Chapter 1.

Introduction to
the Financial System

The Financial System - Evolution since Bretton

Woods (I)

1)TheagreementreachedatBrettonWoodsattheendoftheSecondWorld
War:
gavebirthtotheIMFandtheWorldBank
establishedthegolddollarparity
fosteredfreetradeanddiscardedprotectionism

2)USeconomicimbalancesattheendofthe60smeanttheendofBretton
Woods:
Floatingexchangerateswereintroduced
Theriskassociatedtofloatingratesandmoreglobalcapitalmarketsledtoa
higherdegreeoffinancialinnovation:hedgingproductsandderivatives

3)Firstdecadeofthe21stcentury:

HighdeficitintheUSBalanceofPayments
TheEurowaslaunchedinJanuary2002
Chinamaintainedadepreciatedyuantofavourexportsandbuildupreserves,
mostlyaimedatfinancingtheUSeconomy

The Financial System - Evolution since Bretton

Woods (II)
LowinterestratesandhighforeigninvestmentinflowscontributedtotheUSreal
estateboom,whichledtothe2008financialcrisis
ThiscrisisspreadthroughouttheworldandalsoaffectedtheEuroZone,mainly
thosecountrieswiththeirownrealestatebubble,i.e.IrelandandSpain
Despitetheabove,theEurohasgainedgroundinternationallyandcurrently
accountsforaround25%ofworldreserves

4)Futureoutlook:

ChinaandIndiawillgraduallyincreasetheircontributiontoglobalGDP
Asiawillconcentratearound50%ofglobalGDP
ItseemsthatwearemovingtowardsathreecurrencysystemtheDollarasthe
leadingcurrency,theEuroandtheYuan

The Euro Zone

EuroZone
EuropeanUnion
countries

NonEuro
Zone

Austria
Belgium
Cyprus
Estonia
Finland
France
Germany
Greece
Ireland
Italy

Bulgaria,CheckRepublic,Denmark,
Hungary,Latvia,Lithuania,Poland,
Romania,Sweden,UnitedKingdom

Luxembourg
Malta
Portugal
Slovakia
Slovenia
Spain
TheNetherlands

The Financial System

Financialintermediariesallocateresourcesbyattractingsavingsandchannelingthese
flowstoinvestmentprojectslendingactivities
Theirprofitmarginconsistsofthespreadbetweenthecostoffundsandthereturn
obtainedontheirlendings/investments

Investment
projects

Financialintermediaries
(e.g.banks,savingsbanks,etc.)

Savers

Ontheotherhand,saversandinvestorsmaymeetdirectlyintheFinancialMarkets
withoutanyinvolvementofanyfinancialintermediary

The Spanish Financial System

StructureoftheSpanishFinancialSystem:
MinisteriodeEconoma
SecretaradeEstadodeHacienda
SecretaradeEstadodeEconoma:
DireccinGeneraldeFinanciacinInternacional
DGTPF
DGSFP
DireccinGeneraldePolticaEconmica
BancodeEspaa
CNMV

Evolution of the Spanish Financial System

From1986to1999:Deregulation

19992009:ConsolidationoftheMonetaryUnion

20092012:Restructuringofthefinancialsystemasaresultof
thecrisis

SingleBankingLicenseattheEU
Ley24/1988delMercadodeValores
Ley37/1998delMercadodeValores

EstablishmentofBME
EstablishmentofMEFFAIAFSENAF

Sectorconsolidation
Mostsavingsbanksarebailedoutandtransformedintobanks

The basics of Monetary Policy

TheevolutionofMoneySupplyhasagreatimpactoninterestratesandinflation

MoneySupply=Totalcurrencycirculatinginthepublic(Cash)+nonbankdeposits
withcommercialbanks(Deposits)

MonetaryBase=CentralBankliabilities=Cash+commercialbanksreservesthat
aremaintainedinaccountswiththeircentralbanks(Reserves)

Therefore,MoneySupply/MonetaryBase=(Cash+Deposits)/(Cash+Reserves)

Asaresultoftheabove,wecanconcludethatMoneySupplyistheMonetaryBase
timesafactor,wherethelatterdependsontwokeyrelationships:Cash/Depositsand
Reserves/Deposits

TobefurtherdevelopedinChapter2