MONEY (BANK AND FINANCIAL
INSTITUTION)
Lecture
: Irvan Yoga Pardistya, SE., MM., Ak
By
:
Armike
Febtinugraini 1610631030049
ACCOUNTING
– A8
ECONOMIC
& BUSINESS FACULTY
SINGAPERBANGSA
KARAWANG UNIVERSITY
2017
PREFACE
Thankyou almighty God, who has given
His bless to the writer for finishing this assignment about bank and financial
institution. Thankyou for Mr. Irvan
Yoga Pardistya, SE., MM., Ak who given the writer the lesson of Money.Thankyou
for my parents who given the writer strong support.
Hopefully
we as a student in “State Singaperbangsa Karawang University” can work more
professional by using English as the second language whatever we done. Thank
you.
Armike
Febtinugraini
NPM : 1610631030049
NPM : 1610631030049
BANKING AND
FINANCIAL INSTITUSION
MONEY
1. Introduction
One of the great mysteries and
elegant features of the financial system in general and of the banking sector
in particular. Is the creation of of new money. The largerst component of the
money stock, bank deposits, is literally created by accounting entries, and the
amount created of the growth rate “allowed” is the territory marked by the
central bank whose main function is the implementation of monetary policy. The
latter expression means “a policy on money”
Why must there be a “policy on money”?
it is because it is a relationship between the growth rate in the money stock
and pice developments (the rate of inflation). This relationship is not even
debated any longer. (except by some diehards) and there is much evidence to
support the strong relationship, the latest being the rate of inflation (a few
quintilion million percent per annum, the highest in the history of the world)
in a particular African country that has resulted from the excessive creation
of money. (in this case government borrowwing from the banking sector and the
printing of bank notes). The highest denomination bank notes in this country
was ZWD 100 trillion (this was after 13 zero’s had already been lopped off the
currency).
What are the consequences of
inflation? The consequences are profound in terms of the destruction of
economic growth and employment when inflation is high.
The consequences of even slight
excesses in money growth (15–20%) can be severe, such as occurred in the developed world in 2007–2009. The cause (excessive
money stock growth) took place for a number of years prior to the consequences
being felt, and these consequences were inevitable to many who keep an eye on
world money growth.
What is too high money stock growth?
It is when money growth (which reflects additional demand for goods and
services) exceeds the country’s ability to satisfy the additional demand in
terms of production capacity (i.e. capacity, being “sticky”, cannot keep up
with rapidly rising demand). When this happens worldwide, balances of payments
become skewed, currencies become volatile and inflation occurs worldwide, as
evidenced in the increasing costs of transport and food.
The reaction of the central banks of
the world to this situation is to raise interest rates, and it is this that can
trigger large-scale defaulting on loans (particularly in the case of sub-prime
borrowers). This can lead to large-scale banking solvability issues and
government bailouts (as happened in 2007–2009).
What
underlies money growth? In the main it is bank loan growth, and banks are able
to create loans / credit at will to satisfy demand (and money as a
consequence), assuming the borrower is creditworthy / the project funded is
sound. This rests on the fact that the public generally accepts bank deposits
as the main means of payments / medium of exchange. The issue of
creditworthiness / project-soundness is critical: because some banks evidence
promiscuity in this regard, the banking system is inherently unstable. It is
the job of the central bank to ensure financial system stability and therefore
to curb the growth rate in bank loans / credit (and its counterpart money) and
this they do via the manipulation of interest rates. These critical issues are
the subject of this text, which we cover in the following sections:
·
What is money?
·
Measures of money.
·
Monetary banking institutions.
·
Money and its role.
·
Uniqueness of banks.
·
The cash reserve requirement.
·
Money creation does not start with a
bank receiving a deposit.
·
Money creation is not dependent on a cash
reserve requirement.
·
There is no such thing as a money
“supply”.
·
The money identity and the creation of
money.
·
Role of the central bank in money
creation.
·
How does a central bank maintain a bank
liquidity shortage?
2.
What
is Money?
What is money? Money is anything
that complies with the following criteria:
·
Medium of exchange.
·
Store of value.
·
Unit of account.
·
Standard of deferred payment.
The best example of the total
erosion of these criteria in a currency is the currency of the country referred
to earlier (with the highest inflation rate ever recorded). In 2009 the stage
was reached when the particular currency was no longer accepted as a medium of
exchange, a store of value, a unit of account or a standard of deferred
payment. The mediums of exchange in this country became the USD and the ZAR.
Inflation fell to low numbers almost instantaneouslyIt will be evident that of
the four criteria, medium of exchange is paramount, and the other criteria are
subordinated to this one. Consequently, we can think of money being anything
that is accepted as a means of payments / medium of exchange
So
what is the medium of exchange? It made up of two parts:
·
Bank notes (usually issued by the
central bank) and coins (usually issued by the central bank and in some cases by
government) (N&C).
·
Bank deposits (BD).
Bank notes and coins are well known
as a medium of exchange; we use them every day to make purchases and to repay
debts. However, bank deposits acting as a medium of exchange is often a little
confusing. Consider how many payments are made by bank cheques (diminishing
fast) and electronic funds transfers (EFTs). When an EFT payment is made (best
example = internet banking) the payer’s deposit account at the bank is debited
(made less by the amount) and the payee’s deposit account at the bank is
credited (added to). Similarly, a payment by cheque results in the cheque
writer’s deposit account being debited and the cheque receiver’s account being
credited (when s/he deposits the cheque of course).
Money is not the EFT or the cheque.
They are merely instruments that lead to the shifting of a deposit amount from
one bank account to another. The deposit is money, as is N&C. Thus the
total stock of money (M3 – see below) at a point in time is the total amount of
N&C and BD in the possession of individuals and companies:
M3
= N&C + BD.
The individuals and companies can be
called the “non-bank private sector” (NBPS11). This of course excludes money in
the possession of banks (= N&C), the foreign sector and government deposits.
Figure 1 endeavours to provide an image of “what is money?
3.
Measures
of money
We know that N&C can be used
immediately for payments. We also know that current / cheque account (and some
other) deposits can be used as such. We also know that other deposits can be
used as money after a short notice period, and so on.The central banks of the
world have developed many definitions of money, ranging from M0 to M4. In the
interests of pedagogy (overlook detail and stick with principles) we will use
the definition of money M3. This includes N&C all BD of the NBPS. We will
not be far off the mark in terms of liquidity because for the most part NBPS
bank deposits are short-term.
It is notable that in most developed
countries NBPS BD makes up 96–98% of M3 (and N&C the balance of course). In
some developing countries this number can be quite low, indicating a low
confidence level in respect of banks.
BIBLIOGRAPHY
Prof.
Dr. AP Faure, Banking : An Introduction, Quoin Institute, 2013, page 41-45
