.: IOUs (bonds, stocks, etc.)
• Technical intermediaries help in the mutual search
process
– broker, dealer, dual trader, underwriter (eg. Investment
banks)
• Three major conflicts:
– nominal value
– maturity
– risk.
21/02/2022 36
Function of Financial Markets (direct financing) 1.
• Performs the essential function of channeling funds from
economic players that have saved surplus funds to those that
have a shortage of funds.
• Direct finance: borrowers borrow funds directly from lenders

in financial markets by selling them securities*.
– Direct financing is usually done by borrowers that sell
securities and/or shares to raise money and circumvent the
high interest rate** of financial intermediary (banks).
*A security (financial instrument) is a claim on the issuer’s future income or

assets. E.g. Bond is a debt security; MBS= mortgage backed security
**An interest rate is the cost of borrowing or the price paid for the rental of
funds.
Advantages of Direct finance
– https://www.investopedia.com/terms/f/financial-
market.asp (film)
– Promotes economic efficiency by producing an
efficient allocation of capital, which increases
production
– Directly improve the well-being of consumers
by allowing them to time purchases better.
– Technical intermediaries help in the mutual

search process (broker, dealer, dual trader,
underwriter, investment bank)
21/02/2022 38
Direct finance: how does it start?
• Borrowers/spenders and lenders/buyers are

directly connected to the market places.
• Examples for direct finance : a financial auction
(where price of the security is bid upon, e.g.
government bond auction) or an initial public
offering, IPO (where the security is sold for a set
initial price).
• Assets*: securities (financial instruments)are
claim on the borrowers’ future income or assets.
Securities are assets for the buyer.
• Liabilities** (IOU or debts): securities are
liabilities for the person or firms who sell (issue)
them. 39
• An asset is a resource with economic value that
an individual, corporation, or country owns or
controls with the expectation that it will provide
a future benefit.
• It contributes to the firms’ value
• A liability (generally speaking) is something that is owed to
somebody else. (bank deposit, registered capital of a
firm, loans, accounts payable, mortgages, deferred revenues, bonds,
warranties, and accrued expenses.)
• Liability can also mean a legal or regulatory risk or obligation.
• Current liabilities are a company's short-term financial obligations that
are due within one year or a normal operating cycle (e.g. accounts
payable).
• Long-term (non-current) liabilities are obligations listed on the
balance sheet not due for more than a year. 40
Primary and secondary markets by type of timing of
issuance
• Primary Markets: new issues of securities

(stock, bond) and sold to initial buyers
(Investment banks underwrite securities in
primary markets).
• Secondary Markets: trading with

previously issued securities (Brokers and
dealers work in secondary markets).
– More important in price settings and liquidity
than the primary markets
21/02/2022 41
Structure of Financial Markets (1/2)
• Debt and Equity Markets: 2 ways of obtaining funds
– Debt instruments (bonds*, short or long term
maturity) maturity, interest and principal payment
*bond is a debt security that promises to make payments periodically
(coupon) for a specified period of time.
– Equities (issuance of stocks/ common stock**

which are shares of the net income and assets)
• Dividends: periodic payment to the holder of stock (long
term security with no maturity).
• Ownership rights
**Common stock represents a share of ownership in a corporation.
A share of stock is a claim on the residual earnings and assets of the
corporation.
Global debt
• 70 Trillion USD public debt,
• EME public debt $71.4 Trillion (220% of GDP)
• 40%, or around $19 trillion, of the corporate debt in major economies such as the
U.S., China, Japan, Germany, Britain, France, Italy and Spain was at risk of default
• Mature markets, the rise has mainly been in general government debt
(up $17 trillion to over $52 trillion).
Global debt securities market, Billion USD
The global bond markets increased from $87 trillion in 2009 to over $115 trillion in
mid-2019. 47% of global bond markets is government debt (RED= international debt
sec. Vs domestic)
Global debt securities market, 2014-2018
In 2017, the global bond market (total outstanding debt) is estimated at

$100 trillion.
Global debt securities market by issuing countries and sectors
The bond market is largely dominated by the US, which accounts for around 39% of
the market.
In 2007, 87% of the international debt market remained concentrated in developed
countries. In 2018, 70% !
48% were in Euro issues and 34% (2005) dollar issues.

US Debt as a % of GDP
http://www.usdebtclock.org
Interest Rates on Selected Bonds, 1950–2017
Source: Federal Reserve Bank of St. Louis, FRED database:

https://fred.stlouisfed.org/series/TB3MS; https://fred.stlouisfed.org/series/GS10;
https://fred.stlouisfed.org/series/BAA
Structure of Financial Markets (2 of 2)
– Exchanges: NYSE, Chicago Board of Trade,

– BSE-BÉT, LSE, EuroNext
• A stock exchange is the geographically concentrated market
(meeting) place of the stock buyers and sellers that facilitates
stock brokers to trade company stocks and other securities. A
stock may be bought or sold only if it is listed on an exchange.
– OTC markets: Foreign exchange, US government bonds,

Federal funds
• Over-the-counter (OTC, or phone–based trading) refers to the
process of how securities are traded via a broker-dealer networks
outside of centralized exchanges. Over-the-counter trading can
involve equities, debt instruments, Forex and derivatives, which
are financial contracts that derive their value from an underlying
asset such as a commodity.
– ATS (alternative trading systems), ECN (Electronic Communication
Networks) AIM– (Alternative Investment Markets)
Alternative Trading Systems
• Multilateral Trading Facility (or MTF) loss of monopoly of stock
exchanges
– a multilateral system, operated by an investment firm or a market operator, which brings
together multiple third-party buying and selling interests in financial instruments in a way
that results in a contract in accordance with the provisions of Title II of MiFID* They can
be assimilated to alternative trading exchanges providing additional pool of liquidity to
their members (banks, major mutual funds and large insurance companies).
– *MiFID (Markets in Financial Instruments Directive), 2007
• Crossing network
– matches buy and sell orders electronically for execution without first routing the order to
an exchange or other displayed market, Instead the order is either anonymously placed
into a black box or flagged to other participants of the crossing network. The advantage
of the crossing network is the ability to execute a large block order without impacting the
public quote.
• Dark pools of liquidity
– are crossing networks that provide liquidity that is not displayed on order books. This is
useful for traders who wish to move large numbers of shares without revealing
themselves to the open market.
52
Money and Capital Markets
• Money and Capital Markets:

– Money markets deal in short-term debt
instruments (less than 1 year maturity)
– Capital markets deal in longer-term debt

and
equity instruments (over 1 year maturity)
21/02/2022 55
Financial instruments and financial markets
Securities
 Freely bought and sold
 Shares, preference shares
 Corporate and goverment
bonds, eurobonds
 T-bills
 certificate of deposit,
commercial papers
Types of Money Market Instruments (short-term)
• Treasury bills (kincstárgjegy)
• Negotiable bank CDs (CD: Certificate of deposit, bank
letét; negotiable – átruházható, debt instrument by a
bank)
• Commercial papers (Kereskedelmi papírok by large
banks, corporations)
• Bankers acceptances (Banki elfogadványok)
• Repurchase agreements (visszavásárlási megállapodás
e.g. for T-Bills)
• Fed funds (overnight interbank lending via Fed wire
networks)
• Eurodollars (foreign currencies deposited outside the
home country)
21/02/2022 57
Financial Market Instruments (1 of 2)
Table 1 Principal Money Market Instruments

Amount ($ billions, end of year)
Type of Instrument 1990 2000 2010 2016
U.S. Treasury bills 527 647 1,767 1,816
Negotiable bank certificates of deposit 547 1,053 1,923 1,727
(large denominations)
Commercial paper 558 1,602 1,058 885
Federal funds and security repurchase 372 1,197 3,598 3,778
agreements
Source: Federal Reserve Flow of Funds Accounts; http://www.federalreserve.gov
Types of Capital Market Instruments (long-term)
• Corporate stocks (large stock but slow growth)

• Mortgages and MBS (Mortgage Backed Securities)
by government mortgage agencies
• Corporate bonds (1/3rd of stocks but fastest growth)
• Government securities (notes, bonds)
• State/Region/Local government securities
• Consumer and bank commercial loans
• Eurobonds bond (issued in a currency other than that
of the country’s currency in which it is sold e.g. USD
denominated bonds sold in London)
• Foreign bonds (sold in foreign country denominated
59
in the currency of that foreign country)
Financial Market Instruments (2 of 2)
Table 2 Principal Capital Market Instruments

Amount ($ billions, end of year)
Type of Instrument 1990 2000 2010 2016
Corporate stocks (market value) 3,530 17,628 23,567 38,685
Residential mortgages 2,676 5,205 10,446 10,283
Corporate bonds 1,703 4,991 10,337 12,008
U.S. government securities 2,340 3,171 7,405 12,064
(marketable long-term)
U.S. government agency securities 1,446 4,345 7,598 8,531
State and local government bonds 957 1,139 2,961 3,030
Bank commercial loans 818 1,497 2,001 3,360
Consumer loans 811 1,728 2,647 3,765
Commercial and farm mortgages 838 1,276 2,450 2,850
Source: Federal Reserve Flow of Funds Accounts; http://www.federalreserve.gov
Main International Instruments of Financial Markets
• Foreign Bonds:
– sold in a foreign country and denominated in that country’s currency
(Hungarian goverment bonds in Euro in Frankfurt)
• Eurobond:
– bond denominated in a currency other than that of the country in which it
is sold (USD in London)
• Eurocurrencies or Eurodollars:
– foreign currencies deposited in banks outside the home country
– Eurodollars: U.S. dollars deposited in foreign banks outside the U.S. or
in foreign branches of U.S. banks
• World Stock Markets
– Help finance governments also
21/02/2022 61
Main Groups of Financial Instruments 1.
• Right
– Debt - temporary, should be repaid (bond, with maturity)
– Equity - permanent, not refunded (stock, no maturity)
– Right limiting the trade of a product (bill of lading, warehouse warrant,
fuvarlevél, raktárjegy etc)
– Right or obligation to buy or sell (option, future)
– Compensation note („kárpótlási jegy”, a special Hungarian instrument)
• Transferability
– Registered: given owner, endorsement on the back or on an attached
form
– Bearer entitled: simple sale
– Negotiable: endorsed drafts (indexált váltók), universal obligation
21/02/2022 62
• Physical character
– Materialized: printed, preserved by the owners, physically transferred when
traded
– Immobilized: printed, deposited at a central place, deposit certificates
– Immaterialized: not printed; bookkeeping entry or electronic sign; transfer
between security accounts
• Maturity
– Varies country by country, no consensus
• Short term: less than 1 year to maturity (consensus),
• Medium term: 1-10 years to maturity
• Long term: 5 - 30 years
• Conditional (console): matures with an event (life insurance)
• Without maturity: provides the service till the issuer exists (stock)
21/02/2022 63
• Returns
– Interest bearing securities
• permanent: fix interest from the issue to the maturity
• flexible
– changing by a given schedule (increases 1 % yearly)
– pegged to a well measurable economic phenomenon (inflation, prime rate, exchange
rate, etc.)
– convertible bond (a bond convertible to stock)
– Discount papers: issued under face value and redeemed at the face value
– Dividend bearing securities: shares
• Issuer
– Government: federal, state, regional, municipal (local)
– Special institutions issue special securities:
• banks - CDs,
• mutual funds - mutual fund shares
• warehouses - warehouse warrants
• mortgage institutions - mortgage bonds
– Companies: bonds, stocks, commercial papers...
– Anyone: check, drafts... 64
INDIRECT FINANCE
21/02/2022 65
Function of Financial Markets (indirect financing) 2.
• Indirect finance is where borrowers borrow funds from

the financial market through indirect means, such as
through a financial intermediary (a third party between
lenders and borrowers).
66
Function of Financial Intermediaries: Indirect Finance
• A financial intermediary takes the money from the lender

with an interest rate and lends it to a borrower with a higher
interest rate (profit/IR margin).
• Financial intermediation: financial intermediaries (e.g.

banks) moving funds from lenders to borrowers while
transforming funds by making loans for the borrowers from
deposits (savings from the lenders/savers).
• Institutions:
– banks, mutual funds, pension funds, insurance companies
Financial Intermediation and Banks
• Assets
– Amounts owned
– The uses of funds by financial intermediaries
(loans)
• Liabilities
– Amounts owed
– The sources of funds for financial
intermediaries (deposits)
15-68
Function of Financial Intermediaries: Indirect Finance
1. Lower transaction costs (time and money spent in
carrying out financial transactions)
– Economies of scale and scope (reduction of transaction
costs by increasing the size/scale/variety of transactions)
– Liquidity services (services for customers to conduct
transactions easier, e.g. Bank account, utility bill
payments )
2. Reduce the exposure of investors to risk (uncertainty
about the returns on assets)
– Risk sharing (asset transformation, securitization, CDO;
MBS)
– Diversification (investment into a collection of asstes:
Modern: portfolio theory) „ Don't Put All your Eggs in One
Basket” 69
Banks tackle information asymmetry
Cooperative bank model:

counter information
19th Bank Costumer
asymmetry
century:
Information Banks are reluctant to lend as they do
advantage not possess sufficient information to Costumer = Member
in favour of price risk for certain marktes
customer Result:restricted supply lending to higher
rates & lower aggregate borrowing
21st Bank = Cooperative

Bank Costumer
century:
Information Cooperative model finds the balance
Banks (suppliers) have and advantage between the banks & costumers.
advantage over costumers (buyers) due to Minimized information asymmetry.
in favour of advanced IT analytics, credit scoring
bank Coop represent both buyers &
Result: Higher customer demand due to supplyers through member
information asymmetry, higher prices & ownership..
take up.
Source: Burger-Gál, 2011, Wyman, 2009
Function of Financial Intermediaries 2
3. Deal with asymmetric information problems:
– Adverse Selection (before the transaction): try to avoid
selecting the risky borrower by gathering information
about them
– Moral Hazard (after the transaction): ensure borrower
will not engage in (immoral) activities; from the lenders’
point of view that will prevent him/her to repay the
loan.
• Sign a contract with restrictive covenants.
• Gather information about potential borrower (AI).
• What could be the consequences of both?
– Not making loans, increases loan prices
Funds Borrowers
Savers
(lenders, sufficit) (spenders, deficit)
Securities
Households Households
Firms Firms
Direct finance, Government
Government
Foreigners technical intermediaries Foreigners
Indirect finance, financial intermediaries
Financial markets
Conclusion: Financial intermediaries allow “small” savers and

borrowers to benefit from the existence of financial markets.
Weight of indirect finance 1
21/02/2022 73
Share of banking assets of the total financial assest, 2003,2005, (%)
90
80
70
60
50
48
50 42
37 36 35
40 34 34
31
30
2003
18
20
2005
10
2007
0
EMU
Latin-America
Asia
EU
USA
Japan
Emerging markets
CEE
Middle East
World
21/02/2022 74
Money supply and demand and its players
• Borrowers and lenders – supply and demand
• Borrowers
 Individuals
 Companies
 Government
 Public corporations
 Municipalities
• Intermediaries (pénzügyi
közvetítők)– financial institutes
• Lenders: individuals (and companies)
 Deposit in Commercial bank
– Commercial banks
 Shareholder – Investment funds,
 Investment funds, mutual funds
 pension funds – Mutual funds
 Insurrance companies – Pension funds
– Insurrance companies
Financial Institutions (intermediaries)
• Financial institutions serve as intermediaries

by channeling the savings of individuals, businesses,
and governments into loans or investments.
• They are a primary source of funds for both individuals
and businesses.
• In addition, they are the main store of deposits
for individuals through checking accounts (checkable
deposit, demand deposits), and savings accounts
(savings deposit, time deposits).
Key Customers of Financial Institutions
1. The key customers of financial institutions
are individuals (and households), businesses, and
governments.
2. Savings of individuals provide the main supply
of funds to both businesses and other individuals.
– As a group, individuals/households are net suppliers of
funds.
3. Firms, on the other hand, are net demanders of funds.
4. Finally, like individuals, governments are net demanders
of funds.
Household savings
21/02/2022 78
GFCF and net Savings as a % of GDP (2nd column)
A globális bruttó (állóeszköz) beruházások és a megtakarítások nagysága 2003-ban
Ország/régió Bruttó (állóeszköz) beruházás Nettó megtakarítás

milliárd USD a GDP %-ában milliárd USD a GDP %-ában
Fejlett országok 5 609 19,8 5 386 19,0

Ebből:
– USA 2 025 18,7 1 485 13,5
– Japán 1 027 23,8 1 165 27,0
– EU–15 2013 18,3 1937* 19,3
Eurózóna 2190 19,9 2037 20,3
Fejlődő (és feltörekvő)országok 2 103 29,3 2520 29,7
Ebből:
– Kelet-, Dél- és Délkelet 1344 34,4 1 372** 35,0
Ázsia és Óceánia
– Kína 619 43,9 704 49,8
– Közép- és Kelet-Európa, 246 20,7 335 23,4
Oroszország, FÁK
– Közép- és Kelet Európa 136 22,0 116 18,5
FÁK nélkül
– Latin-Amerika 319 17,5 348 20,0
– Egyéb fejlődő országok 194 – 151 10,9
Világ összesen 7 853 21,7 8 714 24,0
• Financial intermediaries: institutions that borrow

funds from people who have saved and in turn
make loans to people who need funds.
1. Banks:as depository instititions (thrifts)
accept deposits and make loans
2. Other financial (contractual saving)
institutions:
– Acquire funds at periodic intervals, they invest
into long-term securities (bonds, stocks,
mortgages)
– E.g. insurance companies (they acquire funds from the
insurance premium), finance companies, pension funds,
mutual funds and investment companies
Types of Financial Intermediaries (1 of 5)
Table 3 Primary Assets and Liabilities of Financial Intermediaries
Primary Liabilities
Type of Intermediary (Sources of Funds) Primary Assets (Uses of Funds)
Depository institutions (banks) Blank Blank
Commercial banks Deposits Business and consumer loans,
mortgages, U.S. government
securities, and municipal bonds
Savings and loan associations Deposits Mortgages
Mutual savings banks Deposits Mortgages
Credit unions Deposits Consumer loans
[Table 3 Continued]
Primary Liabilities
Contractual savings Blank Blank
institutions
Life insurance companies Premiums from policies Corporate bonds and mortgages
Fire and casualty insurance Premiums from policies Municipal bonds, corporate bonds
companies and stock, and U.S. government
securities
Pension funds, government Employer and employee Corporate bonds and stock
retirement funds contributions
3 Investment intermediaries
• Finance companies
• Mutual funds
• Money Market Mutual funds
• Hedge funds
• Investment banks
21/02/2022 83
[Table 3 Continued]
Primary Liabilities
Investment intermediaries Blank Blank
Finance companies Commercial paper, stocks, Consumer and business loans
bonds
Mutual funds Shares Stocks, bonds
Money market mutual funds Shares Money market instruments
Hedge funds Partnership participation Stocks, bonds, loans, foreign
with huge leverage currencies, and many other assets
(borrowed money)
Investment banks Not a bank, Client servicing, advisor, deal
derivatives*, services makers (mergers &
fees acquisition), sell (underwrites
IPOs) and re-sell securities,
trade and development and
sale of equity and debt
products
*Derivatives are financial contracts, set between two or more parties, that derive
their value from an underlying asset, group of assets, or benchmark. E.g.oil futures
is a type of derivative whose value is based on the market price of oil. 600 Trillon $
global market value of total outstanding.
Investment banks
• Investment banks act as intermediaries between investors (who have
money to invest) and corporations (who require capital to grow and
run their businesses).
• $111.45 billion in 2021 at a compound annual growth rate (CAGR) of
8.4%.
• Investigation, Analysis and Research (Origination), Underwriting
(Public Cash offerings), M&A consultancy and Distribution.
21/02/2022 85
• 3,000 companies with combined annual revenue of about $140
billion.
• The 50 largest firms generate more than 90 percent of the industry's
revenue.
•
21/02/2022 86
Balance Sheet - Investment Bank vs. Commercial Bank
21/02/2022 87
Table 4 Primary Financial Intermediaries and Value of Their Assets
Value of Assets ($ billions, end of year)

Type of Intermediary 1990 2000 2010 2016
Depository institutions (banks) Blank Blank Blank Blank
Commercial banks, savings and loans,
4,744 7,687 12,821 16,834
and mutual savings banks
Credit unions 217 441 876 1,238
Contractual savings institutions Blank Blank Blank Blank
Life insurance companies 1,367 3,136 5,168 6,764
Fire and casualty insurance companies 533 866 1,361 1,908
Pension funds (private) 1,619 4,423 6,614 9,099
State and local government retirement
820 2,290 4,779 6,103
funds
[Table 4 Continued]
Value of Assets ($ billions, end of year)
Type of Intermediary 1990 2000 2010 2016

Investment intermediaries Blank Blank Blank Blank
Finance companies 612 1,140 1,589 1,385
Mutual funds 608 4,435 7,873 13,616
Money market mutual funds 493 1,812 2,755 2,728
Source: Federal Reserve Flow of Funds Accounts;

https://www.federalreserve.gov/releases/z1/current/data.htm, Tables L110, L114, L115, L116, L118, L120,
L121, L122, L127.
Financial institutions
21/02/2022 90
Financial institutions
21/02/2022 91
Flows of Funds trough the Financial Markets
Funds Borrowers
Savers
(lenders, sufficit) (spenders, deficit)
Securities
Households Households
Firms Firms
Direct finance, Government
Government
Foreigners technical intermediaries Foreigners
Indirect finance, financial intermediaries
Financial markets
21/02/2022 92
Materials for the Topic:
Chapter 2. An Overview of the Financial System
Thank You!
21/02/2022 93
MONEY AND ITS FUNCTION
Gál Zoltán, FULL PROFESSOR

What is money?
• We develop precise definitions by exploring the functions of money,
looking at why and how it promotes economic efficiency, tracing how
its forms have evolved over time, and examining how money is
currently measured.
Learning objectives:
1. Describe what money is
2. List and summarize the functions of money
3. Identify different types of payment systems
4. Compare and contrast the M1 and M2 money supplies
5. Understand Innovation of money subsitutes, the
development of Digital money and cryptocurrencies
6. Presentation on the evolution casless society
DEFINING MONEY
What is money?
• Money (or the “money supply”): anything that is generally
accepted as payment for goods or services or in the
repayment of debts.
• A broad definition: money is a social innovation
• Money (a stock concept) is different from:

