Revision sheet: Finance Banking and Financial Markets

📋 Course Outline

1. Banks and Economic Growth
2. Financial Institution Types
3. Central Banks and Regulators
4. Money Supply and Aggregates
5. Digital and Virtual Money
6. Subprime Crisis and Credit Crunch
7. Financial Stability Institutions
8. Microfinance and Venture Capital
9. Business Plans and Strategy
10. Securities and Investment Funds
11. Derivatives and Market Expectations
12. International Finance and Disclosure

📖 1. Banks and Economic Growth

🔑 Key Concepts & Definitions

• Financial institution : Completes and facilitates monetary transactions such as loans, mortgages, and deposits.
• Gross domestic product : Measures the value of goods and services produced within an economy.
• Institution : A set of rules, enforcement characteristics, and behavioural norms that structures repeated human interaction.

📝 Essential Points

• Banks finance economic growth by transforming short-term deposits into long-term loans or investments that support people, companies, and governments.

📖 2. Financial Institution Types

★ Must-know

📌 Banks are for-profit institutions, whereas credit unions are not-for-profit institutions that distribute profits among their members.

• Community development financial institutions provide loans and assistance to underserved communities and low-income individuals.

Further detail

• Government lenders facilitate activities by providing guarantees, such as guaranteeing rent-related arrangements.

• Specialized lenders use primarily transaction-based and collateral-based credit assessment and are more flexible than high-street lenders.

💡 Memory Hook

For-profit banks versus member-owned credit unions

📖 3. Central Banks and Regulators

🔑 Key Concepts & Definitions

• Central bank : Governs the operations of commercial banks and credit unions and implements monetary policy by controlling money supply, interest rates, and liquidity.

★ Must-know

• The Federal Reserve System is the independent United States institution responsible for setting and enacting monetary policy, supervising financial institutions, and regulating them.

• The European Central Bank is one of the seven institutions of the European Union and the central bank for the entire eurozone.

Further detail

• The International Monetary Fund is a global organisation of 190 member countries that supports financial stability, monetary cooperation, sustainable growth, and prosperity.

📖 4. Money Supply and Aggregates

🔑 Key Concepts & Definitions

• Money supply : The total stock of money in circulation, including cash, coins, bank-account balances, and other highly liquid assets available to households and businesses.

★ Must-know

• Money functions as a medium of exchange, a measure of value, a means for lending and borrowing, and a store of purchasing power.

📐 Formula — The monetary aggregates are defined cumulatively as $M0=currency\ notes+coins+bank\ reserves$, $M1=M0+demand\ deposits$, $M2=M1+marketable\ securities+less\ liquid\ bank\ deposits$, $M3=M2+money\ market\ funds$, and $M4=M3+least\ liquid\ assets$.

Further detail

• In the eurozone, the money supply is measured using the monetary aggregates M1, M2, and M3.

💡 Memory Hook

M0 → M1 → M2 → M3 → M4

📖 5. Digital and Virtual Money

🔑 Key Concepts & Definitions

• Fiat currency : A national currency not pegged to a commodity such as gold or silver, whose value depends on public confidence in its government or central bank issuer.
• Cryptocurrency : A virtual currency that uses cryptography to validate transactions and record them on a blockchain or another distributed ledger.
• Blockchain : A decentralised, distributed public ledger that stores data in linked blocks across a network.

📝 Essential Points

• Electronic money is a digitally stored monetary value issued by licensed banks or electronic-money institutions and used as a digital alternative to cash.

• Digital currency is an umbrella term for regulated and unregulated money available purely in digital form, while cryptocurrency is one type of digital currency.

📖 6. Subprime Crisis and Credit Crunch

🔑 Key Concepts & Definitions

• Subprime mortgage : A high-risk home loan offered to a borrower with poor credit or insufficient ability to repay.
• Credit crunch : A situation in which loans become unavailable, difficult, or expensive for businesses and consumers, restricting economic activity.

★ Must-know

• The 2007 subprime crisis developed when low interest rates and abundant lending fuelled a housing boom, risky mortgages defaulted, the real-estate bubble burst, and financial markets suffered a massive sell-off.

• Lehman Brothers filed for bankruptcy on September 15, 2008, with $639 billion in assets and $619 billion in debt.

Further detail

• The 2007–2008 credit crunch was associated with easy credit, lax lending standards, increased subprime mortgages, and risky investor speculation in housing.

