Table Of Content‘The 8th edition of An Introduction to Global Financial Markets is a concise and insightful
introduction to the workings of financial markets, products and institutions. This book is
essential reading for students and finance professionals who wish to familiarise themselves
with the workings of financial markets and institutions in an intuitive and yet comprehen-
sive manner.’
Jens Hagendorff, Martin Currie Professor of Finance & Investment,
University of Edinburgh Business School, University of Edinburgh, UK
‘This 8th edition of An Introduction to Global Financial Markets by Valdez and Molyneux
is a much appreciated guide to better understand contemporary financial markets, institu-
tions and regulators around the globe. Its clear and concise language makes it a valuable
asset for both students and practitioners alike. Anyone embarking on an analysis of finance
and financial markets against the backdrop of recent and ongoing crises and regulatory
responses should resort to this comprehensive yet to-the-point book.’
Michael Koetter, Professor of Banking and Finance,
Frankfurt School of Finance and Management, Frankfurt, Germany
‘We are limited as to how many books we can read, but we do have the privilege of
the right choice. Presenting the vocational aspects of modern financial markets, without
sacrificing the academic rigour is an art that most aim to strike. When this is combined
with a very insightful way of the mechanics of global finance, then this becomes a master-
piece that everyone should read. This is what the latest edition of the book An Introduction
to Global Financial Markets is all about.’
Dr Sotiris K. Staikouras, Cass Business School,
City University London, UK
‘I welcome this well-revised edition of this highly successful book. Its authors combine
world-class scholarship with the highest level of real-world knowledge and experience.
Their book not surprisingly therefore continues to be a most reliable guide for students
that dare to venture into the bewildering (and at times bewitching) landscape of global
financial markets.’
Steven Ongena, Professor of Banking, University of Zurich,
Swiss Finance Institute, Switzerland and CEPR, UK
‘This is an excellent introductory text, full of information, written with great clarity and in
a style that will make it readily accessible and understandable for students.’
Graham Partington, Chair of the Finance Discipline,
University of Sydney, Australia
‘The eighth edition of An Introduction to Global Financial Markets is a must-read for those
beginning to study finance and an essential reference for advanced students of the topic.
The coverage of the recent financial crisis is fantastic and provides a thorough update of
all the data, markets, institutions and financial instruments that played a role in the crisis.’
Allen N. Berger, H. Montague Osteen, Jr., Professor in Banking and Finance,
Carolina Distinguished Professor, Moore School of Business,
University of South Carolina, US
‘The new edition of Valdez and Molyneux’s book An Introduction to Global Financial
Markets is essential reading for anyone interested in understanding the functioning of
banking and financial sectors. The eighth edition offers another substantial update, making
the discussion of current topics really up to date and useful to understand the momentous
changes in banking and financial markets. I highly recommend it.’
Barbara Casu, Reader in Banking,
Cass Business School, City University London, UK
‘This updated edition remains essential reading for anyone studying how global financial
markets operate and, more importantly, looking for insights as to how they may work in
the future. An indispensable resource for all finance professionals.’
Simon Thompson, Chief Executive, Chartered Banker Institute, UK
‘Having taught courses on financial markets and institutions over the last 15 years, this
book has become the perfect tool to provide an attractive and updated picture of todays’
financial system structure and challenges not only to students but also for practitioners
and all readers interested in knowing more about the financial side of the world. It is a
fascinating and thoroughly readable guide.’
Francisco Rodriguez-Fernandez, Professor of Economics and Finance,
University of Granada, Spain
‘Valdez and Molyneux provide a comprehensive and accessible analysis of the evolution
of global financial markets. Through careful use of background references and data, the
authors provide an extensive coverage of historical and recent events and the resultant
impact on the global financial system. This book is essential reading for those wishing to
get to grips with the structure and workings of the modern financial system.’
John O.S. Wilson, Professor of Banking & Finance
and Director for the Centre of Responsible Banking & Finance,
University of St Andrews, UK
An IntroductIon to
Global Financial
Markets
8th edition
Stephen Valdez
& Philip Molyneux
© Stephen Valdez and Philip Molyneux 2016
All rights reserved. No reproduction, copy or transmission of this publication may be
made without written permission.
No portion of this publication may be reproduced, copied or transmitted
save with written permission or in accordance with the provisions of the
Copyright, Designs and Patents Act 1988, or under the terms of any licence
permitting limited copying issued by the Copyright Licensing Agency,
Saffron House, 6–10 Kirby Street, London EC1N 8TS.