– Wealth: the total collection of pieces of property that
serve to store value
– Income: flow of earnings per unit of time (a flow
concept)
Money (different definitions)
• Any medium that is universally accepted
in an economy both by sellers of goods and services and by
creditors as payment for debts. Mishkin, F.p. 44
• Samuelson:“Money is the modern medium of exchange and
the standard unit in which prices and debts are expressed.”
• Money is any material, which is commonly accepted and
generally used as a medium of exchange for all types of
transactions.
• In words of R P Kent, “ Money is anything that is commonly used and
generally accepted as a medium of exchange or as a standard of
value.”
• Geoffry Crowther says, “ Money can be defined as anything that is
generally acceptable as a mean of exchange and at the same time
acts as a measure and store of value.”
15-5
What is money?
• In our everyday lives we often refer to “money” as one of
three things:
• Coins and paper money (currency):
• (“Hand over your money or I'll shoot you”)
• A person's wealth
• (“Bill Gates has a lot of money”)
• A person's income
• (“Working in finance is a fantastic job and you earn a lot
of money”)
What is money? (3)
• This definition deviates from the above mentioned colloquial
definitions of money:
• Ad 1.: Currency fits the economic definition of money, but it is only
part of it. There are other forms of medium of exchange, such as
e.g. checks. Even “money” holdings in savings accounts " affect the
money stock of an economy. Currency, therefore, is too narrow for
a good definition.
• Ad 2.: A person's wealth, on the contrary, consists of many items
which do not fit the definition of money provided above, such as
stocks, bonds, houses, etc, which cannot be transferred into media
of exchange (money) easily. Wealth therefore is too broad for a
good definition.
• Ad 3.: Income often is transferred in form of money. However,
money is defined as a stock, while income is a flow. Moreover, part
of a person's income can be non-monetary, such as health
benefits,in-kind etc.
EVOLUTION/HISTORY OF MONEY
Table Types of Money
15-9
Before money was born: Meaning of Barter:
• There was a time when money did not exist,
people used to exchanges goods for goods.
(NOT fully TRUE)
• Barter
– The direct exchange of goods and services for other goods and
services without the use of money
– Such a system for exchange of goods without the use of money is
called barter.
– Why is the barter inconvenient to use instead of money?
– Double coincidence of wants
• Both trading partners have to mutually offer a good or service that their
counterpart demands. Otherwise no trade occurs.
• This method of exchange complicates trade immensely and creates high
transaction costs.
•
Inconveniences of Barter system
Lack of common measure of values
Lack of double A C Lack of store of

coincidence of values
wants
Difficulties
In Barter
system
Difficulties in E D Payments in the

tax collection future
Types of money
1. In early Societies money developed forms of
proto-money which were commodities that everyone
agreed to accept in trade
• Examples:
Aztecs-Cacao Beans (aka cocoa beans)
Norwegians-Butter
Colonists- Tobacco leaves, animal hides
China, India, Thailand, and West Africa-Cowrie shells
Types of money (cont.)
2. Commodity Money- money that has an alternative use as
an economic good, or commodity
– Specie- money in the form of gold or silver
coins
– Most desirable form of money because of
mineral content, and limited supply (pounds,
mark forint = means of weight).
– 1776 there was $12million dollars worth of coin vs. $
500 million in paper money in the USA
Types of money: Fiat money - Early Paper Currency
3. Fiat Money (Latin: let it be, shall be)- money by
governmental decree, without intrinsic value (no gold)
Instead, it has value only by government order (fiat).
• Early paper money was backed by gold

or silver deposits, served as currency for
immediate area
• States printed money in form of tax
anticipation notes which were used to
pay salaries, buy supplies and meet other
expenditures until they received taxes
and redeemed the notes
• In 1661, Sweden was the first country in

Europe to introduce banknotes.
• 1775 Continental Congress printed money
that was not backed by gold or silver
Types of money (cont.)
3. Fiduciary money: includes demand deposits (such as
checking accounts) of banks.
• Fiduciary money is accepted on the basis of the trust its
issuer (the bank) commands. (=bizalmi pénz)
• Money issued by governments and its value rests on the
public’s confidence that it can be exchanged for goods
and services
– The Latin fiducia means “trust” or “confidence.”
4. Commercial bank money:

The term commercial bank money describes the portion of a
currency which is made of book money – debt and loans
generated by commercial banks.
Q?
• If we did not have currency today, what do you

feel we as a society could trade as proto-
money?
– https://www.youtube.com/watch?v=YCN2aTl
ocOw
– https://www.youtube.com/watch?v=zfoQaN
B4s-o
The Four Characteristics of Money
Portability-(széles körben elfogadott) can be easily transferred from one
person to another, and makes the exchange of money for products easier
(versus Bitcoin): light weight, convenient, easily transferable
Durable-(értékálló) does not deteriorate when handled and can be easily

replaced; Coins tend to last over 20 years, and paper currency lasts 18
months in circulation before being replaced
Divisible-(Osztható) should be able to be broken down into smaller units so

that people can use only as much as needed for a transaction; small changes
Limited Supply- (ritkasági fok magas) can not have to much of something
because then it becomes worthless; Stability- (inflation prone)
Which of these items meet the four characteristics of
money?
FUNCTIONS OF MONEY
Functions of money:
Functions of money
Primary Secondary Contingent

function function function
Functions of money (primary functions):
The primary
functions of
Medium of exchange
1 money are;
Unit of account 2
Standard of deferred 3
payments
4
Store of values
Functions of money (primary funct.):
A. The primary functions of money are as under:
1. Money as a medium of exchange (csereeszköz,
fizetési eszköz):
– Any item that sellers will accept as payment
– Money acts as a medium of exchange and helps in
overcoming the difficulty in barter economy.
– Eliminates the trouble of finding a double
coincidence of needs
– In all market transactions, money is used to pay for
goods and services i.e. the sale or purchase of goods
is done through money.
– Reduces transaction costs: Money facilitates exchange by
reducing transaction costs associated with means-of-
payment uncertainty.
– Permits specialization, facilitates efficiencies
Functions of money (primary funct.):
• A medium of exchange must:

– be easily standardized
– be widely accepted
– be divisible
– be easy to carry
– not deteriorate quickly
Functions of money (cont’d):
2 Money as a unit of account (értékmérő,elszámolási
eszköz): A central property of money
– Money serves as a common measure of value in
the economy
• i.e. the value of goods and services can be expressed
in terms of unit of money.
– The common denominator of the
price system: a measure by which prices are
expressed
• Prices of goods and services are typically not

indicated relative to all other goods and
services, but are usually referenced to money
• This creates a huge informational and
cost advantage over a barter economy.
3. Money as a standard of deferred payments
(halasztott fizetések eszköze):
– Money is used to make payments in the future time.
– Money is the only unit of account which is easy to
borrow and easy to lend.
– A property of an item that makes it desirable for use as
a means of settling debts maturing in the future
– E.g.Investors using present money for future money
Borrower receives loans in present money but pays in
future money
4. Money as a store of value (felhalmozási eszköz) :
– A necessary property of money
– The ability to maintain value over time (Used to save
purchasing power over time).
– Money allows you to transfer value (wealth) into the
future.
– Other assets also serve this function but maybe less
liquid.
– Money is the most liquid of all assets, therefore it is,
easier to store value (resources) in the form of money.
– but loses value during inflation.
Liquidity
• Many of these assets have clear advantages over money.
Bonds for example pay coupons (interest) or gain in
price, houses produce housing services, etc.
• The only rent money provides is inflation, which is
(usually) negative.
So why do people hold money for saving purposes in the
first place?
• The answer to that question is liquidity.
• Liquidity
– The degree to which an asset can be acquired or
disposed of without much danger of any intervening
loss in nominal value and with small transaction costs
– Money is the most liquid asset. 15-27
• Individuals use part of their income for consumption and

part of their income for savings.
– There are numerous assets that can be used for saving.
– Bonds, stock, houses, even consumption goods are
often mainly held for purposes of postponing
consumption.
– Money is merely one of them.
Figure Degrees of Liquidity
The cost of holding money (its opportunity cost)

is the alternative interest yield obtainable by
holding some other asset.
Money is not backed by gold, silver, or even the
federal government. It is backed by the
confidence of those willing to accept it.
15-29
Best investment/savings yields between 1998-2008
Lsd. magyar magányugdíjpénzári reálhozamok !
Is money a good store of value?
• The answer to this question depends - as already indicated

- on inflation, since the value of money is fixed in the price
level.
• During “normal” phases of inflation, money is a relatively
good store of value
• During phases of high inflation or hyperinflation (inflation
rates above 50%), however, money can loose its value very
quickly.
•
Hyperinflation
• Between the end of 1945 and 1946
July 1946, Hungary went through the highest inflation rate

ever recorded till 2010s.
• When the pengő was replaced in August 1946 by the
forint, the total value of all Hungarian banknotes in
circulation amounted to 1⁄1,000 of one US cent.
• Inflation peaked at 1.3 × 1016% per month (i.e. prices
double every 15 hours).
• On 18 August 1946, 400,000,000,000,000,000,000,000,000,000 or
4×1029 pengő (four hundred quadrilliard on the long scale used in
Hungary, or four hundred ostillion on short scale) became 1 forint.
• 2015: Zimbawe, Venezuela
(exceeded)
Functions of money (secondary functions):
The secondary
functions of
Aid to production
1 money are;
Money facilitates 2
to FOP
Money as a tool of 3
monetary management
Money as a instrument 4
of making loan
Functions of money (secondary functions):
B. The secondary functions of money in brief, are as;
1. Aid to production and trade:

 The market mechanism, production of commodities and
expansion of trade etc. have all been facilitated by the
use of money.
2. Money facilitates to FOP (Forms of Payment):

 All production takes place for the market and the
factors payments (rent, wages, interest and profits) are
made in money.
Functions of money (secondary function……cont’d):
3. Money as a tool of monetary management:

 All the monetary progress is done due to money (e.g.
managing money supply by a central bank).
4. Money is an instruments of making loans:

 People save money and deposit it in the banks. The
banks advance these savings to businessmen and
industrialists.
 Thus money is the instruments by which savings are
transferred into investments.
Functions of money (contingent functions):
The contingent
functions of
Distribution of 1 money are;
National income
Basis of credit
2
3
Liquidity of property
Functions of money (contingent functions):
C. The Contingent functions of money are as follows:
1. Distribution of national income:

 Money facilitates the distribution of national income
among the various productive and non-productive
purpose.
2. Basis of credit system:

 Banks create credit on the basis of their cash reserves.
Functions of money (contingent function):
3. Liquidity of property:
 Money gives a liquid form to wealth. A property can be
converted into liquid form with the use of money.
MONETARY AGGREGATES
Defining Money
• Money is important
– We defined money as anything generally accepted in
payment for goods and services
– Changes in the rate at which the money supply increases
or decreases affect important economic variables (at least
in the short run) such as inflation, interest rates,
employment, and the level of real GDP.
• Money Supply
– The amount of money in circulation
– Economists use two basic approaches to define and
measure money.
• The transactions approach
15-40
• The liquidity approach
Defining Money (cont'd)
• How do we measure the actual stock of money money?

Which particular assets can be called “money”?
• - Construct monetary aggregates using the concept of
liquidity
• Transactions Approach
– A method of measuring the money
supply by looking at money as a medium of exchange
• Liquidity Approach
– A method of measuring the money supply by looking at
money as a temporary store of value
15-41
Measuring Money (1 of 2)
• How do we measure money? Which particular assets can

be called “money”?
• Construct monetary aggregates using the concept of
liquidity:
– M0—Physical paper and coin (monetary base,
central bank money)
– M1 (most liquid assets) = currency (M0) + traveler’s

checks + demand deposits + other checkable deposits
(narrow money)
• M2 (adds to M1 other assets that are not so liquid) = M1

+ small denomination time deposits + savings deposits
and money market deposit accounts +money market
mutual fund shares (Intermediate Money)
• M3 —includes M2, time deposits, institutional money

market funds and short-term repurchase agreements.
(Broad money)
• M4- M3+government bonds, long term money market
securities
Monetary aggregates: a measures of money
supply
1. Monetary aggregates are used to measure the money

supply in a national economy.
2. A monetary aggregate is a formal way of accounting for
money, such as cash or money market funds.
3. The monetary base is an aggregate that includes the total
supply of currency in circulation plus the stored portion of
commercial bank reserves within the central bank.
4. The Federal Reserve uses money aggregates as a metric for
how open-market operations affect the economy.
The Federal Reserve’s Monetary Aggregates
(1 of 3)
Table 1 Measures of the Monetary Aggregates

Blank
Value as of July 3, 2017
($ billions)
M1 = Currency 1,481.5
+ Traveler’s checks 2.0
+ Demand deposits 1,501.5
+ Other checkable deposits 574.8
Total M1 3,559.8
M2 = M1 Blank
+ Small-denomination time deposits 357.7

+ Savings deposits and money market deposit accounts 8,923.9
+ Money market mutual fund shares (retail) 673.7
Total M2 13,515.1
Source: Federal Reserve Statistical Release, H.6, Money Stock Measures:
https://www.federalreserve.gov/releases/H6/curr .
ent
The Federal Reserve’s Monetary Aggregates
(2 of 3)
The Federal Reserve’s Monetary Aggregates (3 of
3)
• M1 versus M2: Does it matter which measure of money is

considered?
• M1 and M2 can move in different directions in the short
run (see figure).
• Conclusion: the choice of monetary aggregate is
important for policymakers.
Growth Rates of the M1 and M2 Aggregates, 1960–2020
Source: Federal Reserve Bank of St. Louis, FRED database: https://fred.stlouisfed.org/series/M1SL

Money substitutes as alternative currencies
o Two groups of monetary surrogates:

1. Technical cash equivalents (e.g. bank cards, credit cards,
vouchers, ewallet, reward points etc.)
2. Money substitutes as alternative currencies (on-line
digital assets, local community currencies, credit systems) (on-line
fizetőeszközök, helyi pénzek, jóváírások)
• Different kinds of local currencies (Schraven, 2001):

- community currencies backed by real goods or legal tender
- fiat community currencies
- local exchange trading systems/schemes (LETS)
Some examples of existing local currencies in
Europe
Figure 15-2 Composition of the U.S. M1 and M2 Money
Supply, 2007, Panel (a)
15-53
Figure 15-2 Composition of the U.S. M1 and M2 Money
Supply, 2007, Panel (b)
15-54
Defining the U.S. Money Supply
 The M2 definition of money correlates best with economic activity,

although some business people and policymakers prefer MZM.
• MZM (money-at-zero-maturity)
• MZM entails adding deposits without set
maturities to M1.
• MZM includes all MMFs but excludes all deposits
with fixed maturities.
• The FDIC backs our deposits today up to
$250,000 (M1 / M2)
15-55
ECB monetary aggregates
Liabilities
M1 M2 M3
Currency in circulation X X X
Overnight deposits X X X
Deposits with an agreed maturity up to 2 years X X
Deposits redeemable at a period of notice up to 3 X X

months
Repurchase agreements X
Money market fund (MMF) shares/units X
Debt securities up to 2 years X
M3- A repurchase agreement, or 'repo', is a short-term agreement to sell (mostly

government) securities in order to buy them back at a slightly higher price.
:
https://www.ecb.europa.eu/stats/money_credit_banking/m
onetary_aggregates/html/index.en.html
Means of money subsititutes and their links with the real economy
• Credit supply:
Intermediation
Investment
possibilities (profit
generation)
• Role of the Means of
money subsititutes in
wealth generation
(FIR=Financial
interrelation ratio,
links between finance
and economic
development)
• W= wealth
SHORT INTRO TO THE PAYMENT SYSTEM
Evolution of the Payments System (2 of 1)
• Commodity Money: valuable, easily

standardized, and divisible commodities (e.g.
precious metals, cigarettes)
• Fiat Money: paper money decreed by
governments as legal tender
Retail payments: history of technological innovation of
Instruments transacted
10,000 BC Time Line......-> 2,000
Digital
money
2.0?
» # pécsi Közcáz
ahonnan a karrier indul

History of the payment system
• The payment system is the method of conducting
transactions in an economy.
• Historical forms of payments:
– Commodity money
– Fiat money
– Checks
– Electronic payment
– E-money
Commodity money
• Commodity money is a means of payment made out of precious
metals such as gold or silver or other valuable commodities.
• • It has been the prevailing medium of exchange in most societies
since classical times up to around two hundred years ago.
• Hadrianus, Roman circus coin; Charles Robert d’ Anjou’s Gold Forint

(Florence)
Commodity money (cont.)
• Commodity money fulfills the criterion of general
acceptance,
• because it consists of materials which are already high in
demand.
• It comes with a number of problems, however:
– It's value is not necessarily easily to prove for everyone.
Problems of forgery or debasing (hamisítás) have been
common in history.
– Hard to transport
– The value of commodity money varies with the value
of the underlying commodity and, therefore, is subject
to fluctuations of supply and demands for these
goods.
Fiat money átválthatatlan, fedezet nélküli papírpénz
• The development of bank notes - originally backed by a convertibility

guarantee. Money by governmental decree
• Paper money quickly converted into fiat money - money issued by
governments as legal tender (hivatalos fizetőeszköz), but without
any right of convertibility.
• Fiat money is easier to transport and it is not subject to demand and
supply fluctuations like commodity money
• However, it can only be used as a medium of exchange as long as it is
generally accepted, which is not always a safe bet:
• Once people stop believing in the value of fiat money, the system falls
apart.
• Fiat money, moreover, has similar problems as commodity money. It
is easily stolen and often subject to counterfeit
10.000 Milpengő
(during the
Hungarian
hyperinflation
9,000,000%/mo
nth!! )
Fiat money
• Fiat money is easier to transport and it is not subject to
demand and supply fluctuations like commodity money
• However, it can only be used as a medium of exchange as
long as it is generally accepted, which is not always a
safe bet:
• Once people stop believing in the value of fiat money, the
system falls apart.
• Fiat money, moreover, has similar problems as
commodity money. It is easily stolen and often subject to
counterfeit
• Checks: an instruction to your bank to transfer money

from your account
• Electronic Payment (e.g. online bill pay)
• E-Money (electronic money):
– Debit card
– Stored-value card (smart card)
– E-cash
Checks
• Checks are an instruction to a bank to transfer money
from on person's account to the bank account of the
recipient once he or she deposits the check.
• Checks, thus, solve the problem of transport for large amounts
of money and facilitate transactions in a number of other ways.
• However, two problems are connected to the use of checks:
– Moving checks from one point to another takes time
– The processing of checks does not come for free
and imposes a transaction cost by itself to society
PAST -PRESENT
Payments Innovation
pécsi Közcáz
ohonnon a karrier indul
A few observations from the history
• Innovations have surged constantly to facilitate payments for both

instruments and infrastructure
• Innovation often takes time to flourish
• Institutional arrangements ensure trust and social acceptance
• Pre-modern systems settled payments in commercial bank money, not

Central bank money; and were subject to instability
pécsi Közcáz
ohonnon d karrier indul
Electronic payment
• Increasingly common forms of means of transaction are electronic
payment services offered online by banks.
• • Instead of mailing out a check for every single payment, you simply
log on to the bank's web site or have your money automatically
deducted on a regular basis
• • Electronic payment is a very common means of transaction in Europe
and increasingly popular in the U.S.
•
Credit/debit cards
CASHLESS SOCIETY
Are We Headed for a Cashless Society?
• Predictions of a cashless society have been around for
decades, but they have not come to fruition.
• Although e-money might be more convenient and efficient
than a payments system based on paper, several factors
work against the disappearance of the paper system.
• However, the use of e-money will likely still increase in
the future.
• Share of cash decreased from 92% to 84% between 2006-
and 2016
• China will be cashless by 2023?
• Usually advanced countries and wealthyy classes use less
cash. (Payment under 10$ 50% useing cash, while above
100$ onlyy 8% of cash share)
• However, the circulation of dollar notes increased from 5
to 9 % of US GDP (Grey economy)
Pros:
• Cash handling cca 5-10% of banking cost, and 5-15% of SMEs’ total
cost.’
• Exchange of baknotes in India (2016).
• Cash is a Symbol of liberty, anonymity, privacy, human rights,
Cons:
• financial exclusion of poors, minorities, elderly
• Dangerous e-money frauds, cyber attacks, hackings (300 time are
more frequent in financial sector than in other sectors)
• Big Brother, monopoly of Big Tech companies
• Electricity PROBLEM: electric shutdown, No internet
Mobil bankolás: mobil bankoló ügyfelek aránya
Online banking penetration in selected European markets in 2019
Online banking penetration in European markets 2019
100% 95%
94%
91%
91%
91%
90% 84%
81%
78%
Share of individuals
80% 73%
72%
71%
71%
68%
67%
66%
65% 4…
70% 63%
61%
58%
55%
55%
55%
54%
60% 47%
47%
46%
42%
50% 41%
36%
35%
40% 31%
30% 18%
20% 15%
9%8%5%5%
10% 3%
0%
Bosnia and…
Portugal
Serbia
Estonia
EU-28
Sweden
Slovakia
Kosovo
Spain
Norway
Netherlands
Finland
Belgium
Czechia
Germany
Turkey
Latvia
Lithuania
France
Austria
Poland
Malta
Cyprus
Italy
Greece
Bulgaria
Romania
Denmark
Luxembourg
Hungary
Iceland
Switzerland
Ireland
Slovenia
Croatia
Montenegro
EU-27 (from 2020)
United Kingdom
North Macedonia
Note(s): Europe; 2019; 16 to 74 years
Further information regarding this statistic can be found on page 8.
4 Source(s): Eurostat; ID 222286
• 5555 Kínában használt mobilfizetési
szolgáltatók, 2019
Z generáció (Szürke)
Millenáris (piros)
CRYPTOCURRENCIES
Will Bitcoin Become the Money of the Future?
• Bitcoin is a type of electronic money created in 2009.

