Financial System Overview

1
Financial System Overview
2
Introduction toEconomic Environment

• Economic System
• Financial System
• Banking System

3
Goals of Economic System

• 1. Economic Growth
• 2. Price Stable
• 3. Full Employment
• 4. Low Inflation
• 5. Balance of Payment

4
Goals of Financial System

• 1. Economic Growth
• 2. Price Stable
• 3. Full Employment
• 4. Low Inflation
• 5. Balance of Payment

5
Goals of Banking System

• 1. Economic Growth
• 2. Price Stable
• 3. Full Employment
• 4. Low Inflation
• 5. Balance of Payment

6
Criteria of a Well-FunctioningFinancial System

• 1. High Densely Financial Intermediaries
• 2. Sufficient Financial Instruments
• 3. Accessible Financial Markets

7
Factors to the Development of Financial System

• Rise of large middle class of income earners
• Grasp of financial knowledge
• Rapid technological development
• Economies of scale and scope in the production
  and distribution of financial products
• Increasingly divisibility in denominations of
  financial claims that inaccessible to many
  savers
• Keen competition on financial markets and banking
  business
• Presence of information asymmetries that benefit
  surplus and deficit units
• Regulations make financial system less risky
• Unification of global economy (global markets)

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Economic Units

• 1. Economic Surplus Units -- Savers
• Governments
• Businesses
• Individuals
• 2. Economic Deficit Units -- Borrowers
• Governments
• Businesses
• Individuals

9
Financial Links of Economic Units

• Direct Financing
• Savers ----------gtCash-------------gtBorrowers
  lt--------- Claimslt----------
• Indirect Financing
• Savers --gt Financial Institutions--gtBorrowers
  Cash--gt --gtClaims Cashlt--
  --ltClaims

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Criteria of Financial Links

• 1. Liquidity Costs
• 2. Price Risk
• 3. Transaction / Monitoring Costs
• 4. Maturity

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Hong Kong -- the Worlds Major Financial Center
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Why Hong Kong is Treated as One of the Worlds
Leading Financial Center?

• Number of Foreign Financial Institutions
• Establishment of Financial Markets
• Diversification of Financial Instruments
• Off-shore and Domestic Financial Activities
• Retail and Wholesale Operations

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Basic Factors for aWell-functioningFinancial
Center

• Internal Factors
• External Factors

14
Internal Factors

• 1. Political Social Stability
• 2. Economy Freedom
• 3. Sound Legal System
• 4. Efficient Responsible Government
• 5. Low Tax Rate
• 6. Modernized Infrastructure
• 7. Information Free-flow
• 8.Sufficient High-Tech Human
  Resources Support

15
External Factors

• 1. Geographical Location / Time Zone
  Convenience
• 2. China Connection
• 3. Global (Asian) Economic Growth
• 4. Globalization Financial Activities and
  Innovations

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Financial Resources

• - Money Cash on Hand and Cash in Bank
• - Capital / Wealth
• - Income
• - Funds
• - Credit

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Concept of Money (Cash)

• 1. Nature of Money
• Legal Tender
• Safe and convenient
• Purchasing Power -- Liquidity
• Value in Exchange
• Portable
• Divisible
• Homogeneous and recognizable

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Concept of Money (Contd)

• 2. Function of Money
• Medium of Exchange
• Store of Wealth
• Unit of measurement
• Standard for deferred Payments

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Concept of Money

• 3. Types of Money
• Primary Money -- Notes and Coins, and the
  operational balance of commercial banks placed
  with the central bank
• Secondary Money -- Claims of primary money
  against the commercial banks
• Substitute Money
• Near Money -- Investment Securities
• Plastic Money and Invisible Money

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• Types of Money (by Stock)
• 1. Narrow Money -- LIQUIDITY
  Transaction-oriented financial asset
• 2. Broad Money -- Liquid plus near liquid
  plus savings-oriented assets and other types
  of financial assets

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Motives of Holding Money

• 1. Transaction Motives
• 2. Opportunity Motives
• 3. Precautionary Motives

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Issues of Money

• 1. Demand for Money
• for hold
• to spend
• 2. Money Supply
• M1 -- notes and coins, plus DDA in Banks
• M2 -- M1 plus Savings and Time Deposits in
  Banks
• M3 -- M2 plus all deposits in non-bank FI and
  CDs issued by these FI

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• M0 Currency
• M1 M0 Demand Deposits in Commercial Bank
• M2 M1 All Deposits in Commercial Banks
• M3 M2 All Deposits in Other Financial
  Institutions NCDs

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Issues of Money

• 3. Value of Money
• change in the value of money refer to a change
  in the general level of prices
• value of money changes inversely to changes in
  the general level of prices
• 4. Money and Inflation
• excess of money supply
• excess demand for loans
• excess of government spending
• higher wages
• excess of import

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Monetary Policy

• Reasons
• The rate of money supply growth significantly
  affects other major economic variables -- rate of
  inflation, level of interest rates, aggregate
  demand in the economy.
• This will affect the major goals of the financial
  system and the economic system.
• Closed surveillance and monitor of the money
  supply growth is needed.

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Monetary Policy

• Organization
• Central Bank
• US Federal Reserve Bank
• UK Bank of England
• China Peoples Bank of China
• Hong Kong Monetary Authority
• Foreign Exchange Funds

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Objectives of Monetary Policy

• 1. To maintain the stability of HK Dollar
• 2. To strengthen the creditability of
  monetary policy
• 3. To prevent any conflict with other
  government policies

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Monetary Management

• 1. Management Methods - Monetary Rule
• a. Linked Exchange Rate b.
  Exchange Funds
• - Discretionary Management
• a. Accounting Arrangement
• b. Exchange Fund Bills and Notes
  c. Liquidity Adjustment Facility

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• 2. The Scope of Political Non-intervention System
  
• 3. HKMA as the provider of overdraft facility
  to HKSAR
• 4. No Exchange Controls

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Factors to Cause the Changesin the Money Supply
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Factors to Cause the Changesin the Money Supply

• 1. Bank Lending to the General Public
• 2. Sources of Funding the Government
  Borrowing Requirement
• 3. Changes in Government Deposits with Banks
• 4. Increase in Interest Rate
• 5. Balance of Payment Surplus and Capital Flows
• 6. Defense of the Exchange Rate

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Functions of HKMA

• 1. Acts as Settlement Institution
• 2. Continues to Operate the Central Money
  Markets Unit System with the funds transfer
  system
• 3.Monitors the Payment Flows and Provides
  Liquidity
• 4. Performs a Direct Role in Overseeing the
  Operations of HKs Inter-bank payment system

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Duties of HKMA

• 1. Setting Monetary Policy
• 2. Supervising Banking System
• 3. Monitoring Payments System
• 4. Imposing Liquidity Adjustment Facilities