Any person who does any unauthorized act in relation to this publication
may be liable to criminal prosecution and civil claims for damages.
The authors have asserted their rights to be identified as the authors of this
work in accordance with the Copyright, Designs and Patents Act 1988.
First edition published 1993 as
An Introduction to Western Financial Markets
Second edition 1997
Third edition 2000
Fourth edition 2003
Fifth edition 2007
Sixth edition 2010
Seventh edition 2013
This edition 2016
Published by
PALGRAVE
Palgrave in the UK is an imprint of Macmillan Publishers Limited, registered
in England, company number 785998, of 4 Crinan Street, London N1 9XW.
Palgrave Macmillan in the US is a division of St Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Palgrave is a global imprint of the above companies and is represented
throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries.
ISBN 978–1–137–49755–0
This book is printed on paper suitable for recycling and made from fully
managed and sustained forest sources. Logging, pulping and manufacturing
processes are expected to conform to the environmental regulations of the
country of origin.
A catalogue record for this book is available from the British Library.
short contents
List of Figures xvi
List of Tables xviii
List of Boxes xx
Preface xxii
Companion Website xxv
Acknowledgements xxvi
Abbreviations xxix
Part 1: Introduction 1
1 The Money Merry-go-round 2
Part 2: Banking 11
2 Banking Background 12
3 The Role of the Central Bank 49
4 Commercial Banking 69
5 Investment Banking 103
6 Regulation 120
Part 3: Securities Markets and Investment Companies 145
7 The Money and Bond Markets 146
8 Equity Markets 194
9 Hedge Funds and Private Equity 237
Part 4: Financial Crisis 263
10 Financial Crisis 264
Part 5: Foreign Exchange, Europe and the Eurozone 307
11 Foreign Exchange 308
12 Europe and the Eurozone 338
Part 6: Derivative Products 379
13 Traded Options 380
14 Financial Futures 397
15 Other Derivative Products 414
Part 7: Emerging and Growth-leading Economies (EAGLEs) 437
16 Emerging and Growth-leading Economies (EAGLEs) 438
Part 8: Trends in the Global Financial Markets 469
17 Key Trends 470
Glossary 493
Index 508
v
contents
List of Figures xvi
List of Tables xviii
List of Boxes xx
Preface xxii
Companion Website xxv
Acknowledgements xxvi
Abbreviations xxix
Part 1: Introduction 1
1 The Money Merry-go-round 2
RAIsOn D’êTRE OF THE MARKETs 2
Lenders 2
Borrowers 3
securities 4
RAIsInG CAPITAL 5
Bank Loans 5
Bonds 5
Equity 5
Gearing/Leverage 6
COnCLusIOn 8
suMMARy 9
REVIsIOn QuEsTIOns/AssIGnMEnTs 9
FuRTHER READInG 9
Part 2: Banking 11
2 Banking Background 12
HIsTORy 12
BAnKInG suPERVIsIOn 15
TyPEs OF BAnK: DEFInITIOns 16
Central Banks 16
Commercial Banks 17
Merchant/Investment Banks 18
savings Banks 18
Cooperative Banks 20
Mortgage Banks 21
Giro Banks 22
Credit unions 23
Islamic Banks 24
OTHER BAnKInG TERMInOLOGy 25
Clearing Banks 25
state or Public Banks 26
International Banking 27
shadow Banking 27
vi
ConTEnTS vii
A BAnK’s BALAnCE sHEET 27
THE CREATIOn OF CREDIT 29
Banking Depends on Confidence 30
The Money supply 30
Liquidity Ratios 32
CAPITAL RATIO 32
The Basel Committee 33
Basel III 36
European Capital Regulation 37
Increasing Capital Ratio 38
CEnTRAL BAnK REPORTInG 39
THE Eu’s sECOnD BAnKInG DIRECTIVE 40
MAjOR WORLD BAnKs 41