• By “mining,” Bitcoin is created by decentralized users
when they use their computing power to verify and
process transactions.
• Although Bitcoin functions as a medium of exchange,
it is unlikely to become the money of the future
because it performs less well as a unit of account and
a store of value.
Cryptos
• Crypto means: „hidden” „secret”
• Cryprocurrencies:
– Store of value, unit of account
– BUT NOT the best medium of exchange bcz portability
(wide acceptance) and durability (stable value) are
missing. HIGH VOLATILITY BUT limited supply (similar
to other money)
– THERE IS NO LEGAL TENDER BEHIND, blockchain ( a new
business model)
– Cyberpunk movement 2009, Satoshi,
High volatility of Bitcoin
• 2010. January: 1 USD by 2011
• By 2017. 1000 USD
• By December 2017: 19000 USD
• By 2018 December: 4000 USD

• By 2019 December: 12 000 USD
• Facebook Libra has launched
• Crypto Bubble:
– How is it possible since Bitcoin is not widely used?
– BUT: Bitcoin investments have a high leverage
Regulation as an investment asset
• Requires new regulations
• Crypto exchanges: COINBASE
• ICO: Initial Coin Offering (Like IPOs), investment assets
• Traditional Stock Exchanges offer futures contract for
Bitcoin (NYSE, Chicago)
• JPM Coin
• Still 95% of Bitcoin trade in unregulated crypto exchanges
• Expedia accepts Bitcoin
• 15% of US students use Bitcoin for their student Loans
transactions
Central Bank Digital Currency (CBDC)
• CBDCs: Venezuela and Salvador tried to introduced their

cryptos as official money but failed.
• The main motives behind Central Bank Digital Currency
(CBDC)
1. Decrease of cash circulation
2. Financial inclusion
3. Decrease the cost of cash handling
4. Easier supervision, surveillance of citizens
5. Prevent cryptos’ expansion
6. Protect financial system aginst FinTech, Crypto challenges
Regulation as an investment asset
• How to regulate cryptos?
• axation office
• ICOs are considered by the SEC as an invetsment assets
• Frauds, counterfeiting and currency manipulation are
the most common scams (Internet hackings)
– Therefore China has banned Crypto exchanges!
– 10 other countries have followed suit
– Cryptos stolen in the past decade worth $15 billion

(WSJ)
Disadvantages of cryptos
• Ceiling : Limited supply 21 million coins the
• BUT crypto coins do not require logistic
• HIHG ENERGY consupmtion of Bitcoin: equal with Austria annual
consumption 75 Terra Watt
• 1 Bitcoin transaction consumes 600 KiloWatts, like 100k Visa

transactions is only 200 KW
• Durability some extant BUT not widely accepted

• NO real medium of exchange functions
Is it money?
• Store of value
• Medium of exchange
• Unit of account
Pros and cons of using Bitcoin
• Bitcoins aren't controlled or printed by the big banks.
• They are created digitally by a large community of ordinary
people, also, anyone can join.
• *Bitcoins are 'mined' with computers, solving various
mathematical equations over the web.
PROS CONS
• Independent currency (account cannot be
frozen) • Unstable value (bitcoin currency can
increase or decrease drastically)
• Little to no transaction fees (perfect for
sending money overseas or travelling)
• Volatile market (unpredictable)
• Secure transactions (encrypted)
• Unlimited transfers and amount can be • Not widely accepted (for now...)
sent
• Payments are irreversible
• It's essentially anonymous* (no money back guarantee!)
Bitcoin – The New Gold Rush?
If you want to invest in Bitcoins ……..A NEW INVESTMENT ASSET!
To Quote Dirty Harry:
You've gotta ask yourself a question: "Do I feel lucky?" Well, do ya?
ESSENTIAL TAKEOVER ON MONEY
(a summary)
Learning Objectives
• Describe what money is
• List and summarize the functions of money
• Identify different types of payment systems
• Compare and contrast the M1 and M2 money supplies
Meaning of Money (1 of 2)
• Money (or the “money supply”): anything that is generally
accepted as payment for goods or services or in the
repayment of debts.
• A broad definition
Meaning of Money (2 of 2)
• Money (a stock concept) is different from:
– Wealth: the total collection of pieces of property that
serve to store value
– Income: flow of earnings per unit of time
(a flow concept)
Functions of Money (1 of 2)
• Medium of Exchange:
– Eliminates the trouble of finding a double coincidence
of needs (reduces transaction costs)
– Promotes specialization
• A medium of exchange must:
– be easily standardized
– be widely accepted
– be divisible
– be easy to carry
– not deteriorate quickly
Functions of Money (2 of 2)
• Unit of Account:
– Used to measure value in the economy
– Reduces transaction costs
• Store of Value:
– Used to save purchasing power over time.
– Other assets also serve this function.
– Money is the most liquid of all assets but loses value
during inflation.
• Commodity Money: valuable, easily standardized, and

divisible commodities (e.g. precious metals, cigarettes)
• Fiat Money: paper money decreed by governments as
legal tender
• Checks: an instruction to your bank to transfer money

from your account
• Electronic Payment (e.g. online bill pay)
• E-Money (electronic money):
– Debit card
– Stored-value card (smart card)
– E-cash
• Predictions of a cashless society have been around for
decades, but they have not come to fruition.
• Although e-money might be more convenient and efficient
than a payments system based on paper, several factors
work against the disappearance of the paper system.
• However, the use of e-money will likely still increase in
the future.
Will Bitcoin Become the Money of the Future?
• Bitcoin is a type of electronic money created in 2009.
• By “mining,” Bitcoin is created by decentralized users
when they use their computing power to verify and
process transactions.
• Although Bitcoin functions as a medium of exchange, it is
unlikely to become the money of the future because it
performs less well as a unit of account and a store of
value.
• How do we measure money? Which particular assets can

be called “money”?
• Construct monetary aggregates using the concept of
liquidity:
– M1 (most liquid assets) = currency + traveler’s checks +
demand deposits + other checkable deposits
• M2 (adds to M1 other assets that are not so liquid) = M1 +

small denomination time deposits + savings deposits and
money market deposit accounts + money market mutual
fund shares
The Federal Reserve’s Monetary Aggregates (1 of 3)
Table 1 Measures of the Monetary Aggregates

Value as of July 3, 2017
Blank
($ billions)
M1 = Currency 1,481.5
+ Traveler’s checks 2.0
+ Demand deposits 1,501.5
+ Other checkable deposits 574.8
Total M1 3,559.8
M2 = M1 Blank
+ Small-denomination time deposits 357.7
+ Savings deposits and money market deposit accounts 8,923.9
+ Money market mutual fund shares (retail) 673.7
Total M2 13,515.1
Source: Federal Reserve Statistical Release, H.6, Money Stock Measures:
https://www.federalreserve.gov/releases/H6/current.
The Federal Reserve’s Monetary Aggregates (2 of
3)
Cashless society
Shoud we really change the way we pay?
What is a cashless society?
• Money exists but it is used digitally
• The main substitutes are credit/debit
cards, phone transactions and
cryptocurrencies
Brief history overview
Advantages
• Faster payments
• Safer financial environment
• Easily accessible data
Disadvantages
1. Takes out from small businesses'

profits
2. Limited access to electronic payments

3. Privacy issues
4. Makes you reliant on technology
5. You can be charged fees on transactions

Example No. 1 - Sweden
• Cash accounted for 1% of GDP in 2019
• Innovation and early adapters
• 100% digital economy by 2023
• Exclusive towards elderly and disabled
Example No. 2 - China
• The pandemic increased demand
• 83% of all transactions were mobile payments
• 770 million red packets sent
• PBOC fined 16 organizations
Innovations
• Credit and debit cards
• Electronic payment apps
• Bill-splitting apps
• Mobile payment services
• Mobile wallets
• Facial recognition payment
• Budgeting apps
• Cryptocurrencies
Thank you for your kind attention!
Do you have any questions?

CRYPTOCURRENCY: The money of the future or just an investment
vehicle?
Fanni Navreczki
Ákos Kovacsics
Máté Mészáros
Márton Hegedűs
What is a blockchain?
• Blockchain
– first described in 1991 as a digital notary
– distributed ledger  once recorded it is really hard to remove data from it
– parts of a block
– extra security  P2P network + Proof of Work

– in order to change the blockchain
• change all the hashes of the chain
• develop new PoW
• control more than 50% of the P2P network
Use cases of blockchains
• odometers
• replacing notaries
• smart contracts
– distributing royalties among authors
• cryptocurrencies
Cryptocurrencies
• Most famous one: BitCoin
– 2009 – Satoshi Nakamoto
• unknown figure up until today (group?)
– The coin have to be “mined”
– removing banks as intermediaries
Users work to create the target hash First to reach it receives the reward (coin)
BUT limited supply!
odds of finding the winning value for a single hash : one in the tens of trillions
What are some issues of cryptocurrencies?
Advantages and Disadvantages
• Potential of returns • Volatile investment
• Decentralized • People are distrustful
• Transparent • Does not live up to 2 out of 3

money functions
• Protection of inflation
• Illegal activities
• Transactions cannot be traced
• Tax implications
• Every currency is a startup

Security and Accessibility Issues
• Anonymity
• Hacking
• Losing private key to the wallet
• Leaving digital trail
• No cancellation
• Highly concentrated ownership

3 - Analysed the historical trends in Bitcoin volatility! $67,549.14
$64,936.74
$29,795.55
$19,345.49
$13,925.5
$1,237.55 $687.02
$6,635.84
$315.21
The Hungarian Forint vs. Bitcoin
Cryptocurrencies (Bitcoin) Aspects FIAT Money (HUF)

Satoshi Nakamoto; Mining Issuer The Central Bank (MNB)
Decentralized Regulation Centralized
Extremely High Durability High
High Portability Extremely High
Up to eight decimal points Divisibility Up to 5 HUF coin
Extremely high Uniformity High
Fixed at 21 Million units Limited Supply Decided by the central bank
Very Low Acceptability Extremely High
Low – Frauds and Hacks Safety Very High – OBA; BEVA; Legislation
What are the main functions of money?
The Essential Functions of Money
„That car costs 7 alligators and

a movie theatre, sir.”
Unit of
Account
MONEY
„If I earn 150.000 HUF this
month, can I afford the new
„I can pay with Hungarian
Medium apple watch in March?”
Forints everywhere in Hungary, Storer of
of
because the government Value
Exchange
protects my right to do so.”
Can and should Cryptocurrencies be considered money?
So then what is crypto?
„Currently the U.S. Internal Revenue Service considers bitcoin a taxable

property. But its function as an investment vehicle for some makes it a
security. Further complicating matters is that it was created to be a
currency.” (Knowledge @ Wharton; 2018 p. 6)
Capital Gains Capital Gains

Reward Payment (<1 year) (1+ Years)
Mining
Income Tax Income Tax Income Tax Income Tax Potentially
Rate Rate Rate Rate Less Than
Income Tax
Rate
How the world currently sees cyptocurrencies?
• "In addition to China, eight other

countries have absolute bans on these
digital currencies. Algeria, Bangladesh,
Egypt, Iraq, Morocco, Nepal, Qatar and
Tunisia have all chosen to unilaterally
ban exchanges and services surrounding
cryptocurrencies." (News18)
• “Keep your investments small, and

never put crypto investments above any
other financial goals like saving for
retirement and paying off high interest
debt. “ (Next Advisor)
Non-Fungible Tokens and METAVERSE
Thank you for your attention!
Do you have any questions?

Fanni Navreczki
Ákos Kovacsics
Máté Mészáros
Márton Hegedűs
References
• https://n26.com/en-eu/blog/pros-and-cons-of-cryptocurrency
• https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-9-functions-
of-
money#:~:text=The%20characteristics%20of%20money%20are,%2C%20limited%20supply%2C%20an
d%20acceptability.
• https://kw.wharton.upenn.edu/kwfellows/files/2018/06/2018-08-30-Bitcoin-Student-
Series.pdf
• https://elemzeskozpont.hu/nft-non-fungible-token-jelentese-letrehozasa-problemak-
kockazatok
• https://kriptoakademia.com/2021/12/20/mi-az-a-metaverzum
• https://www.buybitcoinworldwide.com/volatility-index/
• https://www.coindesk.com/price/bitcoin/
• https://www.forbes.com/advisor/taxes/what-are-cryptocurrency-taxes/
• https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp
• https://www.youtube.com/watch?v=SSo_EIwHSd4&t=43s
• https://www.youtube.com/watch?v=aQWflNQuP_o&t=5s
• https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp
BANKING INDUSTRY STRUCTURE &
COMPETITION
Gál Zoltán, FULL PROFESSOR

Preview
• This chapter examines the historical trends in the banking
industry
• Comparison of the European and US banking system
• Comparison of universal and specialized banking
• Explain the unique structure of the U.S. system.
• The banking network consolidation in the US
• International banking regulations
Learning Objectives (1 of 2)
• Recognize the key features of the banking system and the

historical context of the implementation of these
features.
• Understand the evolution and structures of different
national banking system models
• Explain how financial innovation led to the growth of the
shadow banking system.
• Identify the key structural changes in the commercial
banking industry.
• Summarize the factors that led to consolidation (size &
network) in the commercial banking industry.
Learning Objectives (2 of 2)
• Assess the reasons for separating banking from other

financial services through legislation.
• Summarize the distinctions between thrift institutions and
commercial banks.
• Identify the reasons for U.S. banks to operate in foreign
countries and for foreign banks to operate in the United
States.
FINANCIAL INTERMEDIATION AND INDIRECT FINANCE
Revise from the previous class

Function of Financial Markets : Direct and
Indirect finance
Flow of Funds Through the Financial System

2-6
Financial Intermediation
and Banks (cont'd)
• Direct finance
– Individuals purchase bonds from
a business
• Indirect finance
– Individuals hold money in a bank
– The bank lends the money to a business
15-7
Financial Intermediation
and Banks (cont'd)
• Financial Intermediation
– The process by which financial institutions accept
savings (deposits) from businesses, households, and
governments and lend the savings to other businesses,
households, and governments.
15-8
Figure 15-4 The Process of Financial
Intermediation
15-9
Financial Intermediation and Banks
• Two-tier banking system
– Most nations have a banking
system that encompasses two types
of institutions.
1. One type consists of private
banking institutions.
2. The other type of institution is a
central bank.
• One-tier (mono) banking system: in centrally
planned socialist countries
15-10
DIFFERENT BANKING STRUCTURES
Types of banking
Retail Banking mainly focuses on a single

individual. In contrast, Wholesale Banking
focuses on the larger group of individuals
or organizations, or companies to serve
these cooperative clients.
Banking Structures Throughout the World
• Universal Banking (European continental model)
– Universal banking is a system in which banks provide a
wide variety of financial services, including commercial
and investment banking services.
– A universal bank is a bank that combines the three main
services of banking under one roof. The three services are
wholesale banking, retail banking, and investment
banking. In other words, it is a retail bank, a wholesale
bank, and also an investment bank.
– A universal bank participates in many kinds of banking
activities and is both commercial bank and an investment
bank as well as providing other financial services such as
insurance.
15-13
(cont'd)
Universal Banking (European continental model)
– Offers a full range of financial services and to own
shares of stock in corporations (German banks)
– These are also called full-service financial firms,
although there can also be full-service investment
banks which provide wealth and asset management,
trading, underwriting, researching as well as financial
advisory.
*Retail Banking mainly focuses on a single individual.
Wholesale Banking focuses on the larger group of individuals or

organizations, or companies to serve these cooperative clients.
• What is the difference between wholesale and investment
banking?
• Investment Banking is a 'markets business': raising capital,

long term funds, broking and advisory services.
• Wholesale Banking is core commercial banking
(lending,borrowing, payment etc.)that serves large
institutions.
17
Investment banks
• Investment banks act as intermediaries between
investors (who have money to invest) and corporations
(who require capital to grow and run their businesses).
• $111.45 billion in 2021 at a compound annual growth rate (CAGR) of
8.4%.
• Investigation, Analysis and Research (Origination),
Underwriting (Public Cash offerings), M&A consultancy
and Distribution.
22/03/2022
18
Balance Sheet - Investment Bank vs. Commercial Bank
22/03/2022
(cont'd)
• US model is specialized banking:
• The concept is most relevant in the UK and the USA,
where historically (from 1933) there was a distinction
drawn between pure investment banks and commercial
banks up to 1990s.(1999)
Roots of different financial system models
Institutional development of Anglo-Saxon and European continental
system models – Different emphasis on direct and indirect financing
1. Anglo-Saxon capital market-oriented system (Direct finance is
more dominant)
A model based on its overall capital market dominance needs to be
created United States, Great Britain, Canada, and Australia.
2. Bank-oriented continental model in France and Germany (+Japan,
China).
• In the economic development of Eastern Europe, the intermediary role
of banks was stronger by 19-20. century
• Securing and reallocating economic growth factors and late-comers
development, first and foremost through banking system.
• Gradual disintegration of the single-branch local-regional
banking system (unit bank), the continuation of the
development of these national branch network banks
(branch banks)
FinTech evolúciója:Ipar 1.0 -tól az ipar 4.0
korszakáig
22
Share of banking assets of the total financial assest, 2003,2005, (%)
90
80
70
60
50
48
50 42
37 36 35
40 34 34
31
30
18
20
10
0
EMU
Latin-America
Asia
EU
USA
Japan
Emerging markets
CEE
Middle East
World
2003
2005
2007
22/03/2022
Emergence of universal banks (credit demand based concept)
• Late comers in the continantal Europe: increasing capital needs - The
Universal Banking Model Based on Gerschenkron's Credit Demand
(Alexander Gerschenkron (1904-1978), American economic historian)
• There is a correlation between the lack of capital due to late comer
industrialization (rel.economic backwardness) and the weight of bank
(indirect) financing.
• With the emergence of new industries (Industry 2.0: electronics,

chemicals, automotives) in capital-scarce continental countries, the
universal bank has become a long-term financier of increasingly
capital-intensive industrial (and infrastructure) developments.
• Universal banks not only financed industrial companies but also took part
in corporate governance of these companies through shareholding
(Germany)
Emergence of universal banks (credit demand based concept)
Institutionalization of the central bank,

1. Medium decentralization of the state organization; quasi-
decentralized banking systems (local, unit-banks) (Austria-
Hungary, Germany, Switzerland); dual banking system (local
vs.national)
2. Strong decentralization, segmented banking system: lack of
central bank till 1913 hinders the introduction of universal banking
system: USA (dominance of state centered local, regional banks)
3. Due to strong centralization (Great Britain, France, Belgium)
specialized banking system developed (eg. Large London based
banks with extensive nation-wide branch networks)
Emergence of universal banks: deposit (liabilities)-based concept
• Verdier's (2003) source (liabilities)-based universal banking

model
• Due to the dense network of local credit unions, large banks
can rely on their equity and profits from corporate financing
bcz they were excluded from the local deposit markets.
• They need a central bank because of their risky corporate
investments
• Existence of segmented local banking networks (cooperative
savings banks), greater room for maneuver for local
economic development and local finance.
http://www.youtube.com/watch?v=4VFN_26IeKw
The evolution of the modern financial system
Regional and bank-oriented National and capital market- Transnational and securitized
oriented form
Associated with industrializa- Characteristics of industrial ma- Associated with post-industrial

tion phase of economic devel- turity phase of economic devel- and transnational phase of eco-
opment opment nomic development
Banks main source of external Capital markets main source of Bulk of funds obtained through
funds needed by private sector funds, using savings of private capital and credit markets, using
firms investors mainly resources of institutional
investors
Industrial growth financed by Capital markets channel personal Separation of capital and money
loans, risk capital and profits and other savings into industry; markets from industry and
risk spread across shareholders commodification of money;
proliferation of monetary prod-
ucts
Local-regional and national Concentration and centralisation Development of globally inte-
banking system; local sources towards national banking and grated system of world financial
of capital important capital markets; loss of local- centres; loss of national financial
regional financial autonomy; autonomy to supranational
emergence of internationalization economy of stateless monies
Source: Martin, 1994.
Evolution of banking: stages and spatial expansion
STAGES BANKS AND SPACE CREDIT AND SPACE
1. PURE FINANCIAL - Serving local communities Intermediation only
INTERMEDIATION - Private Wealth-based
- Banks lend out savings - Provinding foundation for
- payment in commodity money future financial centers
- No bank multiplier
- Savings preceedes investment
2. BANK DEPOSITS USED - Market dependent ont he Credit creation focused on
AS MONEY extent of confidence held in local community
- Convenient to use paper banker bcz total credit constrained by
money as means of payment - Local unit banks, narrow repo (repurchase) ratio. Lender
- Reduced drains on bank geographical scope of lends for the bank on short –
reserves local/regional banking term basis (Bill of exchange,
- Bank credit creation with váltó)
fractional reserves
- Investment can now preceed A hitelteremtés a helyi
saving közösség bázisán alapszik, a
teljes hitelállomány a repo
(repurchase) arányában
korlátozott.
3. INTER-BANK LENDING - Banking system developes Redeposit constrains relaxed a
- Credit creation still at nationalm level bit so banks can lend wider
constrained by reserves - Nationwide geographical afiled
- Risk of reserve loss offset by scope
inter-bank lending - correspondent banks
- Multiplier process works more
quickly
- Multiplier larger bcz banks
can hold lower reserves
27
A pénzügyi rendszerek és piacok evolúciója: a
bankfejlődés szakaszai
STAGES BANKS AND SPACE CREDIT AND SPACE
4 LENDER OF LAST - Central bank oversees the Banks freeer to respond credit
RESORT national banking system but demand as reserve constrains
- Central bank percieves need to limited power to constrain not binding, , and they can
promote confidence in banking credit determe the volume and
system distribution of credit within
- Lender of last resort facility national economy.
provided if inter-bank lending
inadequate
- Reserves now respond to
demand
- Credit creation freed from
reserves constrains
5 LIABILITY Banks compete at national level Credit creation determined by
MANAGEMENTS with non-bank financial struggle over market share and
- Competition from non banking institutions opportunities in speculative
intermediaries; struggle for markets.
larger market share Total credit uncontrolled.
- Banks actively supply credit
and seek deposits
- Credit expansion diverges from
real economic activity
6 SECURITISATION Deregulation opens up Shift to liquidity by empahis
- Capital adequacy ratio international competition, beeing put on services rather
28
- Reserves now respond to
demand
- Credit creation freed from
reserves constrains
5 LIABILITY Banks compete at national level Credit creation determined by
MANAGEMENTS with non-bank financial struggle over market share and
- Competition from non banking institutions opportunities in speculative
intermediaries; struggle for markets.
larger market share Total credit uncontrolled.
- Banks actively supply credit
and seek deposits
- Credit expansion diverges from
real economic activity
6 SECURITISATION Deregulation opens up Shift to liquidity by empahis
- Capital adequacy ratio international competition, beeing put on services rather
introduced to curtail credit eventually causing than credit; Credit decisions
- Banks have an incresing share concentratiuon in international concentrated in financial
of bad loans bcz of financial centres (IFCs) centres; Total credit
overlending in stage 5 determined by the availability
- Securitisation of bank assets of capital i.e.by central capital
- Increase in off-balance sheet markets
activities
- Drive to liquidity
Evolution of Universal banking in Hungary: transition from unit
bankingto nation-wide branch banking, in 1910
30
DIFFERENT NATIONAL MODELS OF BANKING SYSTEMS
Financial Intermediaries (in the USA)
2-32
USA banking system: Depository Institutions (Banks) are broadly
defined as businesses that accept deposits and make loans
Depository Institutions BANKS
Commercial Savings & Savings Credit

