The Economics of Money, Banking and Finance

657 Pages·2008·3.843 MB·English

by  Peter Howells, Keith Bain

The Economics of Money, Banking and Finance
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FOURTH EDITION
The Economics of Money,
Banking and Finance
A European Text
PETER HOWELLS and KEITH BAIN
Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
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First published 1998 by Addison Wesley Longman Limited
Second edition published 2002
Third edition published 2005
Fourth edition published 2008
© Pearson Education Limited 1998, 2002, 2005, 2008
The rights of Peter Howells and Keith Bain to be identified as authors of
this work have been asserted by them in accordance with the Copyright,
Designs and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without either the prior written permission of the
publisher or a licence permitting restricted copying in the United Kingdom issued by the
Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London ECIN 8TS.
ISBN: 978-0-273-71039-4
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Howells, P. G. A., 1947–
The economics of money, banking and finance : a European text / Peter Howells and Keith Bain. —4th ed.
p. cm.
ISBN 978-0-273-71039-4
1. Finance—Europe. 2. Banks and banking—Europe. 3. International finance. I. Bain, K., 1942– II. Title.
HG925.H695 2008
332.1094—dc22
2008003078
10 9 8 7 6 5 4 3 2 1
12 11 10 09 08
Typeset in 9/11.5 GraphicSabon by 73
Printed by Ashford Colour Press Ltd, Gosport, Hampshire
The publisher’s policy is to use paper manufactured from sustainable forests.
Brief contents
Contents vii Part 4 Money and Banking
Guided tour xii
12 Banks and the supply of money 241
Preface xv
13 The demand for money 265
Acknowledgements xvii
14 Monetary policy 279
Symbols, abbreviations and other
conventions xx
Part 5 Markets
Part 1 Introduction
15 Money markets 303
16 Bond markets 321
1 The role of a financial system 3
17 Equity markets 355
18 Foreign exchange markets 380
Part 2 Financial Institutions and
19 Derivatives – the financial futures
Systems
markets 411
2 An introduction to financial systems 29 20 Options, swaps and other derivatives 432
3 The UK financial system 75
4 The US financial system 104 Part 6 Current Issues
5 The German financial system 124
21 The internal European market 463
6 The French and Italian financial
22 The European Monetary System and
systems 135
monetary union 485
7 Financial systems in Northern Europe
23 The European Central Bank and euro
Hans-Michael Trautwein 166
area monetary policy 506
24 Financial innovation 527
Part 3 Theory
25 The regulation of financial markets 547
8 Portfolio theory 185 26 Financial market efficiency 571
9 The determination of short-term
Case studies 590
interest rates 196
10 The structure of interest rates 213
Glossary of terms 617
11 The valuation of assets 224
Answers to exercises 623
Index 627
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Contents
Guided tour xii 2.5 Non-deposit-taking institutions –
Preface xv mutual funds 65
Acknowledgements xvii 2.6 Summary 71
Symbols, abbreviations and other Key concepts in this chapter 72
conventions xx Questions and problems 72
Further reading 73
3 The UK financial system 75
Part 1 Introduction
3.1 Introduction 76
3.2 Banks in the UK 76
1 The role of a financial system 3 3.3 Building societies in the UK 84
3.4 Insurance companies 86
1.1 Introduction 4
3.5 Pension funds 89
1.2 Lenders and borrowers 5
3.6 Unit trusts 96
1.3 Financial institutions 10
3.7 Investment trusts 100
1.4 Financial markets 19
3.8 Summary 101
1.5 The financial system and the
Key concepts in this chapter 102
real economy 20
Questions and problems 102
1.6 Summary 25
Further reading 102
Key concepts in this chapter 25
Questions and problems 25 4 The US financial system 104
Further reading 26
4.1 Introduction 105
4.2 Deposit-taking institutions in the USA 105
Part 2 Financial Institutions 4.3 The Federal Reserve System 113
and Systems 4.4 Non-depository institutions in the USA 116
4.5 The home mortgage market
and subprime lending 119
4.6 Summary 122
2 An introduction to financial
Key concepts in this chapter 123
systems 29
Questions and problems 123
2.1 Introduction 30 Further reading 123
2.2 Classification of financial systems 30
5 The German financial system 124
2.3 Banks and other deposit-taking
institutions 32 5.1 Introduction 125
2.4 Non-deposit-taking institutions – 5.2 Banks and other deposit-taking
insurance companies and pension funds 43 institutions 126
