central banking and capital markets

8/6/2019 Central Banking and Capital Markets

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Prof. Junnell E. Guia


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The Fed supplies many of the

basic financial services upon which

the economy depends.

It distributes currency and coins to

depository institution to meet the

publics need for money.

It also operates an electronic

payment delivery system called

Automated Clearinghouse, which

processes electronically originated

credit and debit transfers for

participating institutions nationwide.


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New York Fed conducts open market operations to implement the FOMCs policy

directive, it purchases or sells government securities in the open markets, in the form of

the following:


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In a typical repo transaction, adealer puts up liquid securities as

collateral against a cash loan

while agreeing to repurchase the

same securities at a future date

at a higher price that reflects

financing costs.


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- includes the European Central Bank and the national central banks of the

European Union members.

The Eurosystem has set maintaining price stability as its primary objective and

its tasks include the following:

ECBs capital is 5 billion euro.


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Bank of England is the central bank in Great Britain.

The BOEs Monetary Policy Committee (MPC) makes

decisions on interest rates at its monthly meetings, and its

objectives are to ensure price stability and to support

growth.

Bank of Japan is the central bank in Japan.

The mission of the Bank of Japan are similar to those of

other central banks: to maintain price stability and to

ensure an orderly financial systems.


8/15

Prof. Junnell E. Guia


9/15

Traditionally, banks have played several key roles in the economy.

In their intermediation role, banks transform client savings into credit for

businesses and individuals.

As payor, banks made payments for goods and services on behalf of

their customers.

In their guarantor role, banks provide guarantees of customers debts

and obligations.

Banks act as agents on behalf of their customer to manage and

protect their property or to issue and redeem their securities.

Furthermore, banks play an important policy role in that they serve

as q conduit for the Feds monetary policy action to maintain price

stability and sustain economic growth.


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The trends in thebanking sector

The implicationsof the financialmodernization

legislation

Bank reserverequirements and

capitalrequirements

The use oftechnology

banking

The main risksbanks face andhow they manageeach type of risk

The objectives of this chapter are to provide an understanding of:


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Independent Banks

- is a bank that doesntoperate under the control

of a multibank holding

company.

Bank Holding Companies

- owns and managessubsidiary firms. The

holding company is theparent organization, andoperating entities are the

subsidiaries.


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Small bank holding companieshas a total consolidated assets of

less than $150 million.

Large bank holding companiesare: (1) holding companies withtotal consolidated asset of $150million or more; and (2) multibankholding companies, regardless ofsize, that debt outstanding to the

general public.

Top Bank Holding Companies

Name Headquarter State Total Assets ($ billion)

Citigroup NY 1,057

JP Morgan Chase NY 712

Bank of America NC 619

Wachiova NC 319

Wells Fargo CA 311

Banc One IL 262

Taunus Corporation NY 225

FleetBoston MA 192

ABN Amro North America IL 174

US Bancorp MN 164


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Bank holding company can acquire a bank in any state.

The bank holding company must pass the review by the

Federal Reserve Board of Governors.

Citibank

JP Morgan Chase

Bank of America

Bank of New York

Some banks who have gone global:


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Mergers and Acquisitions among banks and financial services companies occur.

Megamerger is a merger between

banks with assets of more than $1

billion.

Supermegamerger is a merger

between banks with assets of more than

$100 billion each.

Citicorp-Travelers

BankAmerica-NationsBank Banc One-First Cargo Norwest-Well Fargo Chase Manhattan-JP Morgan


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Ph

one Centers

AutomaticT

eller Mach

ines(ATM)

Personal

Computers

InternetBanking

MobileBanking

Advances in information and technology have had tremendous impacts on banking,

but larger financial institutions can use any of the new tools of financial engineering

more efficiently. Some of the methods are:

Financial Engineering is the design of new financial instruments, such as derivative

contracts using sophisticated mathematical and statistical models and computer

technology.

central banking and capital markets

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