Banks Loans Banks Unions
Non-Bank Thrifts
• Raise finds by issuing checkable •Deal almost exclusively in short term
(demand), savings and time deposits.deposits and mortgages.
• Money multiplier (credit creation) •Are generally mutual companies (depositors
function. are the owners)
• Making different (commercial,
consumer, mortgage) loans. •Are allowed to hold corporate
• Diversified asset portfolios equities/bonds
Depository Institutions (Banks)
• Commercial banks
– Raise funds primarily by issuing checkable, savings, and
time deposits which are used to make commercial,
consumer and mortgage loans
– Collectively, these banks comprise the largest financial
intermediary and have the most diversified asset
portfolios
Copyright © 2006
Pearson Addison-Wesley.
2-34
All rights reserved.
Depository Institutions (Banks)
• S&Ls, Mutual Savings Banks and Credit Unions
– Raise funds primarily by issuing savings, time, and
checkable deposits which are most often used to make
mortgage and consumer loans, with commercial loans
also becoming more prevalent at S&Ls and Mutual
Savings Banks
– Mutual savings banks and credit unions issue deposits as
shares and are owned collectively by their depositors,
most of which at credit unions belong to a particular
group, e.g., a company’s workers
2-35
Financial Intermediation and Banks (cont'd)
• Payment Intermediaries
– Institutions that facilitate transfers of funds
between depositors who hold transactions
deposits with those institutions
– Credit card companies (MC, Visa, American
Express)
– New FinTechs: TransferWise
15-36
Credit cards; How a Debit-Card Transaction Clears
credit and debit the account
15-37
The 3 pillars of German banking system
In terms of total assets, the four major German commercial banks (Deutsche Bank AG,
Commerzbank AG, UniCredit Bank AG and Deutsche Postbank AG) account for nearly
65 %. This reflects the particular importance of the major banks.
Key figures and business aims of German banks
Co-operative banks tackle information asymmetry
Cooperative bank model:

counter information
19th Bank Costumer
asymmetry
century:
Information Banks are reluctant to lend as they do not
advantage possess sufficient information to price Costumer = Member
in favour of risk for certain marktes
customer Result:restricted supply lending to higher
rates & lower aggregate borrowing
21st Bank = Cooperative

Bank Costumer
century:
Information Banks (suppliers) have and advantage Cooperative model finds the balance
over costumers (buyers) due to advanced between the banks & costumers.
advantage
IT analytics, credit scoring Minimized information asymmetry.
in favour of
bank Result: Higher customer demand due to Coop represent both buyesr &
information asymmetry, higher prices & supplyers through member
take up. ownership..
Source: Burger-Gál, 2011, Wyman, 2009
Az ügyfélhez való földrajzi közelség; a tagsági tulajdon információs előnyeinek kiaknázása (pl. helyi kis- és középvállalatok finanszírozásában); a
szövetkezettel szembeni bizalom növekedése az informális, helyi kapcsolatokon keresztül; információs előny érvényesítése a versenytársakkal szemben
(országos hálózatú kereskedelmi bankok).
Increasing members in the German
cooperative banks
No of
branches
(1000)
No. of coop banks

(1000, right)
Members
(million)
Balance sheet
per branch(100
million €, right)
1970 1980 1990, 2000 2010

Reunification
Forrás: BVR (2010),
CEPS (2010: 30)
Performance at cooperative banks means achieving
stakeholder value creation in an efficient manner
Structural factors
Actual execution: maximising efficiency
„Dual bottom-line” institutions: stakeholder and relative growth
vs. shareholder banks; profit+ social
impact Owners (members) are users Efficiency:
(costumers) • Shows how scarce resources are used to
• Value-added is incorporated in achieve a goal
products • Cost-income-ratio is one main metric
• Profit expectation vs. profit • Includes efficient risk management
pressure • May be explicitly influenced by
• Goal is to maximise benefit/surplus institutional protection schemes
distributed to members
Relative growth and value creation:
high • Relative, compared to market
Bad coop. Ideal coop
• Measures the co-operative’s
attractiveness (social & economic and
Efficiency community values) to existing and new
Destroying Bad
credibility managers members
low • Includes profitability, profit growth,
low high number of new members and clients
42
Relative
growth Sources: CEPS(2010:4), Wyman (2008: 31)
Top-25 global banking groups by Tier 1 capital
(Bn $), 2006
Bank of America
Citigroup
HSBS
CREDIT AGRICOLE
JP Morgan Chase
4th
Mitsubitsi Financial…
ICBC
Royal Bank Of…
Bank of China
Sandander Banco…
BNP Paribas
Barclays Bank
HBOS
China Construction…
Mizuho Financial
Wachovia
Unicerdit
Wells Fargo
RABOBANK
ING Bank
19th
Sumimoto Financial
UBS
Deutsche Bank
ANB Amro
CREDIT MUTUEL
25th
0 20 40 60 80 100
Share of cooperative banking sector
• 37% of population in Germany and 40% in Austria are customers of
CBs
• 32% of SMEs were members of cooperative banks in EU-15 (2003)
• The Italian Banche Popolari is responsible for 75% of SME lending
• 90% of Frech farmers are customers of Credit Agricole
Cooperative Banks—Market Shares of Assets (In percent of total banking system assets)
1994 1997 2000 2003
Austria … 29.4 29.5 35.6
Finland 18.5 17.5 16.2 15.9
France 1/ 28.4 27.9 28.1 24.1
Germany 14.3 12.4 9.8 10.3
Greece … 0.2 0.3 0.6
Italy … 17.0 16.8 14.9
Netherlands … 21.2 29.0 26.7
Portugal … 3.5 3.4 3.5
Spain 3.0 3.5 3.7 3.9
1/ Including savings banks, before and after their conversion to cooperative banks in 2000
The birth of cooperative bank models
• Cooperative banks have long been an integral and well-established

part of the financial system in many European countries
• there is no single universal model
• Cooperative banks have evolved from their origins in the second
half of the 19th century, and many have evolved over time into
full-service universal banks
• Friedrich Wilhelm Raiffeisen (1818 – 1888) was a German, who
pioneered rural credit unions in 1864.
• Hermann Schulze-Delitzsch (1808-1883)who established the first
urban cooperatives (e.g. a shoemaker’s cooperative but also
savings and creditcooperatives) in the town of Delitzsch in 1852.
• They became widespear during cris times when the the credit
channels are not developed or disrupted.
Indian Financial system (mixed anglo saxon –
European continantal)
National systems of banking
• The ways that banks around the world differ
– Size
• United States has banks of various sizes
• Europe, China and Japan have few large banks
– Legal
• Limits on financial services such as insurance and bank
stock ownership (separate commercial and investment
bank operation) USA till 1990s
• Universal banking
– Importance in financial system
• Major importance (bank-oriented financial systems)
• Part of a varied (complex) financial system (United
States) 15-48
The World’s Largest Banks by Tier 1 capital,
1994-2010
The World’s Largest Banks, 2006
15-50
Top global banks by assets, 2020
Table 3 Ten Largest Banks in the World, 2020
Bank Assets (U.S. $ trillions)
1. Industrial and Commercial Bank of China, China 4.32

2. China Construction Bank Corp., China 3.82
3. Agricultural Bank of China, China 3.70
4. Bank of China, China 3.39
5. JPMorgan Chase, US 3.14
6. HSBC Holdings plc, United Kingdom 2.92
7. Mistubishi UFJ Financial Group, Japan 2.89
8. Bank of America, US 2.62
9. BNP Paribas 2.43
10. Credit Agricole Group, France 1.98
Source: From Bankrate.com––Compare mortgage, refinance, insurance, CD rates,
http://www.bankrate.com/finance/banking/largest-banks-in-the-world- .
1.aspx
Top global banks by market capitalization, 2019
Top global banks by Tier 1 capital, 2020
Tier 1 capital:
disclosed reserves—
that appears on the
bank's financial
statements—and
equity capital
HISTORICAL DEVELOPMENT OF THE BANKING
SYSTEM
(REGULATIONS & INNOVATIONS)
Historical Development of the Banking System
• Bank of North America chartered in 1782
• Controversy over the chartering of banks
• National Bank Act of 1863 creates a new banking system of
federally chartered banks
– Office of the Comptroller of the Currency (Pénzügyi
Ellenőrzési Hivatal)
– Dual banking system (Federal & state level)
• Federal Reserve System (central bank functions) is created
in 1913.
Figure 1 Time Line of the Early History of
Commercial Banking in the United States
Primary Supervisory Responsibility of Bank
Regulatory Agencies
• Federal Reserve and state banking authorities:

state banks that are members of the Federal
Reserve System.
• Comptroller of the Currency—national banks
• Fed also regulates bank holding companies.
• FDIC Dederal Deposit Insurance Corp): insured
state banks that are not Fed members.
• State banking authorities: state banks without
FDIC insurance.
The Federal Reserve System
• The Fed
– The Federal Reserve System; the central bank of the United States
– The most important regulatory agency in the U.S. monetary system
– Established in 1913 by the Federal Reserve Act
– Federal Reserve Banks (12 Districts),25 branches
15-59
U.S. Has a Dual Banking System
• State banks chartered by state governments
• National banks chartered by federal government beginning
in 1863
10-60
Levels of financial regulations
There is a adverse selection problem/moral hazard problem
between both the bank and its depositors as well as
between the bank and its potential loan customers
Depositors Bank Loans
This problem must A bank can deal with this problem

be dealt with with:
through regulation
•Credit Scoring
FDIC (Revolut has
•Collateral
an issue in Hungary:
wahat is it? •Optimal Debt Contracts
A timeline of Banking Regulation
Banking Act
Restrictions on
McFadden Act
Competition
Holding Company Act
Monetary Control Act
Great Depression Riegle-Neal

1933 1956 1999
1863 1927 1980 1994
Graham - Leach - Bliley

Restrictions on
Holding Company Act

activities
Glass - Steagall
Federal Deposit Insurance (1934)
• Federal reserve members are required to purchase deposit
insurance. Insurance is optional for state banks (98% of all
banks have deposit insurance)
– FDIC insured banks are charged up to 27 cents per $100
of eligible deposits
– All deposits up to $100,000 are insured by the FDIC.
REGULATIONS AND INNOVATIONS
THE BIRTH OF SHADOW BANKING

Regulations & innovations
• Questions: Which one is the more important?
• Financial innovation is driven by the desire
to earn profits
• Innovations often responds to regulations and
changing in the financial environment
– Recent outcome and framework: SHADOW BANKING
1. Responses to change in demand conditions

2. Responses to changes in supply conditions
3. Securitization of Shadow Banking System
4. Avoidance of regulations
10-65
Financial Innovation and the Growth of the
“Shadow Banking System”
• A change in the financial environment will stimulate
a search by financial institutions for innovations that
are likely to be profitable
• A shadow banking system is the group of financial
intermediaries facilitating the creation of credit
across the global financial system but whose
members are not subject to regulatory oversight
(risk, liquidity, and capital restrictions) . E.g.hedge
funds, unlisted derivatives
• The shadow banking system also refers to
unregulated activities by regulated institutions (off
balance sheet, CDS).
1 Responses to Changes in Demand Conditions:
Interest Rate Volatility
High fluctuation of interest rates (1960s: 1-3.5%; 1970s:
4-12%; 1980s: 5-15%, )
• Adjustable-rate mortgages
– Flexible interest rates keep profits high and lower
interest rate risk when rates rise for banks
– Lower initial interest rates make them attractive
to home buyers
• Financial Derivatives
(invented in 1870s but re-introduced in 1975)
– Ability to hedge interest rate risk (Futures)
– Payoffs are linked to previously
issued (derived) securities
10-67
2 Responses to Changes in Supply Conditions:
Information Technology
• Bank credit and debit cards (which one was introduced earlier?)
– Improved computer technology lowers the transaction
costs
• Electronic banking
– ATM
– Home banking
– ABM (automated banking machines)
– Virtual banking
• Junk bonds (lower rated bonds from riskier corps)
• Commercial paper market (short term debt securities)
10-68
3 Securitization and the Shadow Banking System
• Securitization
– To transform otherwise illiquid financial
assets into marketable capital market
securities involving different less reguated
financial institutions.
– Bundling illiquid assets of e.g.mortgage & auto
loans into markatable capital market securities
– Securitization played an especially prominent

role in the development of the subprime
mortgage market in the mid 2000s.
Financial engineering and the „originate to distribute model”
in the shadow banking
• Financial engineering is the application of mathematical methods
to the solution of problems in finance in developing new
instruments to address the needs of investors and institutions in a
rapidly changing financial climate.
e.g. Financial mathematics, mathematical finance, financial physics and
computational finance
'Originate-to-hold' model to Originate & Distribute model
Financial innovations before and after 2008 crisis
Financial mathematics models FinTech

(IT-driven models, distributed
ledger, cryptos, FinTech platforms)
3 Securitization and the Shadow Banking System
(Cont.)
• These securities (along with many other securities
– private & Fannie Mae and Freddie Mac) were
used as collateral in the Shadow Banking System.
• Sale and Repurchase Market (“REPO”) – The

essence of “Shadow” Banking. Shadow Banks (1)
do not take deposits; (2) provide credit and
liquidity; (3) no access to central bank funding or
the FDIC.
Subprime mortgage market operates with low transaction cost
Mortgage broker – loan originator
Servicer (takes interest and principal payments , sells mortgage to another institution
Bundler- takes interest and principal payments, passes to distributor
Distributor sells the claims to interest and principal payments as securities to other
financial intermediary (MMF, pension fund),
real estate mortgage investment conduit (REMIC)
74
Subprime mortgage market
Average US Home prices Growth in subprime loans
75
Size of Sahadow banking
In China shadow banking is growing
https://www.cnbc.com/2013/09/12/risk-is-being-driven-
to-shadow-banks.html
Commercial banks' income sources
Sources of non-interest income, end-2007 (
Michael Brei)
4 Avoidance of Existing Regulations
• Loophole Mining:
– Reserve requirements act as a tax on deposits
– Restrictions on interest paid on deposits led to
disintermediation
– Money market mutual funds
– Sweep accounts
4 Avoidance of Existing Regulations (cont.)
Regulations Behind Financial Innovation
1. Reserve requirements
Tax on deposits = i  r
2. Deposit-rate ceilings (Reg Q till 1980, i was over 10%
while REG Q was 5.5% max.)
As i , loophole mine to escape reserve requirement tax
and deposit-rate ceilings
Regulation Q was repealed in 1986
3. Money market mutual funds (Bruce Bent, 1970)
4. Sweep accounts*
*A sweep account automatically transfers cash funds into a safe but

higher interest-earning investment option at the close of each business
day, e.g., into a money market fund.
10-81
Problems with Restricting Activities
Banks compete with other financial services companies as

well as other banks!!
During the late 1970’s, market interest rates rose well above 10%,
but banks were restricted by regulation Q to pay only 5.25% in
savings accounts (time deposits) and 0% on checking accounts
Banks Financial Companies

Checking Accounts (0%) Money Markey Mutual
Funds (10%)
As households pulled their money out of banks, mortgage

and small business lending was seriously curtailed!
4 Avoidance of Regulations: Loophole Mining
(cont.)
• Reserve requirements act as a tax
on deposits
– Sweep accounts (not subject to reserve requirement, so
non taxable checking account invested, swept out into
overnight securities, into MMF)
• Restrictions on interest paid on deposits led to
disintermediation of bank deposits to avoid interest rate
ceiling.
– Money market mutual funds (with higher returns,
invested into higher than 5.5% Regulation Q interest
rate ceiling)
10-83
Bruce Bent and the Money Market Mutual Fund
Panic of 2008
• Bruce Bent, one of the originators of money market

mutual funds, almost brought down the industry during
the global financial crisis in the fall of 2008.
• Not surprisingly, given the extension of a government

safety net to the money market mutual fund industry,
there are calls to regulate this industry more heavily.
IMPACT OF INOVATION ON TRADITIONAL
BANKING
Financial Innovation and the Decline of
Traditional Banking (1 of 3)
• As a source of funds for borrowers, market share
has fallen.
• Commercial banks’ share of total financial
intermediary assets has fallen
• No decline in overall profitability: Increase in
income from off-balance-sheet activities
Figure 3 Number of Commercial Banks in
the United States, 1934–2019
https://fred.stlouisfed.org/series/USN .
UM
10-88
• Decline in cost advantages in acquiring funds
(liabilities)
– Zero interest rate checkable deposits were
cheap source till 1970s
– Rising inflation led to rise in interest rates and
disintermediation
– Low-cost source of funds, checkable deposits
declined in importance (from 60% to 10% as
source of fund/liabilities between 1960s-2018)
10-89
• Decline in income advantages on uses of funds
(assets)
– Information technology has decreased need for banks to
finance short-term credit needs or to issue loans
– Information technology has lowered transaction costs
for other financial institutions, increasing competition
• Clients Bypassing banks and went directly to money
and capital markets (commercial paper, junk bonds)
• Increasing the role of shadow banking system
• Problems for S& L to securitize mortgage loans
Decline in Traditional Banking
Loss of Cost Advantages in Acquiring Funds

(Liabilities)
  i  then disintermediation because
1.Deposit rate ceilings and regulation Q (1933-
2010)
2.Money market mutual funds
3.Foreign banks have cheaper source of funds:
Japanese banks can tap large savings pool
Loss of Income Advantages on Uses of Funds (Assets)
1.Easier to use securities markets to raise funds:
commercial paper, junk bonds, securitization
2.Finance companies more important because
easier for them to raise funds
10-91
Financial Innovation and the Decline of Traditional
Banking (3 of 3): Banks’ Responses
Loss of cost advantages in raising funds and income advantages in
making loans causes reduction in profitability in traditional banking
Banks’ Responses
1. Expand lending into riskier areas: e.g., real estate
• Commercial real estate loans
• Corporate takeovers and leveraged buyouts
2. Expand into off-balance sheet activities (non-interest rate but
fee generation)
• Non interest income
• Concerns about risk
• Decline of Traditional Banking in Other Industrialized Countries
3. Creates problems for U.S. regulatory system
• Similar problems for banking industry in other advanceds

countries (Eurobond markets, Australia)
FINANCIAL DISINTERMEDIATION
Financial disintermediation
• The process by which financial sector players enter into
more and more business directly with each other,
bypassing banks.
• The main area of disintermediation is the DIRECT FINANCE via capital
market, which enables securitization to bypass traditional financial
intermediaries (banks) and to avoid bank commissions, thus
increasing investors' returns on credit and other transactions.
• One interpretation is that disintermediation means bypassing the
financial intermediary system. In this interpretation, direct
participation in the money and capital markets represents
disintermediation (direct financing)
• Also referred to as (banking) disintermediation is the phenomenon of
investors shifting their savings from bank deposits to institutional
investors.
Stages of financial disintermediation
1. Investment banks vs commercial banks after 1933
2. Institutional investors (pension funds, insurance
companies, mutual funds) from 1950s
3. Non-Financial service providers (selling banking products,
e.g. Texaco petrol staions, Texco financial services)
4. Challenges of FinTech companies
Financial disintermediation
• The former three actors saver ̶̶̶ bank ̶̶̶ borrower relationship is replaced by
the saver ̶̶̶ non-bank financial intermediary ̶̶̶ bank ̶̶̶ borrower - four-
actors mediation chain
– The emergence of non-bank players also in retail markets
previously dominated by banks (insurance and pension funds
investment products competing for deposits
• Institutional investors (pension funds, insurance companies,
mutual funds) have become the strongest competitors of
banks.
– Strong competition has pushed players towards cooperation
(eg bankassurance model).
– Competition of non-financial service providers (Tesco
Finance); alternative payment channels on the Internet and
mobile phones
– Competition from Fintech start-ups
Rise of new challengers: Fintech companies
Banks reaction:
• Have become distributors of new investment and pension insurance
products,
• They have also developed riskier product segments through the
securitization of loans.
• Developing or merging with Fintech start-ups
Table 1 Size Distribution of Insured Commercial
Banks, March 31, 2017
Table 1 Size Distribution of FDIC Insured Banks, March 31, 2017
Assets Number of Share of Share of Assets

Banks Banks (%) Held (%)
Less than $100 million 1,501 25.6 0.5
$100 million–$1 billion 3,605 61.6 6.9
$1 billion–$10 billion 632 10.8 10.4
$10 billion–$250 billion 109 1.9 31.6
More than $250 billion 9 0.2 50.6
Total 5,856 100.00 100.00
Source: FDIC Quarterly Banking Profile, https://www.fdic.gov/bank/analytical/qbp/index.html

Table 2 Ten Largest U.S. Banks, 2017
Bank Assets ($ billions) Share of All Commercial Bank

Assets (%)
1. J.P. Morgan Chase & Co. 2,420 14.4
2. Bank of America Corp. 2,150 12.8
3. Citigroup Inc. 1,770 10.5
4. Wells Fargo & Co. 1,750 10.4
5. U.S. Bankcorp 416 2.5
6. Bank of New York Mellon Corp. 377 2.2
7. PNC Financial Services Group 362 2.2
8. Capital One Financial Corp. 314 1.9
9. HSBC North America Holdings 292 1.7
10. TD Bank U.S. Holding Co. 253 1.5
Total 10,103 60.1
Source: From Bankrate.com––Compare mortgage, refinance, insurance, CD rates:

http://www.bankrate .com/banking/americas-top-10-biggest-banks/#slide=1.
2017
NETWORK STRUCTURE OF BANKING
AND BRANCHING OUT IN THE USA
Network structure of the U.S. Commercial
Banking Industry Branching
• McFadden Act (1927) and state branching
regulations prohibited branching across state lines
and forced all national banks to conform to the
branching regulations of the state in which they
were located.
• Bank holding companies (1956) 90% of total
banking assets
• Automated teller machines (ATMs, 1967) are
responses to these regulations
0-102
Until the mid 1900’s, we were a nation of unit banks
Year Number of Banks Total Branches

1900 12,500 13,000
2000 7800 68,000
McFadden Act (1927)
National Banks State Banks Main Office

Prohibited from Unit Banking
interstate
Limited Branching
branching
Statewide Branching
Must comply
with state
branching rules
Branch Offices
Branching Restrictions could be avoided by forming
holding companies
Main Office Holding Company
Branch Offices Subsidiaries
Illegal under the McFadden Act Legal under the McFadden Act
A timeline of Banking Regulation
Banking Act
Restrictions on
McFadden Act
Competition
Holding Company Act
Monetary Control Act
Great Depression Riegle-Neal

