Capital-Market-Assignment .docx - Capital Markets Assignment Group Assignment Pham Dinh Duy 44337558 Tran Viet Thanh Truc 44330243 Nguyen Ngoc Anh

Capital-Market-Assignment .docx - Capital Markets...

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Capital Markets Assignment Group Assignment Pham Dinh Duy 44337558 Tran Viet Thanh Truc 44330243 Nguyen Ngoc Anh 44364555 Shwne Lei Po Po Maung 44323840 1 | P a g e
Question 1a: In general, deposit at banks is one type of money. When a loan is made to Mr A and it is used to pay to Mr B to buy a house, a new deposit with the same amount of the loan will be created in the Mr B’s deposit account (as shown in figure below), and that leads to money creation. Figure 1. Balance sheets of the house buyer and seller before and after loan is made (Source: McLeay, Radia & Thomas 2014a) However, when Mr B uses the deposit to pay off his existing loan, his deposit account reduces by the amount of the loan, which is equal to the newly created money. Thus, money is destroyed as bank loan is destroyed. Question 1b : As discussed by McLeay, Radia & Thomas (2014b), “central bank money” includes currency and reserves with central bank, which are “promises to pay” from the central bank to other groups in the economy. Currency consists of bank notes (around 94%) and coins. This component is mostly held by households and companies, who are the main spending- decision-makers in the economy. In the RBA (2018)’s balance sheet as at 23 May 2018, this item is “Australian notes on issue” in the “Liabilities” column with a value of $ 75,466 million. This is the total amount of bank notes in economy circulation. The second component is reserves held by commercial banks with the central bank. In the balance sheet of RBA (2018), these reserves are represented by “Exchange Settlement Balances”, which equal $ 27,951 million. The reason is that this item represents total deposits from Australian banks as explained in the “Notes” sheet of the RBA excel data. The “Deposits” item is not included in central bank money because they are deposits from the government and other authorities, not commercial banks. Question 1c: ( Source: RBA Statistical Table D3 Monetary Aggregates) 2 | P a g e $ billion Currency 73.1 Current deposits with banks 279.3 Certificates of deposit issued by banks 198.6 Term deposits with banks 581.3 Other deposits with banks 891.9 Deposits with non-bank ADIs 36.4 M3 2060.6
Question 1d: In Basel III, amounts of different components of capital as percentages of risk-weighted assets (RWA) that banks must keep in their balance sheets are clearly specified (BIS 2011). All instruments to be categorised in the CET1, Tier 1 or Tier 2 Capital share the same characteristics of having high costs of funding because they are all high-risk instruments. To maintain the profit, banks have to raise lending cost, resulting in restriction in lending because at higher cost less consumers would want to borrow. Slovik & Cournède (2011) pointed out that in OECD economies loan rate increases by around 14.4% for every 1% increase in the capital ratio.

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