viii CONTENTS
5.3 Non-deposit institutions 130 8.3 Diversification 187
5.4 The use of bond and equity markets 8.4 ‘Market’ and ‘specific’ risk 191
in Germany 131 8.5 The capital asset pricing model 192
5.5 Summary 133 8.6 Summary 194
Key concepts in this chapter 134 Key concepts in this chapter 195
Questions and problems 134 Questions and problems 195
Further reading 134 Further reading 195
6 The French and Italian 9 The determination of
financial systems 135 short-term interest rates 196
6.1 Introduction 136 9.1 Introduction 197
6.2 The French banking system 138 9.2 Interest rates defined
6.3 Specialist and non-deposit institutions 144 and classified 197
6.4 Financial markets in France 148 9.3 ‘Market’ theories of interest rate
6.5 The development of the Italian determination 198
financial system 150 9.4 The role of central banks –
6.6 The current position of the Italian ‘administered’ interest rates 206
financial system 152 9.5 A synthesis 210
6.7 Summary 163 9.6 Summary 211
Key concepts in this chapter 164 Key concepts in this chapter 211
Questions and problems 164 Questions and problems 212
Further reading 164 Further reading 212
7 Financial systems in
10 The structure of interest rates 213
Northern Europe 166
10.1 Introduction 214
Hans-Michael Trautwein 10.2 The effect of term 214
10.3 The effect of risk 217
7.1 Introduction 167
10.4 Expectations and government
7.2 Banking systems in the Nordic
borrowing 218
countries 168
10.5 Summary 222
7.3 Other financial intermediaries in the
Key concepts in this chapter 223
Nordic countries 171
Questions and problems 223
7.4 The evolution and integration
Further reading 223
of financial systems in Scandinavia 174
7.5 Monetary policy strategies in the
11 The valuation of assets 224
Nordic countries 177
7.6 Summary 180 11.1 Introduction 225
Key concepts in this chapter 180 11.2 Supply and demand in asset
Questions and problems 181 markets 225
Further reading 181 11.3 Asset valuation 227
11.4 The ‘fundamentals’ of asset
valuation 232
Part 3 Theory
11.5 An alternative interpretation 233
11.6 Summary 235
Key concepts in this chapter 236
8 Portfolio theory 185
Questions and problems 236
8.1 Introduction 186 Further reading 237
8.2 Risk and return 186 Appendix to Chapter 11 237
CONTENTS ix
Part 4 Money and Banking Part 5 Markets
12 Banks and the supply of money 241 15 Money markets 303
12.1 Introduction 242 15.1 Introduction 304
12.2 The definition of money 242 15.2 Money market instruments:
12.3 Banks’ balance sheets 249 characteristics and yields 305
12.4 Models of money supply 15.3 Characteristics and use of the
determination 255 money markets 310
12.5 Controlling the money supply 259 15.4 Official intervention in the
12.6 Summary 263 money markets 311
Key concepts in this chapter 263 15.5 The Eurocurrency markets 317
Questions and problems 264 15.6 Summary 319
Further reading 264 Key concepts in this chapter 319
Questions and problems 320
13 The demand for money 265 Further reading 320
13.1 Introduction 266 16 Bond markets 321
13.2 The standard approach to the
16.1 Introduction 322
transmission mechanism 266
16.2 Bonds: types and characteristics 322
13.3 Testing the demand for money –
16.3 Bond prices and yields 324
the outcome 270
16.4 Risk and fixed interest bonds 332
13.4 A more realistic approach to the
16.5 The term structure of interest rates 336
transmission mechanism of
16.6 Characteristics of the bond markets 344
monetary policy 272
16.7 International bonds 348
13.5 Summary 277
16.8 Summary 352
Key concepts in this chapter 277
Key concepts in this chapter 352
Questions and problems 278
Questions and problems 353
Further reading 278
Further reading 354
14 Monetary policy 279 17 Equity markets 355
14.1 Introduction 280 17.1 Introduction 356
14.2 The simple Phillips curve 281 17.2 Company shares: types,
14.3 The ‘expectations-augmented’ characteristics and returns 357
Phillips curve 283 17.3 Equity pricing 358
14.4 The policy irrelevance theorem 285 17.4 Share price movements 368
14.5 The Phillips curve and monetary 17.5 Equity market characteristics 371
policy today 287 17.6 Summary 377
14.6 Rules and discretion in monetary Key concepts in this chapter 377
policy 290 Questions and problems 378
14.7 Governments, inflationary Further reading 378
incentives and independent central
18 Foreign exchange markets 380
banks 293
14.8 Summary 297 18.1 Introduction 381
Key concepts in this chapter 298 18.2 Foreign exchange rates in the
Questions and problems 298 Financial Times 384
Further reading 299 18.3 Interest rate parity 396