1933 1956 1999
1863 1927 1980 1994
Graham - Leach - Bliley

Restrictions on
Holding Company Act

activities
Glass - Steagall
The Bank Holding Company act allowed holding companies with only
one bank to provide limited non-bank financial services on an
interstate basis. This created a loophole around Glass-Steagall!!
Prior to Bank Holding Company Act After Bank Holding Company Act
(1956)
Holding Company Holding Company
Bank Bank Bank Non-Bank Non- Bank Financial

Branches Offices Services
Collects deposits, Makes loans, but

but doesn’t make doesn’t collect
loans deposits
Branching Regulations
Branching Restrictions: McFadden Act (1927) and Douglas
Amendment (1956)
Very anticompetitive
Response to Branching Restrictions
1. Bank Holding Companies
A. Allowed purchases of banks outside state
B. BHCs allowed wider scope of activities by Fed
C. BHCs dominant form of corporate structure for banks
2. Automated Teller Machines (1967 Barclays)
Not considered to be branch of bank, so networks
allowed
10-107
Bank Consolidation and Nationwide Banking
• The number of banks has declined dramatically over the
last 30 years.
– Bank failures and consolidation (S&L)
– Deregulation: Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994
– Economies of scale and scope from information
technology
• Results may be not only a smaller number of
banks but a shift in assets to much larger banks.
Figure 3 Number of Commercial Banks in the United States,
1934–2019
https://fred.stlouisfed.org/series/USN .
UM
What Will the Structure of the U.S. Banking
Industry Look Like in the Future?
• Although the United States retains a unique banking

structure in possessing a large number of banks, its
structure is converging with systems in Europe and Japan.
• How far the convergence between banking systems will
extend is the subject of ongoing academic debate
‚Clicks’ or ‚bricks’ in the Banking Industry?
• Early internet based banks wre not successful, and profitable
(First e (Dublin), Wingspan (Bank One)
1. Depositors trust in institutions with longer track record.
2. Customers worry about securities of their online
transactions
3. Customers may prefer service provided of physical
branches and to buy long term products face to face (40%
of US costumers)
4. Technical problems may occur in online transactions
5. COVID
• Coextistence of „clicks and bricks”
• Decline of physical branches in the future
• https://www.cbsnews.com/news/banking-100000-jobs-wells-fargo-analysts-
automation/
• https://www.pymnts.com/news/retail/2020/ebay-repurposes-la-gas-station-for-
Are Bank Consolidation and Nationwide Banking
Good Things? (1 of 2)
• Benefits
– Increased competition, driving inefficient banks out of
business
– Also, increased efficiency from economies of scale and
scope
– Lower probability of bank failure from more diversified
portfolios
Are Bank Consolidation and Nationwide Banking
Good Things? (2 of 2)
• Costs
– Elimination of community banks may lead to less
lending to small business
– Banks expanding into new areas may take increased
risks and fail
DE-REGULATION OF USA BANKING
SYSTEM IN THE 1990S
Following the great depression, the activities of
commercial banks were severely restricted
The Glass-Steagall Act of 1934 was

designed to put a wall between
commercial banking and investment
banking
Examples of separation: J.P Morgan

(CB) vs Morgan Stanley (IB)
Glass-Steagall (1934)
Commercial Banks are restricted from
participating in equities markets
Interest rates on non- transaction deposits
is restricted to be below 5.25%
Regulation Q
No interest allowed on
transaction/checkable deposits
Separation of the Banking and Other Financial
Service Industries (1 of 2)
• Erosion of Glass-Steagall Act (1933)
– Prohibited commercial banks from underwriting
corporate securities or engaging in brokerage
activities
– Section 20 loophole was allowed by the Federal
Reserve (1980s) enabling affiliates of approved
commercial banks to underwrite securities as
long as the revenue did not exceed a specified
amount (10 then later 25% of total revenue)
– U.S. Supreme Court validated the Fed’s action
in 1988
Separation of Banking and Other Financial Service
Industries (1 of 2)
Gramm-Leach-Bliley Financial Modernisation Services Act
(1999)
1. Repeal of Glass-Steagall: allow banks to engage in
underwriting activities
2. States regulate insurance activities (Bank-surrance)
– Allows securities firms and insurance companies to
purchase banks
– Banks allowed to underwrite insurance and engage in real
estate activities
3. SEC keeps oversight of securities activities
4. OCC (Office of the Comptroller of the Currency)
regulates bank subsidiaries engaged in
securities underwriting
5. Fed oversee bank holding companies under which all real
estate, insurance and large securities are housed
Stimulated consolidation of the banking industry; Banking
institutions become larger and more complex
10-120
Emergence of universal banking in the USA
• 1999-es Gramm-Leach-Bliley Financial Services Modernization
Act (repeal of Glass –Steagall, 1933):
– Provision of capital market services by US commercial
banks.
– Commercial banks can purchase or merge with brokerage
firms, insurance companies, pension funds, and hedge
funds in a single holding company (financial conglomerates)
• Integration of different financial market activities within an
institution and the strengthening of specialization.
• Continuous expansion
– of cross-sectoral (banksurance, structured securities)
– and cross-border (international) activities, which deepens
the global integration of the financial system.
Table 1 Size Distribution of Insured Commercial
Banks, March 31, 2017
Table 1 Size Distribution of FDIC Insured Banks, March 31, 2017
Assets Number of Share of Share of Assets

Banks Banks (%) Held (%)
Less than $100 million 1,501 25.6 0.5
$100 million–$1 billion 3,605 61.6 6.9
$1 billion–$10 billion 632 10.8 10.4
$10 billion–$250 billion 109 1.9 31.6
More than $250 billion 9 0.2 50.6
Total 5,856 100.00 100.00
Source: FDIC Quarterly Banking Profile, https://www.fdic.gov/bank/analytical/qbp/index.html

The Global Financial Crisis and the Demise of
Large, Free-Standing Investment Banks
• Although the move toward bringing financial service
activities into larger, more complex banking organizations
was inevitable after the demise of Glass-Steagall,
• no one expected it to occur as rapidly as it did in 2008.
Over a six-month period from March to September 2008,
all five of the largest, free-standing investment banks
ceased to exist in their old form.
Separation of Banking and Other Financial
Services Industries Throughout the World
– Universal banking: No separation between banking and

securities industries in Germany, Holland and Switzerland
– Universal banking in Great Britain
• May engage in security underwriting
• Separate legal subsidiaries are common
• Bank equity holdings of commercial firms are less common
• Few combinations of banking and insurance firms
– Japanese style system:
• Some legal separation: Allowed to hold substantial
equity stakes in commercial firms but
• holding companies are illegal;
• Despite banking & securities are separated but
commercial banks increasingly active in securitization
SAVINGS AND LOAN INDUSTRY
Thrift Industry: Regulation and Structure (1 of 3)
• Savings and loan associations

– Chartered by the federal government or by states
– Most are members of Federal Home Loan Bank
System (FHLBS)
– Deposit insurance provided by Savings Association
Insurance Fund (SAIF), part of FDIC
– Regulated by the Office of Thrift Supervision
• Mutual savings banks

– Approximately half are chartered by states
– Regulated by state in which they are located
– Deposit insurance provided by FDIC or state insurance
• Credit unions
– Tax-exempt
– Chartered by federal government or by states
– Regulated by the National Credit Union Administration
(NCUA)
– Deposit insurance provided by National Credit Union
Share Insurance Fund (NCUSIF)
INTERNATIONAL BANKING STRUCTURE
Financial Intermediation and Banks (cont'd)
• International Financial Intermediation/
International banking
– Financing investment projects in more than
one country; Cross border operation
• Capital Controls
– Legal restrictions on the ability of a nation’s
residents to hold and trade assets denominated
in foreign currencies
• Liberalization & Derugalarisation
• Internal derelularisation(interest rate)
• External derelularisation (exchange rate)
15
International Banking
• Rapid growth
– Growth in international trade and multinational
corporations
– Global investment banking is very profitable
– Ability to tap into the Eurodollar market
10-131
Eurodollar Market
• Eurodollars (foreign currencies deposited outside the
home country)
• US Dollar-denominated deposits held in banks outside of
the United States
– Ironic birth in Communist period (1950 MKB, 1979 CIB,)
• USD is the most widely used currency in international
trade
• Offshore deposits not subject to regulations
– Important source of funds for U.S. banks
• Eurobonds (issued in a currency other than that of the country’s
currency in which it is sold e.g. USD denominated bonds sold in
London)
• Foreign bonds (sold in foreign country denominated in the
currency of that foreign country)
Offshore banking (shell operation)
• An offshore bank is a bank regulated under international banking
license (often called offshore license), which usually prohibits the
bank from establishing any business activities in the jurisdiction
of establishment.
• Due to less regulation, minimal or zero taxation and transparency,
accounts with offshore banks were often used to hide undeclared
income.
• Since the 1980s, jurisdictions that provide financial services to
nonresidents on a big scale, can be referred to as Offshore Financial
Centres.
• OFCs often also levy little or no corporation tax and/or personal
income and high direct taxes such as duty, making the cost of living
high.
Rise of offshore centres
Off-shore market clusters
134
Flying money: Outflows to the Offsore centres,
1990-2010
The 20 largest supplier countries, Bn USD: Total Offshore wealth:22 Trillion

USD, 2010
135
Structure of U.S. Banking Overseas ( ½)
• Shell operation (offshore booking office/terminal)
• Edge Act corporation (1919. amendment of 1913
FED Act) allows national banks to open
subsidiaries abroad) first Citibank branch in
Buenos Aires, 1914
• International banking facilities (IBFs) from 1981
(NYC)
– Not subject to regulation and taxes
– Offshore status
– May not make loans to domestic residents
10-136
US Banks locate facilities abroad to aid in international
trade as well as to avoid regulation and taxes
US Banks Operating Abroad
Subsidiaries: Governed by Federal Reserve Regulation K – must be

involved in business “closely related to banking.
International Banking Facilities: Accepts time deposits and

makes loans to foreign households & firms. Exempt from
reserve requirements, but may not do business in the US.
Edge Act Corporations: Makes loans/accepts deposits. Can deal

with both US and foreign citizens , but is limited to international
trade transactions
Branches: Offer a full line of banking services,

but are subject to foreign laws
Foreign Banks in the United States (1 of 2)
• Agency office of the foreign bank

– Can lend and transfer fund in the United States
– Cannot accept deposits from domestic residents
– Not subject to regulations
• Subsidiary U.S. bank
– Subject to U.S. regulations
– Owned by a foreign bank
Foreign Banks in the United States (2 of 2)
• Branch of a foreign bank

– May open branches only in state designated as home
state or in state that allow entry of out-of-state banks
– Limited service may be allowed in any other state
• Subject to the International Banking Act of 1978
• Basel Accord (1988)
– Example of international coordination of
bank regulation
– Sets minimum capital requirements for banks
Likewise for Foreign Banks…
Foreign Banks Operating in the US
Agency Office: Can’t accept deposits from US citizens, but can

transfer funds from abroad and make loans in the US
Branches: Offers a full range of banking services

for US citizens
Subsidiaries: Treated as a US bank. Subject to all US regulations.

Subsidiaries may also set up edge act corporations and
international lending facilities
Important Dates in International Banking
Bank for International (BIS) Settlements

Created
International Banking Act Basle Accords I
Foreign Bank Supervision Act
BCCI Scandal
1930 1978 1988 1991

The Bank of Credit and Commerce International (BCCI)
was an international bank founded in 1972 by Agha Abedi
Bankruptcy in 1998.
United Kingdom
United States
Federal Reserve Bank of England
Under whose jurisdiction do international

banks fall? (it’s a grey area )
Regulating International Banking
International Banking Act (1978)

Brought foreign banks operating in the US
under federal regulation for the first time
Foreign banks, however, were not monitored
as closely as US banks
Foreign Bank Supervision Act (1991)

Passed shortly after the BCCI scandal
Gave the Federal Reserve and the Comptroller
of the Currency greater control over foreign
banks operating in the US
Banking Systems and
Types of Financial
Intermediaries
TABLE OF CONTENTS
01 02 03 04
Comparison of Types of The two-tier Quiz
the European intermediaries banking
and US system of
banking Hungary since
systems 1987
OUR TEAM
Görhöny Milán Huynh Ngoc Kőszegi Orsolya Pilip Alexandra

Dominik Xuanthanh Eveline
US banking structure
US banking industry overview
Major trends in US
banking industry
• Identity Theft Prevention Software's
• Increase in Crypto Currency
• Open Banking as New Phenomenon
• Cloud Computing
European banking task distribution
1. The Single Supervisory Mechanism (SSM) is one
of the largest banking supervisory authorities in
the world.
2. Currently 125 banking groups in 19 countries are
under direct ECB supervision. Almost 82 % of
euro-area banking assets are under direct ECB
supervision.
3. Around 3,200 smaller institutions are directly
supervised by the National Competent
Authorities (NCAs), with the ECB being
responsible for the system at large.
4. Banking assets under direct and indirect ECB
supervision amount to more than 26 trillion
Euros about 2.6 times euro-area GDP.
Challenges European banks face
• Brexit
• Profitability
• Digitalisation
• Low interest rates
• Overcapacity and fragmentation
• Non-performing loans
• Stronger regulations
European Univeral Banking system (European
continental model)
• Universal banking: banks offer a variety of
financial services including commercial and
investment banking
• Combines wholesale, retail and investment
banking under one roof
• Retail banking:focuses mainly on a single
individual
• Wholesale banking: focuses on serving
larger groups or organisations
• Investment banking: intermediary for
investors and corporations
US Specialized Banking (1933-99)
• Banking Act of 1933 (Glass-Steagall Act) as a response to the Great

Depression
• separation of commercial and investment banking.
• Banks had to choose to specialize either in commercial banking or
investment banking
• Under this act banks were banned from:
• purchasing securities for their own accounts
• issuing, underwriting, selling or distributing securities
• affiliating with a company principally engaged in the activities listed
above
• having interlocking directorships or close employee relationships with
a firm principally engaged in securities underwriting or distributin
• 1999 Glass-Steagall Act was repealed
Banking System in the US today
• Due to strict regulation of the Glass-Steagall Act , the universal banking

system was slow to grow in the United States
• As a response to the 2008 crisis, the Congress restricted the ways in
which banks could invest
• limiting speculative trading and prohibiting involvement with hedge
funds and private equity firms.
• Nowadays there are banks offering a variety of services like banking,
loans, mortgages, insurance, and investments
• However, universal banking is still not as common as in Europe
• Some banks are still purely focusing on investments
German Banking System
Comparing the US and German system
• Both have the largest banking systems in free-market economies in the world in terms
of the number of banks and assets
US Banking System German Banking System
Two-types (commercial, savings) Three types (private sector banks, public

sector banks and cooperatives)
54 % Giant banks Big private banks
Regulatory system  based upon dual Far less fragmented, supervisory responsibility
oversight by federal and state agencies over the entire financial services industry in
the country
National systems of banking
USA Japan Germany
Banking system Dual banking Dual banking Universal banking

system system system
Industry relations Short-term "deal- Long-term Long-term

based-banking" "relationship- "relationship-
banking" banking"
Monitoring Devices - shareholdings - shareholdings - shareholdings
-board of directors (keiretsu) - proxy voting rights
mandates - close housebank - supervisory board
relationship mandates
Sanctioning power small large large

Islamic Banking
• 2 fundamental principles
• sharing of profit and loss
• prohibition of the collection and payment of interest by lenders and
investors
• make a profit through equity participation, which requires a borrower to
give the bank a share in their profits rather than paying interest
• Islamic banking prohibits
• usury and speculation.
• any form of speculation or gambling
• taking interest on loans
• any investments involving items or substances (alcohol, gambling,
and pork)
• culturally distinct form of ethical investing.
Islamic Banking
• Equity participation systems: bank loans money to a business, the
business will pay back the loan without interest and instead give the bank
a share in its profits
• business defaults or does not earn a profit, then the bank also does not
benefit
• risk-averse in their investment practices
Intermediaries
What are financial intermediaries?
The most important types:
• Commercial bank
• Investment bank
• Private bank
• Credit union
• Pension funds
Commercial bank
A commercial bank is a financial institution which:
• accepts deposits
• offers checking account services
• makes various loans
• and offers basic financial products like savings accounts to
individuals and small businesses
Commercial banks are where most people do their banking.

Investment bank
An investment bank is a financial institution which engages in
advisory-based financial transactions on behalf of individuals,
corporations, and governments.
• Not available for anyone

• Higher risks
• 3 types:
o Bulge bracket
o Middle market
o Boutique market
Private bank
A private bank is owned by either an individual or general partner
with limited partner(s).
• Long tradition in Switzerland and the UK

• Not the same as private banking!
Credit union
A credit union is a member-owned financial cooperative,
controlled by its members and operated on a not-for-
profit basis.
• Similar to a commercial bank

• Provide deposit accounts, credit, etc.
• Have lower fees but less coverage (less ATM's,
no mobile apps)
Pension funds
A pension fund is any plan, fund, or

scheme which provides retirement
income.
Have large amounts of money
to invest, major investors
Huge growth is expected
The largest 300 holds around $6 trillion

in assets!
The two-tier banking
system of Hungary
(1987)
The top tier: Central Bank of Hungary (MNB)
• Usually not in direct contact with the public and corporations

• Specialized credit institution - entitled to carry out its activities in
accordance with the special legal regulations applicable to it
• Roles of the central bank:
o Provide the actors of the economy with cash
o Control the money supply
o The central bank is the bank of all the banks
o manages the government's finances: in some cases, it manages the central
budget's funds and lends to the government within certain limits.
o manages the international finances of the state
o central bank manages official reserves in foreign currencies, gold or other assets
Lower tier: Private banking institutions
• Usually operate as businesses, mostly privately
owned
• Major roles:
o collecting deposits
o provide loans
o keep accounts for companies and households
o Issuing and trading securities
o managing foreign currency accounts
o provide other financial services (e.g. factoring,
consulting, leasing, etc.)
How the Process Looks Like
References
• Botos, K. (2019) More than 30 Years of the Hungarian Banking System. [online] Available at:
https://eng.polgariszemle.hu/archive/151-vol-15-special-issue-2019/economic-policy/941-more-than-30-years-of-the-hungarian-
banking-system [Accessed: 18 March, 2022].
• e-learning.sze.hu. (n.d.) Makroökonómia. [online] Available at: http://e-learning.sze.hu/MakroTK/m3/o3_20101.html [Accessed 18
Mar. 2022].
• mek.oszk.hu. (n.d.) A második fél évszázad. [online] Available at: https://mek.oszk.hu/02100/02185/html/385.html#390. [Accessed:
18 March, 2022].
• European Central Bank (2017) European banking supervision, global cooperation and challenges for banks. [online] Available at:
https://www.bankingsupervision.europa.eu/press/speeches/date/2017/html/ssm.sp170518_slides.en.pdf[Accessed: 18 March,
2022].
• The World Savings and Retail Banking Institute, & The European Savings and Retail Banking Group. (2015, September).
FINANCIAL SYSTEMS IN EUROPE AND IN THE US: STRUCTURAL DIFFERENCES WHERE BANKS REMAIN THE MAIN
SOURCE OF FINANCE FOR COMPANIES. WSBI-ESBG. Accessed: March 18, 2022, from https://www.wsbi-
esbg.org/SiteCollectionDocuments/WSBI-PFI-discussion-paper-2018-final.pdf
• https://www.educba.com/commercial-bank-vs-investment-bank/
• https://www.investopedia.com/terms/c/commercialbank.asp
• Löhnert, B. (1995). The Structure of the German Banking System and its Ethical Implications. In: Argandoña, A. (eds) The Ethical
Dimension of Financial Institutions and Markets. Studies in Economic Ethics and Philosophy. Springer, Berlin, Heidelberg.
https://doi.org/10.1007/978-3-642-79723-1_13
• Nelly, M. C. (1995) Commercial & Investment Banking: Should This Divorce Be Saved? [online] Avaliable at:
https://www.stlouisfed.org/publications/regional-economist/april-1995/commercial--investment-banking-should-this-divorce-be-
saved [Accessed: 21 March 2022].
• Kagan, J. (2021) Universal Banking. Invesopedia [online] Available at:
https://www.investopedia.com/terms/u/universalbanking.asp [Accessed: 21 March, 2022].
• https://www.investopedia.com/terms/i/islamicbanking.asp
Thank you for
your attention!
8LI&ILEZMSVSJ-RXIVIWX6EXIW
7SQI MRXIVIWXVEXI EREP]XMGEP I\EQTPIW
4VIWIRX ZEPYI JYXYVI ZEPYI
4:M R M!

M! R!
R! 4:!
4:!
M!
R!
4:!
7SQI MRXIVIWXVEXI EREP]XMGEP I\EQTPIW
7MQTPI 4VIWIRX :EPYI M!
'*!
CF
PV = R!
(1 + i )n
M! M!
'*! '*!
R! R!
8LI(MWXMRGXMSR&IX[IIR6IEPERH
2SQMREP-RXIVIWX6EXIW
• 2SQMREP MRXIVIWX VEXI QEOIW RS EPPS[ERGI JSV MRJPEXMSR
• 6IEP MRXIVIWX VEXI MW EHNYWXIH JSV GLERKIW MR TVMGI PIZIP WS MX QSVI

EGGYVEXIP] VIJPIGXW XLI GSWX SJ FSVVS[MRK
• )\ ERXI VIEP MRXIVIWX VEXI MW EHNYWXIH JSV I\TIGXIH GLERKIW

MR XLI TVMGI PIZIP
• )\ TSWX VIEP MRXIVIWX VEXI MW EHNYWXIH JSV EGXYEP GLERKIW MR

XLI TVMGI PIZIP
/

&
"
"

&
"

"
*

'
"

"

"

"

#

%
6IEPERH2SQMREP-RXIVIWX6EXIW

&
"
"

!
;

&
8LVII1SRXL8VIEWYV]&MPP Ɓ
'
&
&
#

"
%

4VIZMI[
-R XLMW GLETXIV [I I\EQMRI LS[ XLI SZIVEPP PIZIP SJ RSQMREP

MRXIVIWX VEXIW MW HIXIVQMRIH ERH [LMGL JEGXSVW MRJPYIRGI XLIMV
FILEZMSV
0IEVRMRK3FNIGXMZIW
• -HIRXMJ] XLI JEGXSVW XLEX EJJIGX XLI HIQERH JSV EWWIXW
• (VE[ XLI HIQERH ERH WYTTP] GYVZIW JSV XLI FSRH QEVOIX
• )UYMPMFVMYQ MRXIVIWX VEXI MR XLI FSRH QEVOIX
• 0MUYMHMX] TVIJIVIRGI JVEQI[SVO

(IXIVQMRERXWSJ%WWIX(IQERH
• )GSRSQMGEKIRXWLSPHEZEVMIX]SJHMJJIVIRXEWWIXW;LEXEVI
XLITVMQEV]EWWIXW]SYLSPH#
• %REWWIX MWER]XLMRKXLEXGERFIS[RIHERHLEWZEPYI 1SRI]

FSRHWWXSGOWEVXPERHLSYWIWJEVQIUYMTQIRX
QERYJEGXYVMRK QEGLMRIV] EVI EPP EWWIXW
• ;IEPXL XLI XSXEP VIWSYVGIW S[RIH F] XLI MRHMZMHYEP MRGPYHMRK
EPP EWWIXW
• )\TIGXIH 6IXYVR XLI VIXYVR I\TIGXIH SZIV XLI RI\X TIVMSH SR
SRI EWWIX VIPEXMZI XS EPXIVREXMZI EWWIXW
• 6MWO XLI HIKVII SJ YRGIVXEMRX] EWWSGMEXIH [MXL XLI VIXYVR SR
SRI EWWIX VIPEXMZI XS EPXIVREXMZI EWWIXW
• 0MUYMHMX] XLI IEWI ERH WTIIH [MXL [LMGL ER EWWIX GER FI
XYVRIH MRXS GEWL VIPEXMZI XS EPXIVREXMZI EWWIXW
• ;IEPXL EWWIX HIQERH
• )\TIGXIH 6IXYVR EWWIX HIQERH

• 6IXYVR 6MWO
• 0MUYMHMX] EWWIX HIQERH

7SQI I\EQTPIW SJEWWIXW
%WWIX X]TI ;IEPXL'SWX )\TIGXIH 6MWO 0MUYMHMX]
6IXYVRW
&SRHW 0S[ GSWX 0S[ VIXYVR 0S[ VMWO ,MKL PMUYMHMX]
7XSGOW 0S[ GSWX ,MKL VIXYVR ,MKL VMWO ,MKL PMUYMHMX]
,SYWIVIEP ,MKL GSWX ,MKL VIXYVR 0S[ VMWO 0S[ PMUYMHMX]

IWXEXI
'V]TXS 0S[ GSWX ,MKL VIXYVR ,MKLX VMWO 0S[ PMUYMHMX]
GYVVIRG]
8LISV]SJ4SVXJSPMS'LSMGI
,SPHMRKEPPSXLIVJEGXSVWGSRWXERX
8LIUYERXMX]HIQERHIHSJEREWWIXMWTSWMXMZIP]VIPEXIHXS
[IEPXL
MXWI\TIGXIHVIXYVRVIPEXMZIXSEPXIVREXMZIEWWIXW
8LIUYERXMX]HIQERHIHSJEREWWIXMWRIKEXMZIP]VIPEXIHXS
XLIVMWOSJMXWVIXYVRWVIPEXMZIXSEPXIVREXMZIEWWIXW
MXWPMUYMHMX]VIPEXMZIXSEPXIVREXMZIEWWIXW
8LISV]SJ4SVXJSPMS'LSMGI
6IWTSRWISJXLI5YERXMX]SJER%WWIX(IQERHIHXS'LERKIWMR
;IEPXL)\TIGXIH6IXYVRW6MWOERH0MUYMHMX]
2SXI 3RP] MRGVIEWIW MR XLI ZEVMEFPIW EVI WLS[R 8LI IJJIGXW SJ HIGVIEWIW MR XLI ZEVMEFPIW SR XLI
UYERXMX] HIQERHIH [SYPH FI XLI STTSWMXI SJ XLSWI MRHMGEXIH MR XLI VMKLXQSWX GSPYQR
7YTTP]ERH(IQERHMRXLI&SRH1EVOIX
• %X PS[IV TVMGIW LMKLIV MRXIVIWX VEXIW GIXIVMW TEVMFYW XLI

UYERXMX] HIQERHIH SJ FSRHW MW LMKLIV ER MRZIVWI VIPEXMSRWLMT
• %X PS[IV TVMGIW LMKLIV MRXIVIWX VEXIW GIXIVMW TEVMFYW XLI

UYERXMX] WYTTPMIH SJ FSRHW MW PS[IV E TSWMXMZI VIPEXMSRWLMT
1EVOIX)UYMPMFVMYQ
• 3GGYVW [LIR XLI EQSYRX XLEX TISTPI EVI [MPPMRK XS FY]
HIQERH IUYEPW XLI EQSYRX XLEX TISTPI EVI [MPPMRK XS WIPP
WYTTP] EX E KMZIR TVMGI
• &H ! &W HIJMRIW XLI IUYMPMFVMYQ SV QEVOIX GPIEVMRK TVMGI ERH
MRXIVIWX VEXI
• ;LIR &H " &W XLIVI MW I\GIWW HIQERH TVMGI [MPP VMWI ERH
MRXIVIWX VEXI [MPP JEPP
• ;LIR &H &W XLIVI MW I\GIWW WYTTP] TVMGI [MPP JEPP ERH MRXIVIWX
VEXI [MPP VMWI
7YTTP]ERH
(IQERHJSV
&SRHW
1EVOIX)UYMPMFVMYQ
)\GIWW WYTTP]
• &H ! &W XLI IUYMPMFVMYQ
• &H " &W I\GIWW HIQERH
• TVMGI VMWI MRXIVIWX VEXI JEPP
• &H &W I\GIWW WYTTP]
• 4VMGI JEPP MRXIVIWX VEXI VMWI
)\GIWW HIQERH
'LERKIWMR)UYMPMFVMYQ-RXIVIWX
6EXIW
• 7LMJXW MR XLI HIQERH JSV FSRHW
• ;IEPXL MR ER I\TERWMSR [MXL KVS[MRK [IEPXL XLI HIQERH GYVZI JSV FSRHW
WLMJXW XS XLI VMKLX
• )\TIGXIH 6IXYVRW LMKLIV I\TIGXIH MRXIVIWX VEXIW MR XLI JYXYVI PS[IV XLI
I\TIGXIH VIXYVR JSV PSRKXIVQ FSRHW WLMJXMRK XLI HIQERH GYVZI XS XLI PIJX
• )\TIGXIH -RJPEXMSR ER MRGVIEWI MR XLI I\TIGXIH VEXI SJ MRJPEXMSRW PS[IVW XLI
I\TIGXIH VIXYVR JSV FSRHW GEYWMRK XLI HIQERH GYVZI XS WLMJX XS XLI PIJX
• 6MWO ER MRGVIEWI MR XLI VMWOMRIWW SJ FSRHW GEYWIW XLI HIQERH GYVZI XS
WLMJX XS XLI PIJX
• 0MUYMHMX] MRGVIEWIH PMUYMHMX] SJ FSRHW VIWYPXW MR XLI HIQERH GYVZI WLMJXMRK
VMKLX
'LERKIWMR)UYMPMFVMYQ-RXIVIWX
6EXIW
• 7LMJXW MR XLI HIQERH JSV FSRHW
7LMJXMRXLI(IQERH'YVZIJSV&SRHW
7LMJXWMRXLI(IQERHJSV&SRHW
7LMJXWMRXLI7YTTP]SJ&SRHW
• 7LMJXW MR XLI WYTTP] JSV FSRHW
• )\TIGXIH TVSJMXEFMPMX] SJ MRZIWXQIRX STTSVXYRMXMIW MR ER

I\TERWMSR XLI WYTTP] GYVZI WLMJXW XS XLI VMKLX
• )\TIGXIH MRJPEXMSR ER MRGVIEWI MR I\TIGXIH MRJPEXMSR WLMJXW
XLI WYTTP] GYVZI JSV FSRHW XS XLI VMKLX
• +SZIVRQIRX FYHKIX MRGVIEWIH FYHKIX HIJMGMXW WLMJX XLI
WYTTP] GYVZI XS XLI VMKLX
7LMJXWMRXLI7YTTP]SJ&SRHW
7LMJXMRXLI7YTTP]'YVZIJSV&SRHW
6IWTSRWIXSE'LERKIMR)\TIGXIH-RJPEXMSR
)\TIGXIH-RJPEXMSRERH-RXIVIWX6EXIW
8LVII1SRXL8VIEWYV]&MPPW Ɓ
7SYVGIW *IHIVEP 6IWIVZI &ERO SJ 7X 0SYMW *6)( HEXEFEWI LXXTWJVIHWXPSYMWJIHSVKWIVMIW8&1

LXXTWJVIHWXPSYMWJIHSVKWIVMIW'4-%9'707 )\TIGXIH MRJPEXMSR GEPGYPEXIH YWMRK TVSGIHYVIW SYXPMRIH MR
*VIHIVMG 7 1MWLOMR ƈ8LI 6IEP -RXIVIWX 6EXI %R )QTMVMGEP-RZIWXMKEXMSRƉ 'EVRIKMI6SGLIWXIV 'SRJIVIRGI 7IVMIW
SR 4YFPMG 4SPMG] Ɓ 8LIWI TVSGIHYVIW MRZSPZI IWXMQEXMRK I\TIGXIH MRJPEXMSR EW E JYRGXMSR SJ
TEWX MRXIVIWX VEXIW MRJPEXMSR ERH XMQI XVIRHW
E
>
>
-R,YRKEV]Ə
<
>
[
6IEPMRJPEXMSR
)\TIGXIH MRJPEXMSR ^SRI
6IWTSRWIXSE&YWMRIWW']GPI)\TERWMSR
)\TIGXIHTVSJMXEFMPMX]SJMRZIWXQIRXSTTSVXYRMXMIWMRERI\TERWMSRXLIWYTTP]
GYVZIWLMJXWXSXLIVMKLX
7YTTP]ERH(IQERHMRXLI1EVOIXJSV1SRI]
8LI0MUYMHMX]4VIJIVIRGI*VEQI[SVO
%WWYQTXMSRW
/I]RIWMERQSHIPXLEXHIXIVQMRIWXLIIUYMPMFVMYQMRXIVIWXVEXIMR
XIVQWSJXLIWYTTP]SJERHHIQERHJSVQSRI]
8LIVIEVIX[SQEMRGEXIKSVMIWSJEWWIXWXLEXTISTPIYWIXSWXSVI
XLIMV[IEPXLQSRI]ERHFSRHW
8SXEP[IEPXLMRXLIIGSRSQ]!&W 1W !&H1H 6IEVVERKMRK&W Ư
&H !1W Ư1H
-JXLIQEVOIXJSVQSRI]MWMRIUYMPMFVMYQ1W !1H
XLIRXLIFSRHQEVOIXMWEPWSMRIUYMPMFVMYQ&W !&H
)UYMPMFVMYQMRXLI1EVOIXJSV1SRI]
7YTTP]ERH(IQERHMRXLI1EVOIXJSV1SRI]
8LI0MUYMHMX]4VIJIVIRGI*VEQI[SVO
• (IQERH JSV QSRI] MR XLI PMUYMHMX] TVIJIVIRGI JVEQI[SVO
• %W XLI MRXIVIWX VEXI MRGVIEWIW

• 8LI STTSVXYRMX] GSWX SJ LSPHMRK QSRI] MRGVIEWIWƏ
• 8LI VIPEXMZI I\TIGXIH VIXYVR SJ QSRI] HIGVIEWIWƏ
• ƏERH XLIVIJSVI XLI UYERXMX] HIQERHIH SJ QSRI]

HIGVIEWIW
'LERKIWMR)UYMPMFVMYQ-RXIVIWX6EXIWMRXLI
0MUYMHMX]4VIJIVIRGI*VEQI[SVO
• 7LMJXW MR XLI HIQERH JSV QSRI]
• -RGSQI )JJIGX E LMKLIV PIZIP SJ MRGSQI GEYWIW XLI

HIQERH JSV QSRI] EX IEGL MRXIVIWX VEXI XS MRGVIEWI ERH
XLI HIQERH GYVZI XS WLMJX XS XLI VMKLX
• 4VMGI0IZIP )JJIGX E VMWI MR XLI TVMGI PIZIP GEYWIW XLI
HIQERH JSV QSRI] EX IEGL MRXIVIWX VEXI XS MRGVIEWI ERH
XLI HIQERH GYVZI XS WLMJX XS XLI VMKLX
6IWTSRWIXSE'LERKIMR-RGSQISVXLI4VMGI
0IZIP
'LERKIWMR)UYMPMFVMYQ-RXIVIWX6EXIWMR
XLI0MUYMHMX]4VIJIVIRGI*VEQI[SVO
• 7LMJXW MR XLI WYTTP] SJ QSRI]
• %WWYQI XLEX XLI WYTTP] SJ QSRI] MW GSRXVSPPIH F] XLI

GIRXVEP FERO
• %R MRGVIEWI MR XLI QSRI] WYTTP] IRKMRIIVIH F] XLI 'IRXVEP
&ERO [MPP WLMJX XLI WYTTP] GYVZI JSV QSRI] XS XLI VMKLX
6IWTSRWIXSE'LERKIMRXLI1SRI]7YTTP]
'LERKIW MR )UYMPMFVMYQ -RXIVIWX 6EXIW MR XLI
0MUYMHMX] 4VIJIVIRGI *VEQI[SVO
1SRI]ERH-RXIVIWX6EXIW
• % SRI XMQI MRGVIEWI MR XLI QSRI] WYTTP] [MPP GEYWI TVMGIW XS
VMWI XS E TIVQERIRXP] LMKLIV PIZIP F] XLI IRH SJ XLI ]IEV 8LI
MRXIVIWX VEXI [MPP VMWI ZME XLI MRGVIEWIH TVMGIW
• 4VMGIPIZIP IJJIGX VIQEMRW IZIR EJXIV TVMGIW LEZI WXSTTIH
VMWMRK
• % VMWMRK TVMGI PIZIP [MPP VEMWI MRXIVIWX VEXIW FIGEYWI TISTPI [MPP
I\TIGX MRJPEXMSR XS FI LMKLIV SZIV XLI GSYVWI SJ XLI ]IEV ;LIR
XLI TVMGI PIZIP WXSTW VMWMRK I\TIGXEXMSRW SJ MRJPEXMSR [MPP VIXYVR
XS ÎVS
• )\TIGXIHMRJPEXMSR IJJIGX TIVWMWXW SRP] EW PSRK EW XLI TVMGI PIZIP
GSRXMRYIW XS VMWI
(SIWE,MKLIV6EXISJ+VS[XLSJXLI1SRI]
7YTTP]0S[IV-RXIVIWX6EXIW#
• 0MUYMHMX] TVIJIVIRGI JVEQI[SVO PIEHW XS XLI GSRGPYWMSR XLEX ER

MRGVIEWI MR XLI QSRI] WYTTP] [MPP PS[IV MRXIVIWX VEXIW XLI
PMUYMHMX] IJJIGX
• -RGSQI IJJIGX JMRHW MRXIVIWX VEXIW VMWMRK FIGEYWI MRGVIEWMRK

XLI QSRI] WYTTP] MW ER I\TERWMSREV] MRJPYIRGI SR XLI
IGSRSQ] XLI HIQERH GYVZI WLMJXW XS XLI VMKLX
(SIWE,MKLIV6EXISJ+VS[XLSJXLI1SRI]
7YTTP]0S[IV-RXIVIWX6EXIW#
• 4VMGI0IZIP IJJIGX TVIHMGXW ER MRGVIEWI MR XLI QSRI] WYTTP]

PIEHW XS E VMWI MR MRXIVIWX VEXIW MR VIWTSRWI XS XLI VMWI MR XLI
TVMGI PIZIP XLI HIQERH GYVZI WLMJXW XS XLI VMKLX
• )\TIGXIH-RJPEXMSR IJJIGX WLS[W ER MRGVIEWI MR MRXIVIWX VEXIW

FIGEYWI ER MRGVIEWI MR XLI QSRI] WYTTP] QE] PIEH TISTPI XS
I\TIGX E LMKLIV TVMGI PIZIP MR XLI JYXYVI XLI HIQERH GYVZI
WLMJXW XS XLI VMKLX
1SRI]+VS[XL1%RRYEP6EXI ERH-RXIVIWX6EXIW
8LVII1SRXL8VIEWYV]&MPPW Ɓ
Thank for your attention!
&EROMRKERH*MRERGI
9RHIVWXERHMRK MRXIVIWX
VEXIW
4VIZMI[
&IJSVI [I GER KS SR [MXL XLI WXYH] SJ QSRI] FEROMRK ERH

JMRERGMEP QEVOIXW [I QYWX YRHIVWXERH I\EGXP] [LEX XLI TLVEWI
MRXIVIWX VEXIW QIERW -R XLMW GLETXIV [I WII XLEX E GSRGITX
ORS[R EW XLI ]MIPH XS QEXYVMX] MW XLI QSWX EGGYVEXI QIEWYVI SJ
MRXIVIWX VEXI
0IEVRMRK3FNIGXMZIW
• 'EPGYPEXIXLITVIWIRXZEPYISJJYXYVIGEWLJPS[WERHXLI]MIPH
XSQEXYVMX]SRXLIJSYVX]TIWSJGVIHMXQEVOIXMRWXVYQIRXW
• 6IGSKRMÎXLIHMWXMRGXMSRWEQSRK]MIPHXSQEXYVMX]GYVVIRX
]MIPHVEXISJVIXYVRERHVEXISJGETMXEPKEMR
• -RXIVTVIXXLIHMWXMRGXMSRFIX[IIRVIEPERHRSQMREPMRXIVIWX
VEXIW
1IEWYVMRK-RXIVIWX6EXIW
• 4VIWIRXZEPYIEHSPPEVTEMHXS]SYSRI]IEVJVSQRS[MWPIWWZEPYEFPIXLER
EHSPPEVTEMHXS]SYXSHE]
• ;L] E HSPPEV HITSWMXIH XSHE] GER IEVR MRXIVIWX ERH

FIGSQI 㽢M SRI ]IEV JVSQ XSHE]
4VIWIRX:EPYI
0IXM !
-RSRI]IEV !
-RX[S]IEVW !
SV
-RXLVII]IEVW !
SV
-RR ]IEVW
M R
7MQTPI4VIWIRX:EPYI
4:!XSHE]ƅWTVIWIRX ZEPYI
'*!JYXYVIGEWLJPS[TE]QIRX
M !XLIMRXIVIWXVEXI
CF
PV =
(1 + i )n
M!R!
'*!4:!#
*SYV8]TIWSJ'VIHMX1EVOIX-RWXVYQIRXW
• 7MQTPI0SER
• *M\IH4E]QIRX0SER
• 'SYTSR&SRH
• (MWGSYRX&SRH
=MIPHXS1EXYVMX]
=MIPH XS QEXYVMX] XLI MRXIVIWX VEXI XLEX IUYEXIW XLI TVIWIRX ZEPYI
SJ GEWL JPS[ TE]QIRXW VIGIMZIH JVSQ E HIFX MRWXVYQIRX [MXL MXW
ZEPYI XSHE]
=MIPHXS1EXYVMX]SRE7MQTPI0SER
PV = amount borrowed = $100
CF = cash flow in one year = $110
n = number of years = 1
$110
$100 =
(1 + i )1
(1 + i ) $100 = $110
$110
(1 + i ) =
$100
i = 0.10 = 10%
For simple loans, the simple interest rate equals the
yield to maturity
*M\IH4E]QIRX0SER
8LIWEQIGEWLJPS[TE]QIRXIZIV]TIVMSHXLVSYKLSYXXLIPMJISJ
XLIPSER
0:!PSERZEPYI
*4!JM\IH]IEVP]TE]QIRX
R !RYQFIVSJ]IEVWYRXMPQEXYVMX]
FP FP FP FP
LV = + + + . . . +
1 + i (1 + i )2 (1 + i )3 (1 + i )n
'SYTSR&SRH
9WMRKXLIWEQIWXVEXIK]YWIHJSVXLIJM\IHTE]QIRXPSER
4!TVMGISJGSYTSRFSRH
'!]IEVP]GSYTSRTE]QIRX
*!JEGIZEPYISJXLIFSRH
R !]IEVWXSQEXYVMX]HEXI
C C C C F
P= + + +. . . + +
1+ i (1+ i )2 (1+ i )3 (1+ i )n (1+ i )n
'SYTSR&SRH
=MIPHWXS1EXYVMX]SRE 'SYTSR6EXI&SRH1EXYVMRKMR8IR
=IEVW*EGI:EPYI!
'SYTSR&SRH
• ;LIRXLIGSYTSRFSRHMWTVMGIHEXMXWJEGIZEPYIXLI]MIPHXS
QEXYVMX]IUYEPWXLIGSYTSRVEXI
• 8LITVMGISJEGSYTSRFSRHERHXLI]MIPHXSQEXYVMX]EVI
RIKEXMZIP]VIPEXIH
• 8LI]MIPHXSQEXYVMX]MWKVIEXIVXLERXLIGSYTSRVEXI[LIRXLI
FSRHTVMGIMWFIPS[MXWJEGIZEPYI
(MWGSYRX&SRH
*SVER]SRI]IEVHMWGSYRXFSRH
F − P
i=
P
*!*EGIZEPYISJXLIHMWGSYRXFSRH
4!'YVVIRXTVMGISJXLIHMWGSYRXFSRH
8LI ]MIPH XS QEXYVMX] IUYEPW XLI MRGVIEWI MR TVMGI SZIV XLI ]IEV
HMZMHIH F] XLI MRMXMEP TVMGI
%W [MXL E GSYTSR FSRH XLI ]MIPH XS QEXYVMX] MW RIKEXMZIP] VIPEXIH
XS XLI GYVVIRX FSRH TVMGI
8LI(MWXMRGXMSR&IX[IIR-RXIVIWX6EXIW
ERH6IXYVRW
6EXISJ6IXYVR The payments to the owner plus the change in value
expressed as a fraction of the purchase price
C P − Pt
RET = + t +1
Pt Pt
RET = return from holding the bond from time t to time t + 1
Pt = price of bond at time t
Pt +1 = price of the bond at time t + 1
C = coupon payment
C
= current yield = ic
Pt
Pt +1 − Pt
= rate of capital gain = g
Pt
ERH6IXYVRW
• 8LIVIXYVRIUYEPWXLI]MIPHXSQEXYVMX]SRP]MJXLILSPHMRKTIVMSHIUYEPWXLI
XMQIXSQEXYVMX]
• %VMWIMRMRXIVIWXVEXIWMWEWWSGMEXIH[MXLEJEPPMRFSRHTVMGIWVIWYPXMRKMRE
GETMXEPPSWWMJXMQIXSQEXYVMX]MWPSRKIVXLERXLILSPHMRKTIVMSH
• 8LIQSVIHMWXERXEFSRHƅWQEXYVMX]XLIKVIEXIVXLIWMÎSJXLITIVGIRXEKI
TVMGIGLERKIEWWSGMEXIH[MXLERMRXIVIWXVEXIGLERKI
• -RXIVIWXVEXIWHSRSXEP[E]WLEZIXSFITSWMXMZIEWIZMHIRGIHF]VIGIRX
I\TIVMIRGIMR.ETERERHWIZIVEP)YVSTIERWXEXIW
ERH6IXYVRW
3RI=IEV6IXYVRWSR(MJJIVIRX1EXYVMX] 'SYTSR6EXI&SRHW
;LIR-RXIVIWX6EXIW6MWIJVSQ XS
ERH6IXYVRW
• 8LIQSVIHMWXERXEFSRHƅWQEXYVMX]XLIPS[IVXLIVEXISJVIXYVR
XLISGGYVWEWEVIWYPXSJERMRGVIEWIMRXLIMRXIVIWXVEXI
• )ZIRMJEFSRHLEWEWYFWXERXMEPMRMXMEPMRXIVIWXVEXIMXWVIXYVR
GERFIRIKEXMZIMJMRXIVIWXVEXIWVMWI
1EXYVMX]ERHXLI:SPEXMPMX]SJ&SRH
6IXYVRW-RXIVIWX6EXI6MWO
• 4VMGIW ERH VIXYVRW JSV PSRKXIVQ FSRHW EVI QSVI ZSPEXMPI XLER
XLSWI JSV WLSVXIVXIVQ FSRHW
• 8LIVI MW RS MRXIVIWXVEXI VMWO JSV ER] FSRH [LSWI XMQI XS

