FINANCIAL MARKETS AND
INSTITUTIONS
Prof. Dr. Geert Gielens en Rudy Vandorpe
Overview – Part I : Fixed Income Securities
1. Introduction
2. Money and money creation
3. Financial intermediaries
– Financial institutions
– Why do banks exist?
– Banks
– (Payment systems)
4. Regulatory context part 1
– Regulatory authorities
5. Financial instruments & markets
– Money markets (incl. repo’s)
– Bond markets
– Interest rate swaps aka a derivates
6. Exercise session
7. (Regulatory context part 2)
– Monetary authorities
Opmerking : kleurgebruik :
Blauw = Nota’s uit HOC
Groen = prof slides
donkerblauw : randopmerkingen van de prof op slides powerpoint
Book : “Greenbaum, S. I., Thakor, A.V., Boot, A.W.A. , “Contemporary Financial Intermediation”, 3th
ed., Academic Press
Examen :
1/3 op Excercices like in class but disguised in an economic problem
True/False question + explanation -> display your knowledge and inside
questions. Explain clearly (Prof will not interpretate but take literally what you
write)
Open question -> knowledge related to actual news
You can answer in English or in Dutch
Fadia Farhat | VUB 2023-2024 1
, Introduction :
Preventing regulation in the banking system
Creditor = schuldeiser - Debtor : schuldenaar
Throughout time societies have developed tools and institutions to organize the conditional
transfer of “means” from economic agents that have abundant “means” to economic agents
that have (temporary) need for/shortage of these “means”. “Means” should be interpretated as
any in that society accepted tool of payment or store of value. Today this is typically just fiduciary
money (= currency).
How to get the surplus (savings) to where it is needed (debt in all its forms + equity)?
Which instruments should I use?
Macro-economic identity
• Y = C + I + G + (X – M)
• Y- T = C + I + G – T + (X – M)
• Y- T – C = I + (G – T) + (X – M)
• S = I + (G – T) + (X – M)
• Sparen = Investeringen + overheidsschuld (+ effect internationale kapitaalmarkten)
• Sparen = overschot en Investeringen = geld lenen; krediet aangaan.
• How to get the surplus (savings) to where it is needed (debt in all its forms + equity)
• Financiële systemen zorgen ervoor dat S kan gelijk zijn aan I. Wat overblijft = wat er nodig is.
• Financiële markten zorgen ervoor dat overvloed aan geld gaat naar diegenen die het
nodig hebben. Men kan de financiële markten bekijken als een infrastructuur binnen de
economie
Y = National income
C = consumption
G = Government purchases
NX = X-M = Net-export
Financial plumbing of the economy (Financiële infrastructuur van de economie)
Fadia Farhat | VUB 2023-2024 2
, Economy, regulations, and systems determine what can be used and what is popular
Figuring out how exactly savings can go from the saver to the borrower
Endogenous system:
Endogeen; het is zo omdat het gecreëerd is doorheen omstandigheden.
time dependent
o All the settings you have today are there for a reason. When things change, it has a
major impact (technology changes or monetary policies).
Changes due to the development of the European union, the financial crises
of 2008 and the subsequent changes in regulation, technological
developments, societal changes, and the economy itself
What changes? E.g. the development of “green bonds” as a result of the
growing awareness of the public with respect to social and environmental
issues (ESG)
The markets have looked different for over 15 years. Things that used to be big
(15 years ago) no longer exist (think at Belgian frank).
E.g. When you were a child maybe 10 euros banknote was money for
you, but nowadays money may be your phone (instead of using cash
or a bank card). Paying by phone 10 years ago was unimaginable, so
this is a recent change. Banks have changed, which means payments
terms have changes, which means financial markets and institutions
have changed. It may mean that your monetary policy will also have
to change into the future.
Why does a financial system change? A financial system answers to the need
of the economy and the economy changes as well
geography dependent (There is no unified system in the EU!)
o There is a European banking union
The Belgian Financial system is different from the Dutch pension system. (A
bank is a bank in every country but the types of banks may be different)
E.g. In the Netherlands they ask for bonds of half a billion which is not
the case in Belgium
Differences due to existing habits of economic agents, different capital and
financial markets, national regulation and national interests
System in place
Role of the banks, regulators
There is no unified system (financial markets)in the EU!
Why?
Language barriers
Different insolvency law in different systems; but this law is very
important when you lend money. Another insolvency law means that
you financial system will be different
Different consumer habits (ex: morgage law)
Fadia Farhat | VUB 2023-2024 3
, How does the financial system look like?
IMF-BIS-Financial
Stability board
Regulator: Centr. Bank – FSMA – EC - EBA
Payment systems exchanges/
Eco agent B
A money
Cap. market
Fin. Intermed. SB
Int. capitalmarket CCP
Payment systems exchanges/
Eco agent B
B money
Cap. market
Fin. Intermed. SB
2 countries: A & B -> same entries in each country
Starting point: The financial system always start with money in the hands of economic
agents (consumers, corporations, governments, institutional players).
This money is used to transact (buying or selling). Therefore financial intermediaries and/or
auctions (exchanges/capital markets) are necessary just as payment systems.
If economic agents can use money to transact, it means there is a whole payment system (IT –
People & Sanity checks) behind it.
These payment systems (settlement mechanisms like for instance Euroclear for securities)
are currently going through an important change as a result of financial and technical
innovations (Fin. Tech. evolutions).
Financial Intermediaries can be divided info two subclasses: commercial banks and
shadow banks.
