The Economics Of Money, Banking And Finance: A European Text

620 Pages·2005·4.567 MB·English

by  P. G. A. Howells, Keith Bain

The Economics of Money, Banking and Finance
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THIRD EDITION
The Economics of Money,
Banking and Finance
A European Text
PETER HOWELLS and KEITH BAIN
iv CONTENTS
Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
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www.pearsoned.co.uk
First published 1998 by Addison Wesley Longman Limited
Second edition published 2002
Third edition published 2005
© Pearson Education Limited 1998, 2002, 2005
The rights of Peter Howells and Keith Bain to be identified as authors of this
work have been asserted by the 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, 90 Tottenham Court Road, London W1T 4LP.
ISBN-13: 978-0-273-69339-0
ISBN-10: 0-273-69339-5
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.–– 3rd ed.
p. cm.
Includes bibliographical references and index.
ISBN 0-273-69339-5
1. Finance––Europe. 2. Banks and banking––Europe. 3. International finance. I. Bain, K.,
1942– II. Title.
HG925.H695 2005
332.1’094––dc22
2005040733
10 9 8 7 6 5 4 3 2
10 09 08 07 06
Typeset in 9/11.5 Sabon by 35
Printed by Ashford Colour Press Ltd, Gosport
The publisher’s policy is to use paper manufactured from sustainable forests.
Contents
Preface xi 2.4 Non-deposit-taking institutions
Acknowledgements xiii – insurance companies and
Symbols, abbreviations and other pension funds 41
conventions xvi 2.5 Non-deposit-taking institutions
– mutual funds 63
2.6 Summary 67
Key concepts in this chapter 68
Part 1 Introduction Questions and problems 68
Further reading 69
1 The role of a financial system 3 3 The UK financial system 70
1.1 Introduction 4 Murray Glickman with Peter Howells
1.2 Lenders and borrowers 5
3.1 Introduction 71
1.3 Financial institutions 10
3.2 Banks in the UK 71
1.4 Financial markets 19
3.3 Building societies in the UK 78
1.5 The financial system and the
3.4 Insurance companies 81
real economy 20
3.5 Pension funds 83
1.6 Summary 24
3.6 Unit trusts 91
Key concepts in this chapter 25
3.7 Investment trusts 94
Questions and problems 25
3.8 Summary 95
Further reading 25
Key concepts in this chapter 96
Questions and problems 96
Further reading 96
Part 2 Financial Institutions and
4 The US financial system 98
Systems
4.1 Introduction 99
4.2 Deposit-taking institutions
2 An introduction to financial in the USA 99
systems 29 4.3 The Federal Reserve System 106
4.4 Non-depository institutions
Murray Glickman
in the USA 109
2.1 Introduction 30 4.5 Summary 111
2.2 Classification of financial systems 30 Key concepts in this chapter 112
2.3 Banks and other deposit-taking Questions and problems 112
institutions 32 Further reading 112
vi CONTENTS
5 The German financial system 113
Part 3 Theory
5.1 Introduction 114
5.2 Banks and other deposit-taking
institutions 115 8 Portfolio theory 171
5.3 Non-deposit institutions 119
5.4 The use of bond and equity markets 8.1 Introduction 172
in Germany 120 8.2 Risk and return 172
5.5 Summary 122 8.3 Diversification 173
Key concepts in this chapter 123 8.4 ‘Market’ and ‘specific’ risk 177
Questions and problems 123 8.5 The capital asset pricing model 178
Further reading 123 8.6 Summary 180
Key concepts in this chapter 181
Questions and problems 181
6 The French and Italian
Further reading 181
financial systems 125
9 The determination of
6.1 Introduction 126
6.2 The French banking system 127 short-term interest rates 182
6.3 Specialist and non-deposit
9.1 Introduction 183
institutions 132
9.2 Interest rates defined and classified 183
6.4 Financial markets in France 137
9.3 ‘Market’ theories of interest rate
6.5 The development of the Italian
determination 184
financial system 139
9.4 The role of central banks –
6.6 The current position of the Italian
‘administered’ interest rates 192
financial system 141
9.5 A synthesis 196
6.7 Summary 149
9.6 Summary 197
Key concepts in this chapter 150
Key concepts in this chapter 197
Questions and problems 150
Questions and problems 198
Further reading 150
Further reading 198
7 Financial systems in 10 The structure of interest rates 199
Northern Europe 152
10.1 Introduction 200
Hans-Michael Trautwein 10.2 The effect of term 200
10.3 The effect of risk 203
7.1 Introduction 153
10.4 Expectations and government
7.2 Banking systems in the Nordic
borrowing 204
countries 154
10.5 Summary 208
7.3 Other financial intermediaries
Key concepts in this chapter 208
in the Nordic countries 158
Questions and problems 209
7.4 The evolution and integration of
Further reading 209
financial systems in Scandinavia 160
7.5 Monetary policy strategies in the
11 The valuation of assets 210
Nordic countries 163
7.6 Summary 166 11.1 Introduction 211
Key concepts in this chapter 167 11.2 Supply and demand in asset markets 211
Questions and problems 167 11.3 Asset valuation 213
Further reading 167 11.4 The ‘fundamentals’ of asset valuation 218
CONTENTS vii
11.5 An alternative interpretation 219 14.6 Governments, inflationary incentives
11.6 Summary 221 and independent central banks 278
Key concepts in this chapter 222 14.7 The independence of the Bank
Questions and problems 222 of England 281
Further reading 223 14.8 Transparency in the conduct of
Appendix to Chapter 11 223 monetary policy 282
14.9 Summary 285
Key concepts in this chapter 285