QEXYVMX] QEXGLIW XLI LSPHMRK TIVMSH
8LI(MWXMRGXMSR&IX[IIR6IEPERH
2SQMREP-RXIVIWX6EXIW
• 2SQMREP MRXIVIWX VEXI QEOIW RS EPPS[ERGI JSV MRJPEXMSR
• 6IEP MRXIVIWX VEXI MW EHNYWXIH JSV GLERKIW MR TVMGI PIZIP WS MX QSVI

EGGYVEXIP] VIJPIGXW XLI GSWX SJ FSVVS[MRK
• )\ ERXI VIEP MRXIVIWX VEXI MW EHNYWXIH JSV I\TIGXIH GLERKIW

MR XLI TVMGI PIZIP
• )\ TSWX VIEP MRXIVIWX VEXI MW EHNYWXIH JSV EGXYEP GLERKIW MR

XLI TVMGI PIZIP
&EROMRKERH*MRERGI
7XSGO1EVOIX8LISV] SJ6)
)1,
0IEVRMRK SFNIGXMZIW
• 'EPGYPEXI XLI TVMGI SJGSQQSR WXSGO
• 6IGSKRMÎ XLI MQTEGX SJRI[ MRJSVQEXMSR SR WXSGO TVMGIW
• 9RHIVWXERHMRK VEXMSREP I\TIGXEXMSRW
• )\TPEMR XLI )JJMGMIRX 1EVOIX,]TSXLIWMW )1,

7XSGOQEVOIX
• %WXSGO QEVOIXSV IUYMX] QEVOIXMWEQEVOIXJSV XLI XVEHMRK SJGSQTER]

WXSGO ERHHIVMZEXMZIW EX EREKVIIH TVMGI
• 7LEVIW VITVIWIRX EJVEGXMSR SJS[RIVWLMT MREFYWMRIWW8LIGSQQSR

JIEXYVI SJEPP XLIWI MWIUYMX] TEVXMGMTEXMSR(MJJIVIRX GPEWWIW SJWLEVIW
LEZI HMJJIVIRX ZSXMRK VMKLXW
7XSGOQEVOIX
• 3[RIVWLMT SJWLEVIW MWHSGYQIRXIH F] EPIKEP HSGYQIRX XLEX WTEGMJMIW

XLI EQSYRX SJWLEVIW S[RIH F] XLI WLEVILSPHIVERHSXLIV WTIGMJMGW SJ
XLI WLEVIW
• 8LIWI HE]W XLIWI WXSGO GIVXMJMGEXIW LEZI FIIR HIQEXIVMEPMÎH

7LEVILSPHIV
• % WLEVILSPHIV SV WXSGOLSPHIV MW ER MRHMZMHYEP SV GSQTER] XLEX PIKEPP]
S[RW SRI SV QSVI WLEVIW SJ E GSQTER]
• 7LEVILSPHIVW EVI KVERXIH TVMZMPIKIW HITIRHMRK SR XLI GPEWW SJ WXSGOW

MRGPYHMRK XLI VMKLX XS ZSXI SR QEXXIVW WYGL EW IPIGXMSRW XS XLI FSEVH SJ
HMVIGXSVW XLI VMKLX XS WLEVI MR HMWXVMFYXMSRW SJ XLI GSQTER]ƅW MRGSQI
XLI VMKLX XS TYVGLEWI RI[ WLEVIW MWWYIH F] XLI GSQTER] ERH XLI VMKLX
XS E GSQTER]ƅW EWWIXW HYVMRK E PMUYMHEXMSR SJ XLI GSQTER]
• 7LEVILSPHIVW ZEV] JVSQ MRHMZMHYEP WXSGO MRZIWXSVW XS PEVKI LIHKI JYRH

XVEHIVW
;L] HSIW EGSQTER] MWWYI WLEVIW XS XLI
TYFPMG#
• %GSQTER] QE] [ERX EHHMXMSREP GETMXEP XS MRZIWX MRRI[ TVSNIGXW
• 8LITVSQSXIVW QE] WMQTP] [MWL XS VIHYGI XLIMV LSPHMRKJVIIMRKYT

GETMXEP JSV XLIMV S[R TVMZEXI YWI
• 3RGI EGSQTER] MWPMWXIHMX[MPP FIEFPI XS MWWYI JYVXLIV WLEVIW ZME E

VMKLXW MWWYIXLIVIF] EKEMRTVSZMHMRK MXWIPJ [MXL GETMXEP JSV I\TERWMSR
[MXLSYX MRGYVVMRK ER] HIFX
• *MRERGMRK EGSQTER] XLVSYKL XLI WEPI SJWXSGO MREGSQTER] MWORS[R

EW IUYMX] JMRERGMRK
8VEHMRK
• 8LIWLEVIW SJEGSQTER] EVI MWKIRIVEP FIXVERWJIVVEFPI JVSQ SRI

WLEVILSPHIV XS ERSXLIV8LMW PIEHW XS FY]MRK ERHWIPPMRK SJWLEVIW
XIVQIHEW XVEHMRK
• -RZIWXSVW YWYEPP] FY] ERHWIPP WLEVIW SR XLI I\GLERKIW XLVSYKL EWXSGO

FVSOIVW VIKMWXIVIH [MXL XLI I\GLERKI
• %GSQTER] QE] PMWX MXW WLEVIW SR ERI\GLERKI F] QIIXMRKERH

QEMRXEMRMRK XLI PMWXMRK VIUYMVIQIRXW SJETEVXMGYPEV WXSGO I\GLERKI
,S[XLI1EVOIX7IXW7XSGO4VMGIW
• 8LITVMGIMWWIXF]XLIFY]IV[MPPMRKXSTE]XLILMKLIWXTVMGI
• 8LIQEVOIXTVMGI[MPPFIWIXF]XLIFY]IV[LSGERXEOIFIWXEHZERXEKI
SJXLIEWWIX
• 7YTIVMSVMRJSVQEXMSREFSYXEREWWIXGERMRGVIEWIMXWZEPYIF]VIHYGMRK
MXWTIVGIMZIHVMWO
,S[XLI1EVOIX7IXW7XSGO4VMGIW
• -RJSVQEXMSRMWMQTSVXERXJSVMRHMZMHYEPWXSZEPYIIEGLEWWIX
• ;LIRRI[MRJSVQEXMSRMWVIPIEWIHEFSYXEJMVQI\TIGXEXMSRWERHTVMGIW
GLERKI
• 1EVOIXTEVXMGMTERXWGSRWXERXP]VIGIMZIMRJSVQEXMSRERHVIZMWIXLIMV
I\TIGXEXMSRWWSWXSGOTVMGIWGLERKIJVIUYIRXP] )ZIV] WXSGOW TVMGI MW
ZSPEXMPMX]
'SQTYXMRKXLI4VMGISJ'SQQSR7XSGO
8LI3RI4IVMSH:EPYEXMSR1SHIP
Div1 P1
P0 = +
(1 + ke ) (1 + ke )
P0 = the current price of the stock
Div1 = the dividend paid at the end of year 1
ke = the required return on investment in equity
P1 = the sale price of the stock at the end of the first period
8LI3RI4IVMSH:EPYEXMSR1SHIP
(SPPEV-RGMWI\TIVMIRGMRKETIVMSHSJVETMHKVS[XL8LIJMVQ[MPPTE]EHMZMHIRHSJ
SRI]IEVJVSQXSHE]8LIWXSGOTVMGIMWI\TIGXIHXSFIMRE]IEVƅWXMQI-J
XLIVIUYMVIHVEXISJVIXYVRSRXLIWXSGOMW [LEXMWXLITVMGISJEWLEVISJXLI
WXSGOXSHE]#
7GYFEPERH -RGMWI\TIVMIRGMRKETIVMSHSJVETMHKVS[XL)EVRMRKWERHHMZMHIRHWTIV
WLEVIEVII\TIGXIHXSKVS[EXEVEXISJ HYVMRKXLMW]IEV=IWXIVHE]7GYFEPERH
TEMHEHMZMHIRHSJ8LIWXSGOTVMGIMWI\TIGXIHXSFIMRE]IEVƅWXMQI-JXLI
VIUYMVIHVEXISJVIXYVRSRXLIWXSGOMW [LEXMWXLITVMGISJEWLEVISJXLIWXSGO
XSHE]#
8LI+SVHSR+VS[XL 1SHIP
D0 (1+ g) D1
P0 = =
(ke − g) (ke − g)
D0 = the most recent dividend paid
g = the expected constant growth rate in dividends
ke = the required return on an investment in equity
Dividends are assumed to continue growing at a constant rate forever
The growth rate is assumed to be less than the required return on equity
8LI+SVHSR+VS[XL 1SHIP
7YTTSWI%QWXIVHEQ*SSHW-RGLEWNYWXTEMHEHMZMHIRHSJTIVWLEVI-XW
HMZMHIRHMWI\TIGXIHXSKVS[XLEX TIV]IEVMRTIVTIXYMX]-JXLIVIUYMVIHVEXISJ
VIXYVRMW [LEXMWXLIZEPYISJEWLEVISJ%QWXIVHEQ*SSHW#
'SRWMHIVXLIWXSGOSJ(EZMHWSR'SQTER][LMGL[MPPTE]ERERRYEPHMZMHIRHSJ
SRI]IEVJVSQXSHE]8LIHMZMHIRH[MPPKVS[EXEGSRWXERXERRYEPVEXISJ JSVIZIV
8LIQEVOIXVIUYMVIHETIVGIRXVIXYVRSRXLIGSQTER]ƅWWXSGO;LEXMWXLIGYVVIRX
TVMGISJEWLEVISJXLIWXSGO#
1SRIXEV] 4SPMG]ERH7XSGO4VMGIW
• 1SRIXEV]TSPMG]GEREJJIGXWXSGOTVMGIWMRX[S[E]W*MVWX[LIRXLI
'IRXVEP &ERO PS[IVWMRXIVIWXVEXIWXLIVIXYVRSRFSRHWEREPXIVREXMZI
EWWIXXSWXSGOW HIGPMRIWERHMRZIWXSVWEVIPMOIP]XSEGGITXEPS[IV
VIUYMVIHVEXISJVIXYVRSRERMRZIWXQIRXMRIUYMX]8LIVIWYPXMRKHIGPMRI
PS[IVWXLIHIRSQMREXSVMRXLI+SVHSRKVS[XLQSHIPERHVEMWIWWXSGO
TVMGIW
1SRIXEV] 4SPMG]ERH7XSGO4VMGIW
• *YVXLIVQSVI E PS[IVMRK SJ MRXIVIWX VEXIW MW PMOIP] XS WXMQYPEXI XLI

IGSRSQ] WS XLI KVS[XL VEXI MR HMZMHIRHW K MW PMOIP] XS FI WSQI[LEX
LMKLIV 8LMW VMWI MR K EPWS GEYWIW XLI HIRSQMREXSV MR XLI +SVHSR QSHIPP
XS HIGVIEWI [LMGL EPWS PIEHW XS E VMWI MR WXSGO TVMGIW
8LI+PSFEP*MRERGMEP'VMWMW ERHXLI 7XSGO
1EVOIX
• 8LIJMRERGMEPGVMWMWXLEXWXEVXIHMR%YKYWXPIHXSSRISJXLI[SVWX
FIEVQEVOIXWMR]IEVW
• (S[R[EVHVIZMWMSRSJKVS[XLTVSWTIGXWĻK
• -RGVIEWIHYRGIVXEMRX]ĹOI
• +SVHSRQSHIPTVIHMGXWEHVSTMRWXSGOTVMGIW
8LI8LISV] SJ6EXMSREP )\TIGXEXMSRW
• %HETXMZII\TIGXEXMSRW
– )\TIGXEXMSRWEVIJSVQIHJVSQTEWXI\TIVMIRGISRP]
– 'LERKIWMRI\TIGXEXMSRW[MPPSGGYVWPS[P]SZIVXMQIEWHEXEGLERKIW
– ,S[IZIVTISTPIYWIQSVIXLERNYWXTEWXHEXEXSJSVQXLIMVI\TIGXEXMSRWERH
WSQIXMQIWGLERKIXLIMVI\TIGXEXMSRWUYMGOP]
8LI8LISV] SJ6EXMSREP )\TIGXEXMSRW
• )\TIGXEXMSRW[MPPFIMHIRXMGEPXSSTXMQEPJSVIGEWXWYWMRKEPPEZEMPEFPIMRJSVQEXMSR
• )ZIRXLSYKLEVEXMSREPI\TIGXEXMSRIUYEPWXLISTXMQEPJSVIGEWXYWMRKEPPEZEMPEFPI
MRJSVQEXMSRETVIHMGXMSRFEWIHSRMXQE]RSXEP[E]WFITIVJIGXP]EGGYVEXI
– -XXEOIWXSSQYGLIJJSVXXSQEOIXLIMVI\TIGXEXMSRXLIFIWXKYIWWTSWWMFPI
– 8LIFIWXKYIWW[MPPRSXFIEGGYVEXIFIGEYWIXLITVIHMGXSVMWYRE[EVISJWSQI
VIPIZERXMRJSVQEXMSR
6EXMSREPI &ILMRH XLI 8LISV]
• 8LI MRGIRXMZIW JSV IUYEXMRK I\TIGXEXMSRW [MXL STXMQEP JSVIGEWXW EVI

IWTIGMEPP] WXVSRK MR JMRERGMEP QEVOIXW -R XLIWI QEVOIXW TISTPI [MXL
FIXXIV JSVIGEWXW SJ XLI JYXYVI KIX VMGL
• 8LI ETTPMGEXMSR SJ XLI XLISV] SJ VEXMSREP I\TIGXEXMSRW XS JMRERGMEP

QEVOIXW [LIVI MX MW GEPPIH XLI IJJMGMIRX QEVOIX L]TSXLIWMW SV XLI XLISV]
SJ IJJMGMIRX GETMXEP QEVOIXW MW XLYW TEVXMGYPEVP] YWIJYP
-QTPMGEXMSRWSJXLI8LISV]
• -JXLIVIMWEGLERKIMRXLI[E]EZEVMEFPIQSZIWXLI[E]MR[LMGLI\TIGXEXMSRWSJXLI
ZEVMEFPIEVIJSVQIH[MPPGLERKIEW[IPP
– 'LERKIWMRXLIGSRHYGXSJQSRIXEV]TSPMG]IKXEVKIXXLIJIHIVEPJYRHWVEXI
• 8LIJSVIGEWXIVVSVWSJI\TIGXEXMSRW[MPPSREZIVEKIFIÎVSERHGERRSXFITVIHMGXIH
ELIEHSJXMQI
8LI)JJMGMIRX1EVOIX,]TSXLIWMW6EXMSREP
)\TIGXEXMSRWMR*MRERGMEP1EVOIXW
Recall
The rate of return from holding a security equals the sum of the capital
gain on the security, plus any cash payments divided by the
initial purchase price of the security.
Pt +1 − Pt + C
R=
Pt
R = the rate of return on the security
Pt +1 = price of the security at time t + 1, the end of the holding period
Pt = price of the security at time t , the beginning of the holding period
C = cash payment (coupon or dividend) made during the holding period
%XXLIFIKMRRMRKSJXLITIVMSH[IORS[4X ERH'
4X MWYRORS[RERH[IQYWXJSVQERI\TIGXEXMSRSJMX
8LII\TIGXIHVIXYVRXLIRMW
Pt e+1 − Pt + C
R =e
Pt
)\TIGXEXMSRWSJJYXYVITVMGIWEVIIUYEPXSSTXMQEPJSVIGEWXW
YWMRKEPPGYVVIRXP]EZEMPEFPIMRJSVQEXMSRWS
Pt e+1 = Pt of+1 R e = R of
7YTTP]ERH(IQERHEREP]WMWWXEXIW6I [MPPIUYEPXLI
IUYMPMFVMYQVIXYVR6 WS6SJ !6
• 'YVVIRXTVMGIWMREJMRERGMEPQEVOIX[MPPFIWIXWSXLEXXLISTXMQEP
JSVIGEWXSJEWIGYVMX]ƅWVIXYVRYWMRKEPPEZEMPEFPIMRJSVQEXMSR
IUYEPWXLIWIGYVMX]ƅWIUYMPMFVMYQVIXYVR
• -RERIJJMGMIRXQEVOIXEWIGYVMX]ƅWTVMGIJYPP]VIJPIGXWEPPEZEMPEFPI
MRJSVQEXMSR
6EXMSREPI&ILMRHXLI,]TSXLIWMW
R of > R* Pt ↑ R of ↓
R of < R* Pt ↓ R of ↑
until
R of = R*
In an efficient market, all unexploited profit opportunities will
be eliminated
,S[:EPYEFPI%VI4YFPMWLIH6ITSVXWF]
-RZIWXQIRX%HZMWSVW#
• -RJSVQEXMSR MR RI[WTETIVW ERH MR XLI TYFPMWLIH VITSVXW SJ MRZIWXQIRX

EHZMWIVW MW VIEHMP] EZEMPEFPI XS QER] QEVOIX TEVXMGMTERXW ERH MW EPVIEH]
VIJPIGXIH MR QEVOIX TVMGIW
• %GXMRK SR XLMW MRJSVQEXMSR [MPP RSX ]MIPH EFRSVQEPP] LMKL VIXYVRW SR

EZIVEKI
• 8LI IQTMVMGEP IZMHIRGI JSV XLI QSWX TEVX GSRJMVQW XLEX

VIGSQQIRHEXMSRW JVSQ MRZIWXQIRX EHZMWIVW GERRSX LIPT YW SYXTIVJSVQ
XLI KIRIVEP QEVOIX
)JJMGMIRX1EVOIX4VIWGVMTXMSRJSVXLI
-RZIWXSV
• 6IGSQQIRHEXMSRWJVSQMRZIWXQIRXEHZMWSVWGERRSXLIPTYW
SYXTIVJSVQXLIQEVOIX
• %LSXXMTMWTVSFEFP]MRJSVQEXMSREPVIEH]GSRXEMRIHMRXLITVMGISJXLI
WXSGO
• 7XSGOTVMGIWVIWTSRHXSERRSYRGIQIRXWSRP][LIRXLIMRJSVQEXMSRMW
RI[ERHYRI\TIGXIH
• %ƈFY]ERHLSPHƉWXVEXIK]MWXLIQSWXWIRWMFPIWXVEXIK]JSVXLIWQEPP
MRZIWXSV
;LEX(S7XSGO1EVOIX'VEWLIW8IPP9W
%FSYXXLI)JJMGMIRX1EVOIX,]TSXLIWMWERH
XLI)JJMGMIRG]SJ*MRERGMEP1EVOIXW#
2SXLMRK MR IJJMGMIRX QEVOIXW XLISV] VYPIW SYX PEVKI GLERKIW MR WXSGO

TVMGIW % PEVKI GLERKI MR WXSGO TVMGIW GER VIWYPX JVSQ RI[ MRJSVQEXMSR
XLEX TVSHYGIW E HVEQEXMG HIGPMRI MR STXMQEP JSVIGEWXW SJ XLI JYXYVI
ZEPYEXMSR SJ JMVQW ,S[IZIV IGSRSQMWXW EVI LEVH TVIWWIH XS JMRH
JYRHEQIRXEP GLERKIW MR XLI IGSRSQ] XLEX [SYPH LEZI GEYWIH XLI &PEGO
1SRHE] ERH XIGL GVEWLIW 3RI PIWWSR JVSQ XLIWI GVEWLIW MW XLEX JEGXSVW
SXLIV XLER QEVOIX JYRHEQIRXEPW QE] LEZI ER IJJIGX SR EWWIX TVMGIW
;L]XLI)JJMGMIRX1EVOIX,]TSXLIWMW(SIW
2SX-QTP]XLEX*MRERGMEP1EVOIXW%VI
)JJMGMIRX
• 7SQIJMRERGMEPIGSRSQMWXWFIPMIZIEPPTVMGIWEVIEP[E]WGSVVIGXERH
VIJPIGXQEVOIXJYRHEQIRXEPW MXIQWXLEXLEZIEHMVIGXMQTEGXSRJYXYVI
MRGSQIWXVIEQWSJXLIWIGYVMXMIW ERHWSJMRERGMEPQEVOIXWEVI
IJJMGMIRX
• ,S[IZIVTVMGIWMRQEVOIXWPMOIXLIWXSGOQEVOIXEVIYRTVIHMGXEFPI
8LMWGEWXWWIVMSYWHSYFXSRXLIWXVSRKIVZMI[XLEXJMRERGMEPQEVOIXW
EVIIJJMGMIRX
&ILEZMSVEP *MRERGI
• &ILEZMSVEP JMRERGI MWEVIPEXMZIP] RI[ JMIPH XLEX WIIOW XS GSQFMRI

