Money and Banking

Lecture 01

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Text and Reference Material

• The Primary textbook for the course will be• “Money, Banking and Financial Markets” by

Stephan G. Cecchetti International Edition, McGraw Hill Publishers, ISBN 0-07-111565-X”

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Text and Reference Material

• Reference books will be• “The Economics of Money, Banking and

Financial Markets”, by Fredrick S. Mishkin 7th Edition Addison Wesley Longman Publishers

• “Principles of Money, Banking and Financial Markets” by Lawrence S. Ritter, Willaim L. Silber and Gregory F. Udell, Addison Wesley Longman Publishers

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Course Contents

• Money and the Financial System• Money and the Payments System • Financial Instruments, Financial Markets, and

Financial Institutions

• Interest rate, Financial instruments and financial markets• Future Value, Present Value and Interest Rates • Understanding Risk • Bonds, Pricing and Determination of Interest Rates • The Risk and Term Structure of Interest Rates• Stocks, Stock Markets and Market Efficiency

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Course Contents

• Financial Institutions • Economics of Financial Intermediation• Depositary Institutions: Banks and bank Management• Financial Industry Structure• Regulating the financial system

• Central Banks, Monetary Policy and Financial stability• Structure of central banks• Balance sheet and Money Supply process• Monetary policy• Exchange rate policy

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Course Contents

• Modern Monetary Economics• Money growth and Money Demand• Aggregate demand• Business Cycle• Output and inflation in the short run

• Money and Banking in Islam• Monetary and financial policy and structure for an

Interest-free economy• Islamic Banking in the contemporary world

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Five Parts of the Financial System

1. Money

2. Financial Instruments

3. Financial Markets

4. Financial Institutions

5. Central Banks

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Five Parts of the Financial System

1. Money• To pay for purchases• To store wealth

• Evolved from gold and silver coins to paper money to today’s electronic funds transfers

• Traditional Paycheck system vs. ATM Withdrawals

• Mailed transactions vs. E-banking

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Five Parts of the Financial System

2. Financial Instruments• To transfer wealth from savers to borrowers • To transfer risk to those best equipped to bear it.

• once investing was an activity reserved for the wealthy• Costly individual stock transactions through

stockbrokers• Information collection was not so easy

• Now, small investors have the opportunity to purchase shares in “mutual funds.”

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Five Parts of the Financial System

3. Financial Markets• To buy and sell financial instruments quickly and

cheaply

• evolved from coffeehouses to trading places (Stock exchanges) to electronic networks.

• Transactions are much more cheaper now• Markets offer a broader array of financial

instruments than were available even 50 years ago

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Five Parts of the Financial System

4. Financial Institutions.• Provide access to financial markets

• Banks evolved from Vaults and developed into deposits- and loans-agency

• Today’s banks are more like financial supermarkets offering a huge assortment of financial products and services for sale. • Access to financial markets• Insurance • Home- and car-loans• Consumer credit• Investment advice

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Five Parts of the Financial System

5. Central Banks• Monitors financial Institutions • stabilizes the Economy

• Initiated by Monarchs to finance the wars• The govt. treasuries have evolved into the

modern central bank • control the availability of money and credit in

such a way as to ensure 1. low inflation, 2. high growth, and 3. the stability of the financial system.

• State Bank of Pakistan www.sbp.org.pk

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Summary

• Five Parts of the Financial System• Money• Financial Instruments• Financial Markets• Financial Institutions• Central Banks

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Upcoming Topics

• Five Core Principles of Money and Banking• Time has Value• Risk Requires Compensation• Information is the basis for decisions• Markets set prices and allocate resources• Stability improves welfare

• Financial System Promotes Economic Efficiency• Facilitate Payments• Channel Funds From Savers to Borrowers• Enable Risk Sharing

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Upcoming Topics

• Money• Characteristics of Money• Liquidity

• Payment system• Commodity vs. Fiat Money• Cheques• Other forms of payments

• Future of Money

• Measuring Money