Topic 1 Recap - FINS 5550 / FINS 3650 International Banking...

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FINS 5550 / FINS 3650 — International Banking Recap — Introduction to International Banking Consider this recap a bit of a treat, in that you should be able to have written this recap on your own. In later weeks, as we delve deeper into the workings of international banking, your recap should include more and more details drawn from the required readings and any other materials where your curiosity might draw you. So this is my gift to you. In future weeks, the recap will be your gift to yourself. And perhaps to your classmates, for if you post your recap, you stand to earn class-participation marks. Legend ± — Cite included for the purpose of crediting authors with their work. ² — Could be a really interesting source, but most likely of interest only to those interested in pursuing the topic, either because of intellectual curiosity, or because one’s paper is on the topic. ²² — Generally applicable to course requirements, but don’t memorise it! ²²² — Essential material, either because of its topic matter or its insight. Maybe you SHOULD memorise it. Topic 1 — The Genius of Banking One would have thought that banks were there with Adam and Even in the Garden of Eden, living in paradise, naked and unfettered. Whereas Adam and Eve were cast out of the Garden, the punishment for the poor banks was to be saddled with regulation. And ever since it’s been red tape keeping the banks from running free. NOT. Banks are and always have been creatures of regulation. A banking licence constitutes membership in an elite club, the special privileges of which the banks use to make enormous sums of money. In particular, a bank can take deposits without the disclosure and registration requirements that would apply to, say, a BHP if it were to borrow money from individuals. The licence means that individuals who lend (deposit) their money to the bank can treat that claim as if it were cash — “money in the bank”, or at the very least, “M2 in the bank”. This gives banks a role in the money creation process, and in fact banks are needed to perform this function, transmitting monetary policy to the real economy. But monetary policy isn’t what bank managers think about in their spare time. Instead, they focus on taking as many deposits as they can. As PIMCO’s Paul McCulley puts it: The essence, or the genius of banking, not just now, the last century or the century before that, but since time immemorial, is that the public’s ex-ante demand for assets that trade on demand at par is greater than the public’s ex-post demand for these types of assets. The only problem with funding a bank lending book with deposits is what happens if all the depositors wake up one day and want their money back. McCulley continues:
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Topic 1 Recap and Post-Lecture Readings FINS XX50 — International Banking 2 A second principle: A banking system is solvent only if it is believed by
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This note was uploaded on 09/19/2011 for the course FINS 3650 taught by Professor Arnold during the Three '11 term at University of New South Wales.

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Topic 1 Recap - FINS 5550 / FINS 3650 International Banking...

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