suMMARy 45
REVIsIOn QuEsTIOns/AssIGnMEnTs 46
REFEREnCEs 46
FuRTHER READInG 47
Appendix 1: Top us bank mergers and acquisitions 48
3 The Role of the Central Bank 49
HIsTORy OF THE MAjOR CEnTRAL BAnKs 49
Brazil 49
China 49
France 49
Germany 50
India 50
japan 50
Russia 51
united Kingdom 51
united states 52
The European Central Bank 54
CEnTRAL BAnK ACTIVITIEs 54
supervision of the Banking system 55
Monetary Policy 56
Banknotes 57
Banker to the Other Banks 60
Banker to the Government 61
Raising Money for the Government 61
Controlling the nation’s Currency Reserves 62
Acting as Lender of Last Resort 63
Liaison with International Bodies 64
THE POsITIOn OF CEnTRAL BAnKs TODAy 65
suMMARy 67
REVIsIOn QuEsTIOns/AssIGnMEnTs 68
REFEREnCE 68
FuRTHER READInG 68
4 Commercial Banking 69
InTRODuCTIOn 69
viii ConTEnTS
RETAIL BAnKInG 69
Types of service 69
Money Banking: Deposits 70
new Payments Technologies 72
Loans 74
Other services 76
Delivery Channels 78
Clearing systems 82
Key Retail Banking Issues 84
use of IT 90
WHOLEsALE BAnKInG 91
uncommitted Facilities 91
Committed Facilities 92
syndicated Facilities 94
The Loan Agreement 98
WHOLEsALE BAnKInG IssuEs 100
suMMARy 101
REVIsIOn QuEsTIOns/AssIGnMEnTs 102
REFEREnCEs 102
FuRTHER READInG 102
5 Investment Banking 103
InTRODuCTIOn 103
InVEsTMEnT BAnKInG 103
Accepting 103
Corporate Finance 106
securities Trading 110
Investment Management 111
Loan Arrangement 112
Foreign Exchange 112
Miscellaneous Activities 112
InVEsTMEnT BAnKs AnD THE CREDIT CRIsIs 113
REGuLATIOn 114
sHADOW BAnKInG 115
suMMARy 118
REVIsIOn QuEsTIOns/AssIGnMEnTs 118
REFEREnCE 119
FuRTHER READInG 119
6 Regulation 120
AFTER THE CRIsIs 120
FREQuEnCy OF CRIsEs AnD THEIR COsTs 120
RATIOnALE FOR BAnK REGuLATIOn 121
InFORMATIOn AsyMMETRIEs In BAnKInG AnD FInAnCE 122
GOVERnMEnT sAFETy nET PROBLEMs FOR REGuLATORs 123
THEORIEs OF BAnKInG CRIsEs 124
FEATuREs OF sysTEMIC RIsK 125
What Is ‘systemic Risk’? 125
solvency, Liquidity and Maturities 125
Funding Liquidity and the ‘Domino Effect’ 126
ConTEnTS ix
‘Mark to Market’ and Asset Price Effects 127
The ‘Haircut’ spiral 127
systemic Risk: spirals and the Rationale for Regulation 128
THE RIsE OF sysTEMICALLy IMPORTAnT FInAnCIAL
InsTITuTIOns (sIFIs) 128
Which Are the sIFIs? 129
Why Worry about Big Institutions? 129
us REGuLATORy REsPOnsE TO THE CRIsIs: DODD-FRAnK ACT 2010 133
uK REGuLATORy REsPOnsE TO THE CRIsIs 135
EuROPEAn REGuLATORy REsPOnsE 135
InTERnATIOnAL ACTIOn 141
suMMARy 142
REVIsIOn QuEsTIOns/AssIGnMEnTs 143
REFEREnCEs 143
FuRTHER READInG 144
Part 3: Securities Markets and Investment Companies 145
7 The Money and Bond Markets 146
THE RATE OF InTEREsT 146
Risk 146
Maturity 147
Expectations 148
Liquidity 148
supply and Demand 148
Inflation 149
yield 149
Par Values 149
Interest yield 150
Gross Redemption yield 150
Accrued Interest 152
CREDIT RATInGs 153
DOMEsTIC MOnEy MARKETs 155
Call Money 155
The Interbank Market 155
Money Market securities 158
CEnTRAL BAnK ROLE 161
DOMEsTIC BOnD MARKETs 163
Government Bonds (sovereigns) 165
Local Authority/Public sector Bonds 168
Mortgage and Asset-backed Bonds 168
Corporate Bonds 171
Hybrid Bonds 174
Foreign Bonds 175
junk Bonds (High-yield Debt) 176
Islamic Bonds 177
InTERnATIOnAL MARKETs 177
Background: Eurocurrencies 177
The syndicated Loan Market 179
The International Debt Crisis 179
The Eurobond Market 183
