Banks And Financial Intermediation
Banks and Financial
Intermediation
Lecture Outline
Background to Banking
Central Banks
Target 2
International Money and Banking: The FED and ECB.
Banking Crises and their Consequences
Banking Regulation
Why start with banks?
Banks play a key role in the financial system and in the economy.
And, as we will see, monetary policy works largely through the influence that it has on the banking system. The banking sector played a key role in the financial market turmoil that generated the severe global recession of 2008-2009.
Banking problems have also played a key role in the economic problems that continue to afflict the
Euro area.
So, we will start by explaining how banks emerged, how they work and the important role they play in the economy.
Some History: Early Banking
Once coin and paper money replaced barter (more on this later) the question arose of where people stored their money.
You could keep it all at home (perhaps under the mattress) but this would not be very safe.
Banks began as safe depositories for cash: You had your own separate locker in the bank’s vaults for your cash.
And you could go to the bank when you needed to get out your cash.
But why waste your time going yourself? Why not pay your bills with a special piece of paper (clearly identifiable as coming from you) that says the
◦ bearer is entitled to payment of cash from your account?
And so the cheque was born!
After a while, most people that you were paying with a cheque weren’t exchanging it for cash but instead instructing the bank to move cash from your locker to theirs.
History: Bank Clearing House
• Suppose Bank A’s depositors look to have their accounts credited by €10 million by presenting cheques from Bank
B’s depositors. At the same time, Bank B’s depositors look to be credited €9 million from Bank A depositors.
• Solution?
• We could send €19 million in cash around town to the various vaults.
• But the couriers could get held up by
Intermediation
Lecture Outline
Background to Banking
Central Banks
Target 2
International Money and Banking: The FED and ECB.
Banking Crises and their Consequences
Banking Regulation
Why start with banks?
Banks play a key role in the financial system and in the economy.
And, as we will see, monetary policy works largely through the influence that it has on the banking system. The banking sector played a key role in the financial market turmoil that generated the severe global recession of 2008-2009.
Banking problems have also played a key role in the economic problems that continue to afflict the
Euro area.
So, we will start by explaining how banks emerged, how they work and the important role they play in the economy.
Some History: Early Banking
Once coin and paper money replaced barter (more on this later) the question arose of where people stored their money.
You could keep it all at home (perhaps under the mattress) but this would not be very safe.
Banks began as safe depositories for cash: You had your own separate locker in the bank’s vaults for your cash.
And you could go to the bank when you needed to get out your cash.
But why waste your time going yourself? Why not pay your bills with a special piece of paper (clearly identifiable as coming from you) that says the
◦ bearer is entitled to payment of cash from your account?
And so the cheque was born!
After a while, most people that you were paying with a cheque weren’t exchanging it for cash but instead instructing the bank to move cash from your locker to theirs.
History: Bank Clearing House
• Suppose Bank A’s depositors look to have their accounts credited by €10 million by presenting cheques from Bank
B’s depositors. At the same time, Bank B’s depositors look to be credited €9 million from Bank A depositors.
• Solution?
• We could send €19 million in cash around town to the various vaults.
• But the couriers could get held up by