Money and Banking

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Money and Banking

• Professor Chris Adam
• Australian Graduate School of Management
• University of Sydney and University of New South
  Wales

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INTRODUCTION

• What is money?
• What are the forms of money?
• How does banking work?
• How does the government influence money?

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MEANING OF MONEY

• Money is set of assets used in economy to buy
  goods and services from people
• Three functions of money
• 1. Medium of exchange
• Universally accepted for exchange
• Can be used to pay taxes

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MEANING OF MONEY

• Three functions of money
• 2. Unit of account
• Yardstick of measuring value
• 3. Store of value
• Transfer purchasing power from present to future
• Concept of liquidity ease of converting asset
  into medium of exchange

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KINDS OF MONEY

• Commodity money has intrinsic value
• Gold standard
• Cigarettes
• Fiat money has value established by decree
• Economic conditions can induce people to
  substitute first for second

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MONEY IN ECONOMY

• Money supply as circulating volume of purchasing
  power
• Basic type as currency notes and coins in hands
  of public
• Includes EFTPOS (debit cards)
• Also called money base or high powered money

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MONEY IN ECONOMY

• Broader definitions (M1, M2, etc.,) include
• cheque accounts
• savings accounts
• time deposits (Certificates of Deposit)
• deposits in non-bank financial intermediaries
• Credit cards are means of deferring payment not
  part of current money supply

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AUSTRALIAN MONETARY AGGREGATES CHANGES
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AUSTRALIAN MONEY AND CREDIT CHANGES
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RESERVE BANK OF AUSTRALIA

• RBA is Australian central bank
• Created in 1959 from Commonwealth Bank
• Established to manage financial system stability
  for good of economy
• Policy maker for banking system and money supply
  functions
• RBA Board as guide to RBA Governor

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RESERVE BANK OF AUSTRALIA

• RBA functions
• 1. Originally to monitor bank financial
  conditions and recommend actions to keep solvent
  prudential supervision
• Now with APRA
• 2. Guarantor of banking system stability but not
  lender of last resort
• Operates cheque clearance process

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RESERVE BANK OF AUSTRALIA

• RBA functions
• 3. Monetary policy design and implementation, to
  influence growth rate of economy and inflation
• Through open-market operations

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BANKS AND MONEY SUPPLY

• Bank balance sheet model to demonstrate credit
  creation with 100 reserves
• no credit creation!
• Bank balance sheet model to demonstrate credit
  creation with frational reserves
• Allows creation of credit
• Money multiplier

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AUSTRALIAN BANK INTEREST SPREADS
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AUSTRALIAN BANK FEE INCOME
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AUSTRALIAN BANK EQUITY RETURNS
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AUSTRALIAN MONETARY POLICY

• RBA uses changes to cash rate to adjust level of
  interest rates in economy
• overnight loans among intermediaries
• shifts base of yield curve
• Open-market operations to adjust to excess supply
  or demand of overnight funds
• buying and selling government securities from own
  portfolio

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AUSTRALIAN CASH RATE
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AUSTRALIAN INTEREST RATES
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AUSTRALIAN MONETARY POLICY

• RBA also oversees reserve requirements for banks
• Basel Agreement Tier 1 and Tier 2 reserves held
  against assets with appropriate risk classes
• Problems for RBA in monetary policy
• Household deposits at banks are discretionary
• Bank lending as decisions of banks
• Confidence in banks role of bank runs

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AUSTRALIAN CREDIT AND GDP CHANGES