AFIN837_Group_Assignment_Final.edited.pdf - AFIN837 Capital Markets Group Assignment Semester One 2018 Tim Acheson(43269478 Yang Liu(44308051 Anders

AFIN837_Group_Assignment_Final.edited.pdf - AFIN837 Capital...

This preview shows page 1 - 4 out of 13 pages.

AFIN837 Capital Markets Group Assignment Semester One 2018 Tim Acheson (43269478) Yang Liu (44308051) Anders Lundberg (44363265) Shaui Shao (43619053) 08Fall
2Question 1a: According to McLeay, Radia, and Thomas (2014), money is created when the $1 million mortgage is approved as the bank credits the borrower's bank account with a deposit of the size of the mortgage. It increases the commercial bank’s balance sheet. While money is destroyed when the $1 million mortgage is repaid. The bank destroys newly created money by reducing the amount of deposits in the borrower’s account by the value of the mortgage. Question 1b:As defined by the RBA, central bank money, also known as the monetary base, are the holdings of notes and coins by the private sector plus deposits of banks with the reserve bank and other reserve bank liabilities to the private non-bank sector (Reserve bank of Australia, 2018). According to the RBA balance sheet, the Capital and Reserve Bank Reserve Fund is part of the money base. It is a saving account that is held by financial institutions to meet future obligations and to facilitate the transactions and settlement of payment. Australian notes on issue are the physical notes and coins that created by the central bank, which is the currency in circulation. Hence, it is central bank money. Compared to transforming physical cash between accounts of counterparties, commercial banks hold accounts with the central bank where they deposit cash. When interbank transactions occur, it can be settled by transferring between exchange settlement accounts. Hence, exchange settlement balances are part of the central bank money (Contrarian Investors Journal, 2008). According to the definition of money base, deposits on the liability side of the balance sheet are also part of the central bank money. Question 1c:What makes up M3 Component Amount ($ in billions) Currency Current deposits with banks Certificates of deposit issued by banks Term deposit with banks Other deposit with banks Deposit with non-bank ADIs 73.1 279.3 198.6 581.3 891.9 36.4 M3 2060.6
3M3 that created by commercial banks = Current deposit with banks + certificate of deposit issued by banks + term deposit with banks + other deposit with banks = 279.3 +198.6 + 581.3 + 891.9 = 1951.1 Proportion created by commercial bank = 1951.1 / 2060.6 = 94.69% Question 1d:Basel 3 protects banks from large loan losses by restricting the amount of money creation that banks can do as well as increasing the capital buffer and improving the quality of capital assets (Vine and Gray, 2010). Improve capital ratio requirement: After suffering the economic recession as a result of GFC, banks need to rebuild their capital structures by retaining earnings and raising new capital. Basel 3 is strengthening Tier 1 capital from 2% to 4.5%, and the total Tier 1 ratio is increased from 4% to 6%. While the total capital ratio held must be at least 8% of the total regulatory capital. By doing so, BIS improves the quality of bank capital (Brenk, 2012). In terms of the capital conservation buffer, banks need to hold an additional 2.5% above the capital buffer during periods without financial

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture