Money and Banking

(BECN 250)

Name Email Phone Office Hours

Dr. 11:55am –
[email protected] +971 45566921
Genanew 12:55 pm

Class 02:30 – 5:30

Days Mondays Room DBS-Room 210
Time pm

Textbooks Required Cecchetti, S.G. and Schoenholtz, K.L. (2021), Money, Banking and
Financial Markets, 6th edition (Global), McGraw-Hill, ISBN:
9781259922251

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Course Learning Objectives (CLOs):

The above PLOs are assessed using the following Course Learning Objectives (CLOs). On
successful completion of this course, the learner will be able to:

1. Recognize the structure of the financial system in the UAE/GCC and developed
countries.
2. Construct and analyze the operation and the structure of the central bank in the
UAE/GCC and developed countries.
3. Construct and analyze the central bank balance sheet, money supply process, monetary
policy and the use of interest rate to stabilize the economies in the UAE/GCC and
developed countries.
4. Develop money growth, money demand, and inflation in the UAE/GCC and developed
countries.
5. Apply modern monetary economic policies and challenges facing central bankers in the
UAE/GCC and developed countries.

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 Chapter 1

An Introduction to Money and the Financial

System

© 2021 McGraw-Hill. All Rights Reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Learning Objectives
1. List and explain the six parts of the financial
system.

2. Identify the five core principles of money and

banking.

3. Describe the special features and organization of

the textbook.

© 2021 McGraw-Hill. All Rights Reserved. 1-4

 Introduction
• Every financial transaction has a story:
This afternoon, Ali
• has left his parent’s home-mortgaged (apartment rented on checks)
• jumped into his insured car and drove to Uni (with study loan) on a highway
financed by bond
• on his way, bought coffee using payment card
• purchased the textbook for this course online

• There is a complex web of interdependent institutions and markets,

making up the foundation of daily financial transactions.

• The financial system is efficient that we rarely note of it; but it is like
air to an economy. What if it disappeared suddenly? E.g. the ‘2008
Financial cries’).

• So, what happen in the FS matters to all of us. Let us closely

understand the system:
1. The Six Parts of the Financial System.
2. The Five Core Principles of Money and Banking.
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© 2021 McGraw-Hill. All Rights Reserved.
 Six Parts of the Financial System
(Each plays a role in an economy)
1. Money
We use it to pay for purchases and to store wealth.

2. Financial Instruments – more reading on Ch 3

We use them to transfer resources from savers to investors and to transfer risk to those best equipped to
bear it. E.g. Loans, Stocks, Mortgages, Insurance policies.

3. Financial Markets – more reading on Ch3

Allow us to buy and sell financial instruments quickly and cheaply. E.g. DFM, NY Stock Exchange.

4. Financial Institutions – more reading on Ch3

To provide services, including access to financial markets and collect information about
prospective borrowers to ensure they are creditworthy. E.g. Banks, Insurance companies.

5. Regulatory Agencies
To provide oversight for financial system, government agencies that make sure that the elements of the FS
operate in a safe and reliable manner.

6. Central Banks
To monitor financial Institutions and stabilize the economy.

Note: While their essential functions endure, their form is constantly evolving.
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© 2021 McGraw-Hill. All Rights Reserved.
 Six Parts of the Financial System
1. Money
• Money has changed from gold/silver coins to paper
currency to electronic funds.
• Methods of accessing means of payment have
changed.
o People used to obtain currency from bank tellers.
o Today cash can be obtained from ATM worldwide.

• Bills are paid and transactions are checked online

(instantly, on website or smartphone).
o Bills used to be paid by writing checks, mail it, and wait for the monthly
statement to make sure transaction has occurred.
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© 2021 McGraw-Hill. All Rights Reserved.
 Six Parts of the Financial System
2. Financial instruments
• Often called Securities or tradables, enable individuals to trade within the
financial markets (cash, bonds, Loans, Stocks, Mortgages, Insurance policies).

• Transfer resources from savers to investors, and transfer risk to those best
equipped to bear it.
• Evolved over time:
o Buying and selling individual stocks used to be through stockbrokers, with high transaction
cost.

o Putting together a portfolio (even small number of stocks/bonds) was time

consuming is open to everyone.

o As a result, ‘investing’ (Buying and selling individual stocks) was reserved for the
wealthy.

o Today we have mutual funds and other stocks available through banks or online.
Financial institutions offer people (with as little as $1000 to invest) the ability to
purchase shares in mutual funds which pools the saving of a large number of
investors.
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© 2021 McGraw-Hill. All Rights Reserved.
Six Parts of the Financial System

3. Financial Markets
• Allow the buying and selling of financial instruments (such as
stocks and bonds) easily.

• Went from being in coffee houses and tavern to well

organized/specific markets like the NY Stock Exchange or DFM.

• Now transactions are mostly handled by electronic networks.

o This has reduced the cost of processing financial transactions making the way for a
much broader array of financial instruments available – even small investors can
participate.

© 2021 McGraw-Hill. All Rights Reserved. 1-9

Six Parts of the Financial System
4. Financial Institutions
• Provide all the services of the financial system like providing
access to financial markets and gathering information. E.g. Banks,
Insurance companies.

• Banks began as vaults (where people store valuables), developed into

institutions that accepted deposits and gave loans, and evolved
to today’s financial supermarket: with various types of products and
services for sale: from access to financial markets to insurance policies,
mortgages, credits, even investment advise).

