Money and the Economy

Money competes with other assets.

Tangible assets are lasting physical objects.

Financial assets are claims to immediate or future cash payments (bank deposits, bonds,
shares of stocks)

Assets are what individuals, firms, and other participants in the economy own.

People hold their wealth in various assets depending on the needs and rewards (rates of return)

Money and the Financial System:

Money is transferred from savers to borrowers.
Financial Institutions act as intermediaries in transferring money from savers to borrowers.
Financial Institutions charge intermediation fee (interest rate or brokers commission, trust fee,
etc.) for the transaction.
Financial Intermediation Process

Savers

Financial

Borrowers

Institutions

Households

Banks

Households

Firms

Stockbrokers

Firms

Government

Mutual Fund
Cos.

Government

Trust Cos.

Services Provided by the Financial System

Risk Sharing
Hold several assets/Create a Portfolio
Diversification
Liquidity
A particular asset can be exchanged for other assets or for goods and services
Information
Gathering of information
Communication of information

Bank Intermediation Products:

Traditional Deposits:
Current Account (CA):
A deposit account for the purpose of quickly providing access to funds anytime.
Because of convenience, CAs do not normally bear interest.
Withdrawing of funds via writing of checks
Savings Deposits (SA):
Depositors set aside a portion of their liquid funds and earn interest.
Withdrawing of funds via ATM sites or thru a bank branch
Time Deposits (TD):
A deposit that has a specific maturity date.
Withdrawal can be done at maturity date.
Securities:
Private and Government Securities

Financial Intermediation

Funding

Treasury

Interest Rates:

Compensation to the lender for allowing the use of funds.

The fee paid by the borrower for the privilege of using the funds.

Reserve Requirement:

Lending

a bank regulation that sets the minimum reserves each bank must hold to customer
deposits.
designed to satisfy withdrawal demands of clients.
normally in the form of currency stored/deposited with a central bank and/or
investments in government securities

Basic Formula:
Nominal Rate
--------------------------------(1-Reserve Requirement)

Formula Including Earnings on Reserves:

Nominal Rate Earnings on Reserves

--------------------------------------------------(1-Reserve Requirement)

Reserve Requirement for Commercial Banks and Universal Banks:

Statutory/Legal Reserves
Liquidity Reserves

:
:

8.00%
11.00%
---------19.00%

Reserve Cost Computation

Illustration:
Nominal Cost
Reserve Requirement

:
:

5.00%
19.00%

5.00%
-------------(1 19 .00%)

6.17283951% or 6.17%
Transfer Pool Funds

Reservoir of excess funds from any surplus units of the Bank

Serves as the source of funds from deficient units around the Bank
Price attached to it is the Transfer Pool Rate (TPR)

Transfer Pool Rates (TPR)

Price attached to the reservoir/pool of excess funds from any surplus units of the Bank
Surplus Units earn interest at TPR as if it were another asset/outlet
Deficient Units borrow from the pool at TPR

Transfer Pricing:

Removes market risk exposure from Business Units.

Provides business units with consistent and predictable spreads.
Promotes Management accountability