You can also invest your money in capital markets or exchanges (by stock or equity) or working
through financial intermediaries (= banks (B) or Shadow Banks (SB))
Shadow banks enter in credit like business but is not regulated like a bank (see later)
Fadia Farhat | VUB 2023-2024 4
INSTITUTIONS
Prof. Dr. Geert Gielens en Rudy Vandorpe
Overview – Part I : Fixed Income Securities
1. Introduction
2. Money and money creation
3. Financial intermediaries
– Financial institutions
– Why do banks exist?
– Banks
– (Payment systems)
4. Regulatory context part 1
– Regulatory authorities
5. Financial instruments & markets
– Money markets (incl. repo’s)
– Bond markets
– Interest rate swaps aka a derivates
6. Exercise session
7. (Regulatory context part 2)
– Monetary authorities
Opmerking : kleurgebruik :
Blauw = Nota’s uit HOC
Groen = prof slides
donkerblauw : randopmerkingen van de prof op slides powerpoint
Book : “Greenbaum, S. I., Thakor, A.V., Boot, A.W.A. , “Contemporary Financial Intermediation”, 3th
ed., Academic Press
Examen :
1/3 op Excercices like in class but disguised in an economic problem
True/False question + explanation -> display your knowledge and inside
questions. Explain clearly (Prof will not interpretate but take literally what you
write)
Open question -> knowledge related to actual news
You can answer in English or in Dutch
Fadia Farhat | VUB 2023-2024 1
, Introduction :
Preventing regulation in the banking system
Creditor = schuldeiser - Debtor : schuldenaar
Throughout time societies have developed tools and institutions to organize the conditional
transfer of “means” from economic agents that have abundant “means” to economic agents
that have (temporary) need for/shortage of these “means”. “Means” should be interpretated as
any in that society accepted tool of payment or store of value. Today this is typically just fiduciary
money (= currency).
How to get the surplus (savings) to where it is needed (debt in all its forms + equity)?
Which instruments should I use?
Macro-economic identity
• Y = C + I + G + (X – M)
• Y- T = C + I + G – T + (X – M)
• Y- T – C = I + (G – T) + (X – M)
• S = I + (G – T) + (X – M)
• Sparen = Investeringen + overheidsschuld (+ effect internationale kapitaalmarkten)
• Sparen = overschot en Investeringen = geld lenen; krediet aangaan.
• How to get the surplus (savings) to where it is needed (debt in all its forms + equity)
• Financiële systemen zorgen ervoor dat S kan gelijk zijn aan I. Wat overblijft = wat er nodig is.
• Financiële markten zorgen ervoor dat overvloed aan geld gaat naar diegenen die het
nodig hebben. Men kan de financiële markten bekijken als een infrastructuur binnen de
economie
Y = National income
C = consumption
G = Government purchases
NX = X-M = Net-export
Financial plumbing of the economy (Financiële infrastructuur van de economie)
Fadia Farhat | VUB 2023-2024 2
, Economy, regulations, and systems determine what can be used and what is popular
Figuring out how exactly savings can go from the saver to the borrower
Endogenous system:
Endogeen; het is zo omdat het gecreëerd is doorheen omstandigheden.
time dependent
o All the settings you have today are there for a reason. When things change, it has a
major impact (technology changes or monetary policies).
Changes due to the development of the European union, the financial crises
of 2008 and the subsequent changes in regulation, technological
developments, societal changes, and the economy itself
What changes? E.g. the development of “green bonds” as a result of the
growing awareness of the public with respect to social and environmental
issues (ESG)
The markets have looked different for over 15 years. Things that used to be big
(15 years ago) no longer exist (think at Belgian frank).
E.g. When you were a child maybe 10 euros banknote was money for
you, but nowadays money may be your phone (instead of using cash
or a bank card). Paying by phone 10 years ago was unimaginable, so
this is a recent change. Banks have changed, which means payments
terms have changes, which means financial markets and institutions
have changed. It may mean that your monetary policy will also have
to change into the future.
Why does a financial system change? A financial system answers to the need
of the economy and the economy changes as well
geography dependent (There is no unified system in the EU!)
o There is a European banking union
The Belgian Financial system is different from the Dutch pension system. (A
bank is a bank in every country but the types of banks may be different)
E.g. In the Netherlands they ask for bonds of half a billion which is not
the case in Belgium
Differences due to existing habits of economic agents, different capital and
financial markets, national regulation and national interests
System in place
Role of the banks, regulators
There is no unified system (financial markets)in the EU!
Why?
Language barriers
Different insolvency law in different systems; but this law is very
important when you lend money. Another insolvency law means that
you financial system will be different
Different consumer habits (ex: morgage law)
Fadia Farhat | VUB 2023-2024 3
, How does the financial system look like?
IMF-BIS-Financial
Stability board
Regulator: Centr. Bank – FSMA – EC - EBA
Payment systems exchanges/
Eco agent B
A money
Cap. market
Fin. Intermed. SB
Int. capitalmarket CCP
Payment systems exchanges/
Eco agent B
B money
Cap. market
Fin. Intermed. SB
2 countries: A & B -> same entries in each country
Starting point: The financial system always start with money in the hands of economic
agents (consumers, corporations, governments, institutional players).
This money is used to transact (buying or selling). Therefore financial intermediaries and/or
auctions (exchanges/capital markets) are necessary just as payment systems.
If economic agents can use money to transact, it means there is a whole payment system (IT –
People & Sanity checks) behind it.
These payment systems (settlement mechanisms like for instance Euroclear for securities)
are currently going through an important change as a result of financial and technical
innovations (Fin. Tech. evolutions).
Financial Intermediaries can be divided info two subclasses: commercial banks and
shadow banks.
You can also invest your money in capital markets or exchanges (by stock or equity) or working
through financial intermediaries (= banks (B) or Shadow Banks (SB))
Shadow banks enter in credit like business but is not regulated like a bank (see later)
Fadia Farhat | VUB 2023-2024 4
