Transcript AK/ECON 3430 3.0 A Money, Banking and Finance A Fall 2006

AP/ECON 3430 3.0 A
MONETARY ECONOMICS I: FINANCIAL
MARKETS AND INSTITUTIONS
Fall 2016
Topic 2A: Financial System
Course Director:
Prof. Brenda Spotton Visano
© Brenda Spotton Visano 2016
Agenda
Part 2A:
• Introduction to
– Function of Financial Systems
– Structure of the Financial System: Comparison of
Canadian and Chinese Financial Systems
• Principles Guiding the Design and
Operation of the Financial System
– Core Principles of Western Financial Systems
– Core Principles of Islamic Banking
© Brenda Spotton Visano 2016
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Functions of the Financial
System
• What does the industry produce?
Financial services (payments, credit,
advice, risk management)
• Why? To facilitate the transfer of
purchasing power from savers/lenders to
spenders/borrowers
• Potential Benefits? Better allocation of
productive resources within and across
time
© Brenda Spotton Visano 2016
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Constituent Elements
• Financial Instruments
– Cash, bank account balances, loans, stocks,
fixed income securities (bonds), derivatives
• Financial Markets
– direct “matching” of savers/lenders with
spenders/borrowers (NASDAQ, TSX, NYSE,
Shanghai SE)
• Financial Institutions (FIs)
– As Intermediaries, FIs indirectly match
savers/lenders with spenders/borrowers
© Brenda Spotton Visano 2016
4
Setting up Financial Markets
and Institutions
• Who should own what?
– Public ownership: the state on behalf of
everyone?
– Private ownership: Individuals? In private
family trusts or publicly available to all via
open trading?
© Brenda Spotton Visano 2016
5
How Canada and China are
answering these
foundational questions
© Brenda Spotton Visano 2016
6
FINANCIAL SYSTEM
FINANCIAL SERVICES
INDUSTRY
Direct Finance/
Markets
- stock market
(market cap of listed
domestic companies)
- bond/fixed income
market
Central Bank
CANADA
CHINA*
% of GDP
(concentration)
Ownership
% of GDP
Ownership
500%+
Private with
some Public
232%*
Public with
some Private
103%#
Joint-stock
75%#
State owned
115%+
XXX
41%*
XXX
Not applicable
Bank of Canada:
State-owned
Not
applicable
People’s Bank
of China
State-owned
(excluding direct
finance)
© Brenda Spotton Visano 2016
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FINANCIAL
SYSTEM
Indirect Finance /
Institutions
Deposit/retail
banks assets
CANADA
CHINA*
% of GDP
(concentration)
Ownership
% of GDP
Ownership
133%#
Joint-stock
128%#
State-owned
BOC, ABC, CCB,
ICBC
RB, CIBC, BMO, TDCT, BNS, BN hold 90%
of assets
Top 10 firms (27%
AUM) under
control of Big 6
Securities firms/
investment banks
Pension funds
CPP: state-owned
 13% CPP
Private: Plan
 65% Private
Members
Pension Plans
State-owned but
under reform
(50% with Big 8)
Insurance
companies
38%
Joint-stock
© Brenda Spotton Visano 2016
14%
Joint-stock
8
Core Principles
• What principles should guide design?
– Does it matter if there is a concentration of
wealth?
– Do private markets work “better” than states
to direct resource allocation?
– If you have surplus funds, should I pay you to
use them when I need them?
• Who should decide the principles of operation?
– The state on behalf of everyone?
– Individuals with the freedom to do as they want?
© Brenda Spotton Visano 2016
9
Comparison of Western
and Islamic Core Principles
of Finance
© Brenda Spotton Visano 2016
10
Western Finance
• Time has Value
• Risk requires
Compensation
• Information is the
basis for decisions
• Markets determine
prices and resource
allocation
• Stability improves
welfare
Islamic Finance
• Equitable distribution
and access to wealth
• Consistent with tenets
of Islam
– Avoid riba (interest)
– Avoid gharar (risk,
speculation)
– Avoid haram
(prohibited activities:
gambling, pork and
alcohol consumption)
© Brenda Spotton Visano 2016
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