Changes in the Banking System

Business Environment
Carolina Betancourt
Quijano
 Origins
Functioning
Topics
Too big to fail?
Financial crash
National debt, sustainability?
Low interest rate
 Origins of the
Banking System
 Origins of the Banking
SystemGold used as
money

Mercantilism from the XVI

to the XVIII century

Roads were dangerous, for this reason,

merchants entrust their gold for safekeeping
(paying a fee) with the goldsmith of their city,
since he had to maintain his inventory in
 Origins of the Banking
System

The goldsmith received the gold, gave a receipt to the

merchant, and took care of the gold, charging a fee for this
service. The owner claimed his gold, all or in part, whenever he
 Origins of the Banking
System
Eventually, the receipts began to circulate as
currency.

The merchants began to exchange among themselves these

receipts rather than the gold itself because they trust they could
go to the goldsmith and get it later. It was not necessary to move
 Origins of the Banking
System
With the receipts as currency, nearly all
of the gold that was left for
safekeeping remained untouched in
the vault

Nobody comes for

their gold, maybe I can
SPEND it, or even
better!! Maybe I can
get more leading it and
charging a fee for it
 Origins of the Banking
System
Gold smiths leadings were like this: he gave receipts to the people and the
people would pay him a fee. People would be able of buying what they wanted
and lather on the person who were paid with those receipts could go with the
goldsmith and ask for the gold.

for the receipts to retain their value the goldsmiths had to pretend that those
paper claims to gold and silver were backed by an equal amount of metal and
were therefore of equivalent value. They were not, of course. At the end there
were more receipts than gold.
Functioning of
the Banking
System
 Functioning of the Banking
System
Commercial
Banks

Goldsmiths evolve into bankers, it is more or less the same system

but they realized that more deposits are equal to more profits. So
they began paying people for deposits of gold and silver rather than
charging for their storage, thus inventing the interest-bearing
 Functioning of the Banking
System
At the most basic level, what banks do is fairly simple:
1. Accept deposits from customers
2. Raise capital from investors or lenders
3. Use that money to make loans
4. Buy securities and provide other financial services to customers.
(credit cards, commercial transactions)
 Functioning of the Banking
System

Commercial
Banks

Treasure

Central Banks

The Federal Reserve buys coins and paper money from the Treasury and
distributes them through the banking system, as needed.

Banks effectively buy currency from the Fed, or sell it back when they
have excess amounts on hand.
 Functioning of the Banking
System
So, Banks
cannot create
money?

Well
Actually
.
They displaced, in volume and in importance, the legal money of
the Government which only had a secondary role to play. The
banker created ten times as much paper money as did the State.
 Functioning of the Banking
System
Banks create money through fractional
reserve banking. Banks keep only a
small portion of their deposits on
hand. Every unit deposited in a bank,
can become $10 of new money

Money
Multiplier
Effect
Functioning of the Banking
System
Banks collect money from depositors and
simultaneously lend it out to other borrowers,

forging a chain of debts.

The Banking
System: Too
big to fail?
The Banking System: Too big to fail?
result : An elastic money
fractional reserve banking
supply.
Commercial Banks can lend 80% of
people deposits, and have to keep
the 20% in reserve.
The Banking System: Too big to fail?

The result of this fluctuation in the supply of circulating currency

frequently send the general economy into recession or
Financial
Crash
 Financial Crash
Term of the Stock
Market
Deep and rapid fall
of the
quotations of a
market
largest falls in which the real economy would be
affected and would require a slower recovery.

Due to panic to invest or loss of confidence.

Often, falling stock markets are the end of
speculative bubbles.
 Financial Crash
The most important financial crashes in modern economy

Great Depression 1929 The stock market crash of 1973-74

The Bubble.com in 2000

The Black Monday,1987

The 2008 Economic Crisis

 Financial Crash
Fractional reserve banking
Great Depression 1929
was a major cause of the
Great Depression.

The fractional

Extra currency printed during reserve collapsed

World War I was recycled through both the banking
the fractional reserve banking system and the real
system and massively amplified. economy.
 Financial Crash
The 2008 Economic Crisis
Banks, not only in U.S.A.,
start declaring themselves
without liquidity.

Easy to get a People were not able of

paying
credit. Banks lend
everyone. Banks stated selling
Crisis
spread
this debts in
worldwide packages marked as
AAA (of none risk)
 Financial Crash
Are we about having a
financial crash?

European Stokes prices have been

on a downward trend in 2016

The ECB, has adopted a policy of

monetary expansion. (Excess of
liquidity since 2015)
National Debt
Sustainability
 National Debt
Sustainability
What is National Debt?

Indicator of an economy's health and factor for

sustainability of government finance.
Changes in government debt over time reflect
the impact of government deficits.
This indicator is measured as a percentage of
GDP.
Data are under System of National Accounts
 National Debt
Sustainability
Each year, countries
have a general budget,
with the amount of
Most of the times the budget is
money they are
not as planed and countries
planning to get and
must ask for an external
and the way they will
financing.
spend it

National Debt
Sustainability

Defined as the ability of a country to

meet its debt obligations without
requiring debt relief or accumulating
 National Debt
Sustainability Triggered by
unsustainable
practices (Iceland)

The Eurozone currency union led irresponsible

European Current Crisis Debt governments to borrow excessively.

Granting much lower

interest rates, and
much higher access to
capital,
Since 2010 there were repeated panics in countries like Greece, Ireland and
Spain, as governments struggled to restructure their debt obligations and
secure public acceptance of austerity programs, designed to facilitate eventual
 National Debt
Sustainability
Alarm bells have been ringing over the
explosion of corporate debt levels in emerging
economies, which now exceed $25 trillion.

said the annual report of the UN Conference

on Trade and Development (UNCTAD).
Low interest
rate and its
effects
Low interest rate and its effects
Encourages the
expense of money.

Encourages the
investment
Low Interest
Rate

It is cheaper to
borrow money
.
Low interest rate and its effects
Low
Greater
Interest
liquidity
Rate

Economic
Growth Inflation
But also
Low interest rate and its effects
Sustained rise in
prices in a short
time.
Inflation

There is a lot of
money, so it worth
less
 Are we
going back
to 1929?