 This course is the main part of FINANCIAL

ECONOMICS
 Huge area between FINANCE and
ECONOMICS
Financial Economics

Monetary Policy Banks and Money Financial markets

 Financial Economics studies
FINANCIAL SYSTEM which is consist
of:
1. Financial Institutions
2. Financial Markets
3. Financial Instruments – Assets of value (stocks,
bonds and etc.)
 Financial Institutions

BANKS
…

Investment
Commercial Banks Central Banks Banks
 Financial economics is about HOW the Financial
System effects to the ECONOMY. Each element
effect to economy.
 Most of this ECONOMY will be the
MACROeconomy.
 So try to understand macroeconomy.
 Macroeconomics is about:
1. GDP – output
2. Employment – Jobs
3. Wages and Salaries
4. Government - Spending and Taxes
5. Import + Exports
6. Interest rates savings capital
Financial economics – is how financial institutions,
specially BANKS, effect to each element of
Macroecomics.
 Interest rate – is the most important price in the
country. The price of capital.

 Monetary policy is about money and credit

effects to macroeconomics.
 Credit – is the borrowing money. In our case
borrowing money of financial institute – BANK.
 By credit is increased business in economy.
 So, purpose of BANKING is to find optimal
interest rate and to manage effective credit
policy. Because maybe too much credit will crash
all banking system in economy and will be
collapse.
 Too much money and too much credit will
increase inflation which makes people poor.
 Banking – is the business of receiving
deposits from the general public, and then
lending the funds to borrowers, or otherwise
investing.

 Banking is about dealing in money (and its

substitutes) and providing financial services.
 Banking is:
› the well-spring of the monetary bloodstream (life
blood of business and industry).
› an important component of the economic system
of a country.
› responsible for the rapid development of a
country’s economy (by mobilizing savings into
investments).
 Banks originated in ancient Mesopotamia thousands of
years ago (where royal palaces and temples provided
secure places for the safekeeping of grains and
commodities).
 In Egypt, the centralization of harvests in state
warehouses also led to the development of a system of
banking.
 Written orders for the withdrawal of separate lots of
grains by owners soon became a more general method of
payment of debts to other persons.
 Goldsmith Bankers
› The goldsmiths kept their inventories in their vaults
inside their warehouses. The extra spaces in the safes
were rented by owners of coins, gold, and valuable
items.
› A depositor receipt was issued whenever valuables are
received.
› Instructions to goldsmiths to pay coins to another
person subsequently developed into what is now
known as checks.
 Banks
› = use money and credit (as factors) in the development of
exchange.

BANKS

Central bank: Commercial banks:

main purpose is not purpose - profit
a profit
 To give loans, accept deposits and act as a financial intermediary.
 To take interest for loan investment to give interest to depositors and to
help in overseas transactions.
 To collect and clear cheques, dividends and interest warrant.
 To make payment of rent, insurance premium
 To help in foreign exchange transactions
 To purchase to sell securities
 To act as trustee, attorney, correspondent and executor.
 To accept tax proceeds and tax returns
 To provide money transfer facility.
 To issue travelers' cheque.
 Implementation of monetary policies.
 To make banking regulations and supervise banks
and Financial Institutions.
 To manage the reserve of international currencies
 Act as bankers for the government
 Prevent money laundering
 A bank is a financial intermediary that offers loans
and deposits, and payment services. Nowadays banks
also offer a wide range of additional services, but it is
these functions that constitute banks’ distinguishing
features.

 Banks play such an important role in channeling funds

from savers to borrowers
 A bank is a financial intermediary whose core activity is to
provide loans to borrowers

 By carrying out the intermediation function banks collect

surplus funds from savers and allocate them to those (both
people and companies) with a deficit of funds (borrowers).
 In doing so, they channel funds from savers to borrowers
thereby increasing economic efficiency by promoting a better
allocation of resources.
 Borrowers are generally referred to as deficit units
and lenders are known as surplus units.
 Financial claims can take the form of any financial
asset, such as money, bank deposit accounts, bonds,
shares, loans, life insurance policies, etc.
 The lender of funds holds the borrower’s financial
claim and is said to hold a financial asset.
 The issuer of the claim (borrower) is said to have a
financial liability.
 Lenders are looking for safety and liquidity. Borrowers may
find it difficult to promise either
 Lenders’ requirements:
› The minimization of risk. This includes the minimization of
the risk of default (the borrower not meeting its repayment
obligations) and the risk of the assets dropping in value.
› The minimization of cost. Lenders aim to minimise their
costs.
› Liquidity. Lenders value the ease of converting a financial
claim into cash without loss of capital value; therefore they
prefer holding assets that are more easily converted into cash.
 Borrowers’ requirements:
› Funds at a particular specified date.

› Funds for a specific period of time; preferably long-term

(think of the case of a company borrowing to purchase
capital equipment which will only achieve positive returns
in the longer term or of an individual borrowing to
purchase a house).
› Funds at the lowest possible cost.
 Financial intermediaries help minimize the costs associated
with direct lending .
 To understand the role of financial
intermediaries in the economy
 To understand historical background of
banking
 To understand lenders’ and borrowers’
different requirements and how banks can help
to bridge such differences
 To learn the nature of financial intermediation
 "The Mystery of Banking" by Murray N.
Rothbard.
 Artem Vorobyev. Investments Commercial
Banking.
 https://www.cbar.az/