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Financial Systems

Financial Systems. Generalizations. The Four Institutions. The Ministry of Finance (MOF) The Central Bank (CENT BANK) The Commercial Banks (COMMBANK) The General Public (Public). Ministry of Finance. Manages government budget (B = G – T) Collects taxes

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Financial Systems

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  1. Financial Systems Generalizations

  2. The Four Institutions • The Ministry of Finance (MOF) • The Central Bank (CENT BANK) • The Commercial Banks (COMMBANK) • The General Public (Public)

  3. Ministry of Finance • Manages government budget (B = G – T) • Collects taxes • Sells bonds to the central bank, commercial banks, general public (borrows)

  4. Central Bank • Issues currency • Regulates commercial banks • Manages reserve deposits (R) and enforces reserve/deposit ratio (R/D) • Lends to government (purchases MOF bonds)

  5. Commercial Banks • Lend to general public • Lend to the government (purchase bonds) • Manage general public deposits (D) • Manage reserve to deposit ratio (R/D)

  6. General Public: businesses households, individuals • Hold the money supply (M = C + D) • Manage financial portfolios • Lend to government • Manage currency/deposit ratio (C/D) • Create & produce the GDP

  7. What is Money? • Monetary base: H = C + R • Stock of money: M = C + D • Stock of money vs. flow of income

  8. R/D • Required by the central bank • Desired by the commercial banks • Liquid backing for deposits • Fractional: R/D = 0.2 (My assumption)

  9. C/D • Desired by the general public • Dependent on ratio of expenditures normally financed with currency & those financed with check/electronic transfer funds.

  10. Bottom Line • A nation’s money supply depends on H, R/D & C/D • The central bank determines H • The central bank & commercial banks determine R/D • The general public determines C/D

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