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© 2021 McGraw-Hill. All Rights Reserved.
 Six Parts of the Financial System
5. Government regulatory agencies
• Make sure the elements of the financial system operate safely and
reliably.
• Government regulatory agencies were introduced by federal
government after the Great Depression (in the aftermath of the
financial crises of 1929-33).

• They provide wide-ranging financial regulation, rules, and

supervision; and examine the systems a bank uses to manage its risk.

• The 2007-2009 financial crises has led governments to greater

regulation, such as the 2010 Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ‘Dodd-Frank Act’), intended to make the U.S. financial system
safer for consumers and taxpayers, and to prevent another financial crisis like the one
in 2007–2008.

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© 2021 McGraw-Hill. All Rights Reserved.
 Six Parts of the Financial System
6. Central banks
• began as large private banks to finance wars. Eventually grew
into the modern CBs we know today.
• monitor and stabilize the financial system, controlling the
availability of money and credit to promote low inflation, high
growth and stability of financial system.
• Today’s policymakers strive for transparency in their
operations.
• The financial crisis of 2007-2009 have led central banks to try
many new policy tools.

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© 2021 McGraw-Hill. All Rights Reserved.
© 2021 McGraw-Hill. All Rights Reserved. 13
 Five Core Principles of
Money and Banking
1. Time has value.

2. Risk requires compensation.

3. Information is the basis for decisions.

4. Markets determine prices and allocate resources.

5. Stability improves welfare.

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© 2021 McGraw-Hill. All Rights Reserved.
 Five Core Principles of
Money and Banking

Core Principle 1: Time has value

• Time affects the value of financial instruments.

• Interest is paid to compensate the lenders for the

time the borrowers have their money.

• Chapter 4 develops an understanding of interest

rates and how to use them.
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© 2021 McGraw-Hill. All Rights Reserved.
 Five Core Principles of
Money and Banking
Core Principle 2: Risk requires compensation

• In a world of uncertainty, individuals will accept risk

only if they are compensated.

• In the financial world, compensation comes in the

form of explicit payments: the higher the risk the
bigger the payment.

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© 2021 McGraw-Hill. All Rights Reserved.
 Five Core Principles of
Money and Banking
Core Principle 3: Information is the basis for
decisions

• The more important the decision, the more

information we gather.

• Collection and processing of information is the

foundation of the financial system.

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© 2021 McGraw-Hill. All Rights Reserved.
 Five Core Principles of
Money and Banking
Core Principle 4: Markets determine prices and
allocate resources

• Markets are the core of the economic system.

• Markets channel resources and minimize the cost

of gathering information and making transactions.

• In general, the better developed the financial

markets, the faster the country will grow.

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© 2021 McGraw-Hill. All Rights Reserved.
 Five Core Principles of
Money and Banking
Core Principle 5: Stability improves welfare

• A stable economy reduces risk and improves everyone's

welfare.
• Financial instability in the autumn of 2008 triggered the
worse global downturn since the Great Depression.
• A stable economy grows faster than an unstable one.
• One of the main roles of central banks is stabilizing the
economy.

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© 2021 McGraw-Hill. All Rights Reserved.
Chapter 1 - Summary

© 2021 McGraw-Hill. All Rights Reserved. 20

Special Features of This Book

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© 2021 McGraw-Hill. All Rights Reserved.
 Special Features of This Book
• Your Financial World’’’
– This feature will provide basic guidelines for applying
economic theory to the decisions you make nearly
every day.

• Applying the Concept

– This feature shows how to put theory into practice.
– This feature provides real-world examples of the ideas
introduced in the chapter.

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© 2021 McGraw-Hill. All Rights Reserved.
© 2021 McGraw-Hill. All Rights Reserved. 23
Special Features of This Book
• Lessons from the Crisis
– These inserts will cover episodes from the
financial crisis of 2007-2009, in the U.S. and
in Europe.
– It will provide a framework for
understanding the crisis, and how it is
transforming the world of finance.
– This feature will show how regulators and
central banks countered the financial
instability.
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© 2021 McGraw-Hill. All Rights Reserved.
 Special Features of This Book
• Money and Banking Blog
– This feature helps you better understand the
business and financial news.
– Each chapter in this book closes with an article
drawn from the authors’ blog
www.moneyandbanking.com.
• Tools of the Trade
– This feature concentrates on practical knowledge
relevant to the chapter.

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© 2021 McGraw-Hill. All Rights Reserved.
• Very few pieces of information are needed
to steal your identity.
• Protect your personal information.
– Never tell your birth date, birthplace, address,
or mother’s maiden name.
– Guard your Social Security Number - it is the
key to identity theft
• Don’t give any personal information to
anyone that calls and asks
• Monitor your financial statements closely.
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© 2021 McGraw-Hill. All Rights Reserved.
 Sources of Economic and Financial
News and Data
• Daily • Data
– The Wall Street Journal – The Federal Reserve Board of St. Louis
(FRED)
– Financial Times
– Bureau of Labor Statistics
– Bloomberg.com
– Bureau of Economic Analysis
– Yahoo! Finance – The Federal Reserve Board website
• Weekly
– The Economist • Personal Finance Information
– Bloomberg Business Week – www.choosetosave.org
– www.dinkytown.net
– www.consumerfinance.gov/consumer-
tools

© 2021 McGraw-Hill. All Rights Reserved.

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