FILEZMSVEP ERHGSKRMXMZI TW]GLSPSKMGEP XLISV] [MXL GSRZIRXMSREP
IGSRSQMGW ERHJMRERGI XS TVSZMHI I\TPEREXMSRW JSV [L] TISTPI QEOI
MVVEXMSREP JMRERGMEP HIGMWMSRW
&ILEZMSVEP *MRERGI
• 8LIPEGOSJWLSVXWIPPMRKGEYWMRKSZIVTVMGIHWXSGOW QE]FII\TPEMRIH

F]PSWWEZIVWMSR
• 8LIPEVKIXVEHMRKZSPYQIQE]FII\TPEMRIHF]MRZIWXSVSZIVGSRJMHIRGI
• 7XSGOQEVOIXFYFFPIWQE]FII\TPEMRIHF]SZIVGSRJMHIRGIERHWSGMEP
GSRXEKMSR
8LISVMIW SJ&ILEZMSVEP *MRERGI
• 4VSWTIGX XLISV]
• 6IKVIX XLISV]
• %RGLSVMRK
• 3ZIVERHYRHIV VIEGXMSR
4VSWTIGX XLISV]
• 'EPGYPEXI XLI TVMGI SJGSQQSR WXSGO
• 6IGSKRMÎ XLI MQTEGX SJRI[ MRJVSQEXMSR SR WXSGO TVMGIW
• 9RHIVWXERHMRK VEXMSREP I\TIGXEXMSRW
• )\TPEMR XLI )JJMGMIRX 1EVOIX,]TSXLIWMW )1,

Failure of Bretton Woods System
• Bretton Woods System – 1944
– IMF
– World Bank
– System of fixed exchange rates
• In 1973, Bretton Woods System led to
causalities in German Banking System and
UK’s Banking system with huge amount of
foreign exchange exposures which was more
than the capital of the banks.
Basel Committee - 1974
• The central bank governors of the G10 countries
established a Committee on Banking Regulations and
Supervisory Practices.
• The group of ten countries consist of Belgium, Canada,
France, Germany, Italy, Japan, the Netherlands,
Sweden, the United Kingdom and the United States,
Switzerland was also included as part of the group.
• Later renamed as the Basel Committee on Banking
Supervision(BCBS).
• The Basel Committee on Banking Supervision provides
a forum for regular cooperation on banking
supervisory matters.
• Its mandate is to strengthen the regulation,
supervision and practices of banks worldwide with
the purpose of enhancing financial stability.
• Basel Committee on Banking Supervision
(BCBS) came into being under the patronage
of Bank for International Settlements (BIS),
Basel, Switzerland.
• The Committee formulates guidelines and
provides recommendations on banking
regulation based on capital risk, market risk
and operational risk.
• Currently there are 27 member nations in the
committee.
• Basel guidelines refer to broad supervisory standards
formulated by this group of central banks- called the
Basel Committee on Banking Supervision (BCBS).
• The set of agreement by the BCBS, which mainly
focuses on risks to banks and the financial system are
called Basel accord.
• The purpose of the accord is to ensure that financial
institutions have enough capital on account to meet
obligations and absorb unexpected losses. India has
accepted Basel accords for the banking system.
• Credit Risk - Credit risk is most simply defined
as the potential that a bank’s borrower or
counterparty may fail to meet its obligations
in accordance with agreed terms.
• Market Risk - Market risk refers to the risk to a
bank resulting from movements in market
prices in particular changes in interest rates,
foreign exchange rates and equity and
commodity prices.
BASEL I
• Risk management (Focused on Credit Risk, No
recognition of operational risk)
• Capital adequacy, sound supervision and
regulation
• Transparency of operations
– Unquestionably accepted by developed and
developing countries
– Capital requirement 8% of assets (banks were advised
to maintain capital equal to a minimum 8% of a basket
of assets measured based on the basis of their risk)
• Tier 1 capital at 4%
• Tier 2 capital at 4%
Capital Adequacy Framework
• A bank should have sufficient capital to
provide a stable resource to absorb any losses
arising from the risks in its business.
• Capital is divided into tiers according to the
characteristics/qualities of each qualifying
instrument.
• For supervisory purposes capital is split into
two categories: Tier I and Tier II.
• Tier I capital -Share capital and disclosed
reserves and it is a bank’s highest quality
capital because it is fully available to cover
losses.
• Tier II capital on the other hand consists of
certain reserves and certain types of
subordinated debt.
• The loss absorption capacity of Tier II capital is
lower than that of Tier I capital.
The twin objectives of Basel I were:
(a) to ensure an adequate level of capital in the
international banking system &
(b) to create a more level playing field in the
competitive environment.
BASEL II – The New Capital Farmework
• In June 1999, the Committee issued a proposal
for a new capital adequacy framework to replace
the 1988 Accord.
• This led to the release of the Revised Capital
Framework in June 2004. Generally known as
‟Basel II”,
• The New Basel Capital Accord focused on, three
pillars viz.
– Pillar I - Minimum capital requirement
– Pillar II - Supervisory review
– Pillar III - Market discipline
Pillar I - Minimum Capital
Requirement
• The Committee on Banking Supervision
recommended the target standard ratio of capital
to Risk Weighted Assets should be at least 8% (of
which the core capital element would be at least
4%).
• The minimum capital adequacy ratio of 8% was
prescribed taking into account the credit risk.
• However, in India the Reserve Bank of India has
prescribed the minimum capital adequacy ratio of
9% of Risk Weighted Assets.
Pillar II - Supervisory Review
• The Supervisory review should be carried out
in the following manner.
– Banks should have a process for assessing their
overall capital adequacy
– Supervisors should review banks’ assessments
– Banks are expected to operate above minimum
– Supervisor’s intervention if capital is not sufficient
Pillar III: Market Discipline
• Role of the market in evaluating the adequacy
of bank capital
• Streamlined catalogue of disclosure
requirements
• Close coordination with International
Accounting Standards Board
• In principle, disclosure of data on semiannual
basis
tŚĂƚ ŝƐΗĂƐĞů///Η
• ΗŐůŽďĂůƌĞŐƵůĂƚŽƌǇƐƚĂŶĚĂƌĚŽŶ͗
• ďĂŶŬĐĂƉŝƚĂůĂĚĞƋƵĂĐǇ
• ƐƚƌĞƐƐƚĞƐƚŝŶŐĂŶĚ
• ŵĂƌŬĞƚůŝƋƵŝĚŝƚǇƌŝƐŬ
ůƐŽĂƐĞƚŽĨƌĞĨŽƌŵŵĞĂƐƵƌĞƐƚŽŝŵƉƌŽǀĞ͗
• ZĞŐƵůĂƚŝŽŶ
• ^ƵƉĞƌǀŝƐŝŽŶ
• ZŝƐŬŵĂŶĂŐĞŵĞŶƚ
ZĞĂƐŽŶƐĨŽƌĂƐĞů///&ŽƌŵƵůĂƚŝŽŶ͗
&ĂŝůƵƌĞƐŽĨĂƐĞů//ďĞŝŶŐ͗
͘ /ŶĂďŝůŝƚǇƚŽƐƚƌĞŶŐƚŚĞŶĨŝŶĂŶĐŝĂůƐƚĂďŝůŝƚǇ͘
͘ /ŶƐƵĨĨŝĐŝĞŶƚĐĂƉŝƚĂůƌĞƐĞƌǀĞ͘
͘ /ŶĂĚĞƋƵĂƚĞĐŽŵƉƌĞŚĞŶƐŝǀĞƌŝƐŬŵĂŶĂŐĞŵĞŶƚĂƉƉƌŽĂĐŚ͘
͘ >ĂĐŬŽĨƵŶŝĨŽƌŵĞĚĚĞĨŝŶŝƚŝŽŶŽĨĐĂƉŝƚĂů͘
ŝŵƐΘKďũĞĐƚŝǀĞƐŽĨĂƐĞů///
• dŽŵŝŶŝŵŝǌĞƚŚĞƉƌŽďĂďŝůŝƚǇŽĨƌĞĐƵƌƌĞŶĐĞŽĨĐƌŝƐĞƐƚŽŐƌĞĂƚĞƌĞǆƚĞŶƚ͘
• dŽŝŵƉƌŽǀĞƚŚĞďĂŶŬŝŶŐƐĞĐƚŽƌΖƐĂďŝůŝƚǇƚŽĂďƐŽƌďƐŚŽĐŬƐĂƌŝƐŝŶŐĨƌŽŵ
ĨŝŶĂŶĐŝĂůĂŶĚĞĐŽŶŽŵŝĐƐƚƌĞƐƐ͘
• dŽŝŵƉƌŽǀĞƌŝƐŬŵĂŶĂŐĞŵĞŶƚĂŶĚŐŽǀĞƌŶĂŶĐĞ͘
• dŽƐƚƌĞŶŐƚŚĞŶďĂŶŬƐΖƚƌĂŶƐƉĂƌĞŶĐǇĂŶĚĚŝƐĐůŽƐƵƌĞƐ͘
dĂƌŐĞƚƐ͗
• ĂŶŬͲůĞǀĞůŽƌŵŝĐƌŽƉƌƵĚĞŶƚŝĂůǁŚŝĐŚǁŝůůŚĞůƉƌĂŝƐĞƚŚĞƌĞƐŝůŝĞŶĐĞŽĨ
ŝŶĚŝǀŝĚƵĂůďĂŶŬŝŶŐŝŶƐƚŝƚƵƚŝŽŶƐŝŶƉĞƌŝŽĚƐŽĨƐƚƌĞƐƐ͘
• DĂĐƌŽƉƌƵĚĞŶƚŝĂůƐǇƐƚĞŵǁŝĚĞƌŝƐŬƐƚŚĂƚďƵŝůĚƵƉĂĐƌŽƐƐƚŚĞďĂŶŬŝŶŐ
ƐĞĐƚŽƌĂƐǁĞůůĂƐƚŚĞƉƌŽͲĐǇĐůŝĐĂůĂŵƉůŝĨŝĐĂƚŝŽŶŽĨƚŚĞƐĞƌŝƐŬŽǀĞƌƚŝŵĞ͘
<ĞǇůĞŵĞŶƚƐ ŽĨZĞĨŽƌŵƐ͙
• /ŶĐƌĞĂƐŝŶŐƚŚĞƋƵĂůŝƚǇĂŶĚƋƵĂŶƚŝƚǇĐĂƉŝƚĂů
• ŶŚĂŶĐŝŶŐƌŝƐŬĐŽǀĞƌĂŐĞŽĨĐĂƉŝƚĂů
• /ŶƚƌŽĚƵĐŝŶŐ>ĞǀĞƌĂŐĞƌĂƚŝŽ
• /ŵƉƌŽǀŝŶŐůŝƋƵŝĚŝƚǇƌƵůĞƐ
• ƐƚĂďůŝƐŚŝŶŐĂĚĚŝƚŝŽŶĂůďƵĨĨĞƌƐ
• DĂŶĂŐŝŶŐĐŽƵŶƚĞƌƉĂƌƚǇƌŝƐŬƐ
tĞĂŬŶĞƐƐĞƐ ŽĨĂƐĞů//
• dŚĞƋƵĂůŝƚǇŽĨĐĂƉŝƚĂů͘
• WƌŽͲĐǇĐůŝĐĂůŝƚǇ͘
• >ŝƋƵŝĚŝƚǇƌŝƐŬ͘
• ^ǇƐƚĞŵŝĐďĂŶŬƐ͘
ĂƐĞů///͗^ƚƌĞŶŐƚŚĞŶŝŶŐƚŚĞŐůŽďĂůĐĂƉŝƚĂů
ĨƌĂŵĞǁŽƌŬ
• ĂƉŝƚĂůƌĞĨŽƌŵ͘
• >ŝƋƵŝĚŝƚǇƐƚĂŶĚĂƌĚƐ͘
• ^ǇƐƚĞŵŝĐƌŝƐŬĂŶĚŝŶƚĞƌĐŽŶŶĞĐƚĞĚŶĞƐƐ͘
ĂƉŝƚĂůZĞĨŽƌŵ
• ŶĞǁĚĞĨŝŶŝƚŝŽŶŽĨĐĂƉŝƚĂů͘
• ĂƉŝƚĂůĐŽŶƐĞƌǀĂƚŝŽŶďƵĨĨĞƌ͘
• ŽƵŶƚĞƌĐǇĐůŝĐĂůĐĂƉŝƚĂůďƵĨĨĞƌ͘
• DŝŶŝŵƵŵĐĂƉŝƚĂůƐƚĂŶĚĂƌĚƐ͘
ŶĞǁĚĞĨŝŶŝƚŝŽŶŽĨĐĂƉŝƚĂů
• dŽƚĂůƌĞŐƵůĂƚŽƌǇĐĂƉŝƚĂůǁŝůůĐŽŶƐŝƐƚŽĨƚŚĞƐƵŵŽĨƚŚĞĨŽůůŽǁŝŶŐ
ĞůĞŵĞŶƚƐ͗
ϭ͘dŝĞƌϭĂƉŝƚĂů;ŐŽŝŶŐͲĐŽŶĐĞƌŶĐĂƉŝƚĂůͿ
• Ă͘ŽŵŵŽŶƋƵŝƚǇdŝĞƌϭ
• ď͘ĚĚŝƚŝŽŶĂůdŝĞƌϭ
Ϯ͘dŝĞƌϮĂƉŝƚĂů;ŐŽŶĞͲĐŽŶĐĞƌŶĐĂƉŝƚĂůͿ
&ŽƌĞĂĐŚŽĨƚŚĞƚŚƌĞĞĐĂƚĞŐŽƌŝĞƐĂďŽǀĞ;ϭĂ͕ϭďĂŶĚϮͿƚŚĞƌĞŝƐĂƐŝŶŐůĞƐĞƚŽĨ
ĐƌŝƚĞƌŝĂƚŚĂƚŝŶƐƚƌƵŵĞŶƚƐĂƌĞƌĞƋƵŝƌĞĚƚŽŵĞĞƚďĞĨŽƌĞŝŶĐůƵƐŝŽŶŝŶƚŚĞƌĞůĞǀĂŶƚ
ĐĂƚĞŐŽƌǇ͘
ĂƉŝƚĂůĐŽŶƐĞƌǀĂƚŝŽŶ ďƵĨĨĞƌ
• dŚĞĐĂƉŝƚĂůĐŽŶƐĞƌǀĂƚŝŽŶďƵĨĨĞƌŝƐĚĞƐŝŐŶĞĚƚŽĞŶƐƵƌĞƚŚĂƚďĂŶŬƐďƵŝůĚ
ƵƉĐĂƉŝƚĂůďƵĨĨĞƌƐŽƵƚƐŝĚĞƉĞƌŝŽĚƐŽĨƐƚƌĞƐƐǁŚŝĐŚĐĂŶďĞĚƌĂǁŶĚŽǁŶ
ĂƐůŽƐƐĞƐĂƌĞŝŶĐƵƌƌĞĚ͘
• ĐĂƉŝƚĂůĐŽŶƐĞƌǀĂƚŝŽŶďƵĨĨĞƌŽĨϮ͘ϱй͕ĐŽŵƉƌŝƐĞĚŽĨŽŵŵŽŶƋƵŝƚǇ
dŝĞƌϭ͕ŝƐĞƐƚĂďůŝƐŚĞĚĂďŽǀĞƚŚĞƌĞŐƵůĂƚŽƌǇŵŝŶŝŵƵŵĐĂƉŝƚĂů
ƌĞƋƵŝƌĞŵĞŶƚ͘
• KƵƚƐŝĚĞŽĨƉĞƌŝŽĚƐŽĨƐƚƌĞƐƐ͕ďĂŶŬƐƐŚŽƵůĚŚŽůĚďƵĨĨĞƌƐŽĨĐĂƉŝƚĂů
ĂďŽǀĞƚŚĞƌĞŐƵůĂƚŽƌǇŵŝŶŝŵƵŵ
ŽƵŶƚĞƌĐǇĐůŝĐĂů ĐĂƉŝƚĂů ďƵĨĨĞƌ
• dŚĞĐŽƵŶƚĞƌĐǇĐůŝĐĂůďƵĨĨĞƌĂŝŵƐƚŽĞŶƐƵƌĞƚŚĂƚďĂŶŬŝŶŐƐĞĐƚŽƌĐĂƉŝƚĂů
ƌĞƋƵŝƌĞŵĞŶƚƐƚĂŬĞĂĐĐŽƵŶƚŽĨƚŚĞŵĂĐƌŽĨŝŶĂŶĐŝĂů ĞŶǀŝƌŽŶŵĞŶƚŝŶ
ǁŚŝĐŚďĂŶŬƐŽƉĞƌĂƚĞ͘
• /ƚǁŝůůďĞĚĞƉůŽǇĞĚďǇŶĂƚŝŽŶĂůũƵƌŝƐĚŝĐƚŝŽŶƐǁŚĞŶĞǆĐĞƐƐĂŐŐƌĞŐĂƚĞ
ĐƌĞĚŝƚŐƌŽǁƚŚŝƐũƵĚŐĞĚƚŽďĞĂƐƐŽĐŝĂƚĞĚǁŝƚŚĂďƵŝůĚͲƵƉŽĨƐǇƐƚĞŵͲ
ǁŝĚĞƌŝƐŬƚŽĞŶƐƵƌĞƚŚĞďĂŶŬŝŶŐƐǇƐƚĞŵŚĂƐĂďƵĨĨĞƌŽĨĐĂƉŝƚĂůƚŽ
ƉƌŽƚĞĐƚŝƚĂŐĂŝŶƐƚĨƵƚƵƌĞƉŽƚĞŶƚŝĂůůŽƐƐĞƐ͘
>ŝƋƵŝĚŝƚǇ ^ƚĂŶĚĂƌĚƐ͗
• ϭ͘^ŚŽƌƚͲƚĞƌŵ͗>ŝƋƵŝĚŝƚǇŽǀĞƌĂŐĞZĂƚŝŽ;>ZͿ
• Ϯ͘>ŽŶŐͲƚĞƌŵ͗EĞƚ^ƚĂďůĞ&ƵŶĚŝŶŐZĂƚŝŽ;E^&ZͿ
^ǇƐƚĞŵŝĐƌŝƐŬĂŶĚŝŶƚĞƌĐŽŶŶĞĐƚĞĚŶĞƐƐ
;ŽƵŶƚĞƌƉĂƌƚǇƌŝƐŬͿ
• ĂƉŝƚĂůŝŶĐĞŶƚŝǀĞƐ ĨŽƌ ƵƐŝŶŐ WƐ ĨŽƌ Kd͘

• ,ŝŐŚĞƌ ĐĂƉŝƚĂů ĨŽƌ ƐǇƐƚĞŵŝĐ ĚĞƌŝǀĂƚŝǀĞƐ͘
• ,ŝŐŚĞƌ ĐĂƉŝƚĂů ĨŽƌ ŝŶƚĞƌͲĨŝŶĂŶĐŝĂů ĞǆƉŽƐƵƌĞƐ͘
• ŽŶƚŝŶŐĞŶƚ ĐĂƉŝƚĂů͘
• ĂƉŝƚĂůƐƵƌĐŚĂƌŐĞ ĨŽƌ ƐǇƐƚĞŵŝĐ ďĂŶŬƐ͘
KE>h^/KE
• ĂƐĞů///ŝŶƚƌŽĚƵĐĞƐĂƉĂƌĂĚŝŐŵƐŚŝĨƚŝŶĐĂƉŝƚĂůĂŶĚůŝƋƵŝĚŝƚǇƐƚĂŶĚĂƌĚƐ͘
• /ƚǁĂƐĐŽŶƐƚƌƵĐƚĞĚĂŶĚĂŐƌĞĞĚŝŶƌĞůĂƚŝǀĞůǇƌĞĐŽƌĚƚŝŵĞǁŚŝĐŚůĞĂǀĞƐ
ŵĂŶǇĞůĞŵĞŶƚƐƵŶĨŝŶŝƐŚĞĚ͘
• dŚĞĨŝŶĂůŝŵƉůĞŵĞŶƚĂƚŝŽŶĚĂƚĞĂůŽŶŐǁĂǇŽĨĨ͘

ZH 1

Uploaded by

Copyright:

Available Formats

You might also like

ZH 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ZH 1

Uploaded by

Copyright:

Available Formats

Banking and Finance

Zoltán Gál, full professor; Klaudia Rádóczy , lecturer

Validated course – same requirements for students (PTE and Erasmus)

Contact with the lecturers:

Name of the Weigh Type Details Retake Req. Related

• Midterm exam 25%

1 0,00% 50,00% fail

2 51% 65,00% pass

3 66% 74,00% fair

4 75% 86,00% good

5 87% 100,00% excellent

2. What Is Money? (02.08)

3. Understanding interest rates (02.15)

4. The Stock Market and related theories

5. Economic Analysis of Financial Structure

6. Money supply and Bank Management

7. Development & structure of banking

8. Financial Regulations and central

9. International financial markets and IFCs

10.Financial innovations and Digitalization

• Each group (consists of max. 4 students) has to deliver 15-20 minutes

3 Comparison of US and European continental banking system. Types of

6 Role of central banks in crisis management (FED, ECB, MNB): new

• Where are You from?

And one more….

21/02/2022 Zeller: Banking & Finance 12

Ratio of FX daily turnover to Export daily turnovers

Increasing gap between the daily FX turnover and

daily export Növekvő szakadék a napi devizapiaci forgalom és a

IT innovations: internet, big data, cloud

FDI stocks as % of GDP (FDI stock),

• Epstein (2005) – „Financialization means the increasing

Incomes of US households from

• Demand gap (Gap between the income and consumption) financialisation

„The richest 10% owns 50% of national

End of small–holder US capitalist dream: Wealth forms/share of

FINANCE & FINANCIAL MARKETS

Financial depth: financial assets / GDP

An effective financial system must possess three characteristics:

• Techniques CENTRAL BANK

• Borrowers turn directly to lenders offering

• Direct finance: borrowers borrow funds directly from lenders

*A security (financial instrument) is a claim on the issuer’s future income or

– Technical intermediaries help in the mutual

• Borrowers/spenders and lenders/buyers are

• Primary Markets: new issues of securities

• Secondary Markets: trading with

– Equities (issuance of stocks/ common stock**

In 2017, the global bond market (total outstanding debt) is estimated at

48% were in Euro issues and 34% (2005) dollar issues.

Source: Federal Reserve Bank of St. Louis, FRED database:

– Exchanges: NYSE, Chicago Board of Trade,

– OTC markets: Foreign exchange, US government bonds,

• Money and Capital Markets:

– Capital markets deal in longer-term debt

Table 1 Principal Money Market Instruments

• Corporate stocks (large stock but slow growth)

Table 2 Principal Capital Market Instruments