Questions and problems 285
Part 4 Money and Banking
Further reading 286
12 Banks and the supply
of money 227 Part 5 Markets
12.1 Introduction 228
12.2 The definition of money 228
15 Money markets 289
12.3 Banks’ balance sheets 235
12.4 Models of money supply 15.1 Introduction 290
determination 240 15.2 Money market instruments:
12.5 Controlling the money supply 244 characteristics and yields 291
12.6 Summary 248 15.3 Characteristics and use of the
Key concepts in this chapter 248 money markets 296
Questions and problems 249 15.4 Official intervention in the money
Further reading 249 markets 297
15.5 The Eurocurrency markets 303
13 The demand for money 250 15.6 Summary 305
Key concepts in this chapter 305
13.1 Introduction 251
Questions and problems 306
13.2 The demand for money – an
Further reading 306
introduction 251
13.3 The transmission mechanism of
16 Bond markets 308
monetary policy 252
13.4 The demand for money – a more 16.1 Introduction 309
complete approach 254 16.2 Bonds: types and characteristics 309
13.5 The implications for monetary policy 264 16.3 Bond prices and yields 311
13.6 Summary 264 16.4 Risk and fixed interest bonds 319
Key concepts in this chapter 265 16.5 The term structure of interest rates 322
Questions and problems 265 16.6 Characteristics of the bond markets 330
Further reading 265 16.7 International bonds 336
16.8 Summary 340
14 Monetary policy 266 Key concepts in this chapter 340
Questions and problems 341
14.1 Introduction 267
Further reading 341
14.2 The simple Phillips curve 267
14.3 The ‘expectations-augmented’
17 Equity markets 343
Phillips curve 269
14.4 The policy irrelevance theorem 272 17.1 Introduction 344
14.5 The transmission mechanism of 17.2 Company shares: types,
monetary policy 275 characteristics and returns 345
viii CONTENTS
17.3 Equity pricing 346 Key concepts in this chapter 440
17.4 Share price movements 356 Questions and problems 440
17.5 Equity market characteristics 359 Further reading 441
17.6 Summary 366
Key concepts in this chapter 367
Questions and problems 367
Further reading 368 Part 6 Current Issues
18 Foreign exchange markets 369
21 The single European market 445
18.1 Introduction 370
18.2 The reporting of foreign exchange 21.1 Introduction 446
rates in the Financial Times 373 21.2 The objectives and achievements
18.3 The efficient market hypothesis 381 of the Single European Act 446
18.4 Exchange rate arbitrage 387 21.3 The single financial market
18.5 Foreign exchange risk and (European Financial Common
speculation 388 Market – the EFCM) 448
18.6 Forecasting foreign exchange rates 390 21.4 Progress towards the EFCM 454
18.7 Summary 393 21.5 Enlargement to 25 461
Key concepts in this chapter 393 21.6 Summary 461
Questions and problems 394 Key concepts in this chapter 462
Further reading 395 Questions and problems 462
Further reading 463
19 Derivatives – the financial
futures markets 396 22 The European Monetary
System and monetary union 464
19.1 Introduction 397
19.2 The nature of financial futures 398 22.1 Introduction 465
19.3 Reading the Financial Times 401 22.2 The Treaty on European Union
19.4 The pricing of futures 405 and the plans for monetary union 467
19.5 Summary 413 22.3 The problems of the 1990s 468
Key concepts in this chapter 413 22.4 The movement to monetary union 469
Questions and problems 414 22.5 Monetary union developments 470
Further reading 415 22.6 Future membership of the
monetary union 472
20 Options, swaps and other 22.7 Summary 476
Key concepts in this chapter 477
derivatives 416
Questions and problems 477
20.1 Introduction 417 Further reading 477
20.2 Options 417
20.3 Reading the Financial Times 420 23 The European Central Bank
20.4 The pricing of options 425
and euro area monetary policy 478
20.5 Exotic options 430
20.6 Swaps 431 23.1 Introduction 479
20.7 Comparing different types of 23.2 Inflation, exchange rate risk and
derivatives 434 default risk in monetary union 481
20.8 The use and abuse of derivatives 435 23.3 Monetary institutions and policy
20.9 Summary 439 in the single currency area 482
CONTENTS ix
23.4 The form of monetary policy in 25.4 The impact of globalization and
the euro area 485 financial innovation – the Basel
23.5 ECB monetary policy and the euro 489 Committee 529
23.6 Possible reforms at the ECB 493 25.5 The regulation of universal
23.7 Summary 493 banking in the EU 535
Key concepts in this chapter 494 25.6 Summary 536
Questions and problems 494 Key concepts in this chapter 537
Further reading 495 Questions and problems 537
Further reading 538
24 Financial innovation 496
26 Financial market efficiency 539
24.1 Introduction 497
24.2 Theories of innovation 497 26.1 Introduction 540
24.3 Three case studies 501 26.2 The efficient market hypothesis 541
24.4 The demand for money and 26.3 Implications of the EMH 543
monetary policy 508 26.4 Testing the EMH 547
24.5 Summary 513 26.5 Market rationality 550
Key concepts in this chapter 513 26.6 Behavioural finance 552
Questions and problems 514 26.7 Summary 555
Further reading 514 Key concepts in this chapter 555
Questions and problems 556
25 The regulation of financial Further reading 556
markets 516
Case Studies 1–8 557
25.1 Introduction 517 Glossary of terms 584
25.2 The difficulties of regulation 519 Answers to Exercises 590
25.3 Banking regulation 527 Index 594
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