💡 Memory Hook

Cheap credit → risky mortgages → defaults → credit crunch

📖 7. Financial Stability Institutions

★ Must-know

• FTX, a centralised cryptocurrency exchange, filed for bankruptcy protection in the United States in 2022.

• The Financial Stability Board monitors the global financial system and makes recommendations to promote global financial stability.

Further detail

• Sam Bankman-Fried, FTX's founder and former CEO, was charged and convicted for stealing customer deposits and defrauding investors in November 2023.

• The Securities and Exchange Commission is an independent United States federal agency established under the Securities Exchange Act of 1934 and headed by a five-member Commission.

• The New York State Department of Financial Services regulates financial services and products in New York and works to safeguard firms and consumers against financial crime.

📖 8. Microfinance and Venture Capital

🔑 Key Concepts & Definitions

• Microfinance : Provides banking services, especially small working-capital loans, to low-income individuals without other access to financial services.
• Venture capital : Risk capital invested in start-ups and expanding small businesses with substantial growth and profit potential.

★ Must-know

📌 Microfinance aims to alleviate poverty through credit and financial training, whereas banks focus more on profitability and economic growth.

Further detail

📌 Business angels are wealthy individual investors, whereas venture capitalists are specialist institutions investing pooled funds.

💡 Memory Hook

Poverty alleviation versus rapid-growth financing

📖 9. Business Plans and Strategy

🔑 Key Concepts & Definitions

• Business plan : A written document describing a business's organisation, objectives, strategies, economic sector, market, and financial forecasts.

★ Must-know

• A business plan helps a firm obtain finance, plan how to reach its objectives, and communicate its project to banks, investors, and other stakeholders.

📌 SMART operational objectives must be specific, measurable, achievable, realistic and relevant, and time-specific.

Further detail

• STEEPLE analyses social, technological, economic, environmental, political, legal, and ethical factors affecting an organisation.

💡 Memory Hook

SMART objectives within a STEEPLE environment

📖 10. Securities and Investment Funds

🔑 Key Concepts & Definitions

• Bond : A debt security issued by a government or company that promises periodic interest payments and repayment of its face value on a specified date.
• Investment fund : Pools investors' capital and invests it collectively in financial instruments such as stocks, bonds, and securities.

★ Must-know

📌 Shares or equities give owners voting rights and participation in company policy decisions, whereas bonds give holders debt claims and interest payments without ownership rights.

Further detail

• The European Capital Markets Union aims to create a single market for capital, increase cross-border flows, and improve investment opportunities for consumers, investors, and companies.

📖 11. Derivatives and Market Expectations

🔑 Key Concepts & Definitions

• Derivative : A financial instrument whose value is derived from an underlying asset, commodity, or index through a contract between two parties.
• Spread betting : Speculation on the direction of a financial market without owning the underlying asset, often using leverage.

★ Must-know

📌 A bullish investor expects the price of a security or index to rise, whereas a bearish investor expects it to fall.

Further detail

• A bear market is a period in which securities in a key market index have fallen by at least 20%.

📖 12. International Finance and Disclosure

🔑 Key Concepts & Definitions

• Foreign exchange market : The global market where currencies are traded and their relative prices are determined.
• Financial disclosure : The act of making a company's financial information available to investors, banks, and other users so they can make informed decisions.

★ Must-know

• The foreign exchange market facilitates currency conversion, provides instruments for managing foreign-exchange risk, and allows investors to speculate on currency movements.

📌 The International Monetary System comprises money flows and governance institutions for currency and payment obligations, whereas the International Financial System comprises return-bearing assets, financial institutions, markets, and related transactions.

Further detail

• The three main foreign-exchange markets are the spot market, the forward market, and the futures market.

• The three common financial statements are the income statement, the balance sheet, and the statement of cash flows.

📊 Synthesis Tables

Types of Financial Institution

Institution	Main role	Distinctive feature
Bank	Deposits and loans	For-profit
Credit union	Savings products and loans	Not-for-profit and member-owned
Community development financial institution	Loans and assistance	Serves underserved communities
Central bank	Monetary policy and supervision	Regulates the banking system

Shares and Bonds

Feature	Shares	Bonds
Legal position	Ownership	Debt claim
Return	Variable value and possible gains	Interest and repayment of face value
Voting rights	Generally present	Absent
Issuer	Companies	Companies and governments