Capital Markets Assignment Group Assignment Pham Dinh Duy 44337558Tran Viet Thanh Truc 44330243Nguyen Ngoc Anh 44364555Shwne Lei Po Po Maung 443238401 | P a g e
Question 1a:In general, deposit at banks is one type of money. When a loanis made to Mr A and it is used to pay to Mr B to buy a house, a new depositwith 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 depositaccount reduces by the amount of the loan, which is equal to the newlycreated money. Thus, money is destroyed as bank loan is destroyed. Question 1b:As discussed by McLeay, Radia & Thomas (2014b), “centralbank 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 ismostly held by households and companies, who are the main spending-decision-makers in the economy. In the RBA (2018)’s balance sheet as at 23May 2018, this item is “Australian notes on issue” in the “Liabilities” columnwith a value of $ 75,466 million. This is the total amount of bank notes ineconomy circulation. The second component is reserves held by commercialbanks with the central bank. In the balance sheet of RBA (2018), thesereserves are represented by “Exchange Settlement Balances”, which equal $27,951 million. The reason is that this item represents total deposits fromAustralian banks as explained in the “Notes” sheet of the RBA excel data. The“Deposits” item is not included in central bank money because they aredeposits from the government and other authorities, not commercial banks.Question 1c: (Source: RBA Statistical TableD3 Monetary Aggregates)2 | P a g e$ billionCurrency73.1Current deposits with banks279.3Certificates of deposit issued by banks198.6Term deposits with banks581.3Other deposits with banks891.9Deposits with non-bank ADIs36.4M32060.6
Question 1d:In Basel III, amounts of different components of capital aspercentages of risk-weighted assets (RWA) that banks must keep in theirbalance sheets are clearly specified (BIS 2011). All instruments to becategorised in the CET1, Tier 1 or Tier 2 Capital share the samecharacteristics of having high costs of funding because they are all high-riskinstruments. To maintain the profit, banks have to raise lending cost, resultingin restriction in lending because at higher cost less consumers would want toborrow. Slovik & Cournède (2011) pointed out that in OECD economies loanrate increases by around 14.4% for every 1% increase in the capital ratio.