Key Concepts in Money, Banking, and Financial Systems
Money
Money is a generally accepted medium of exchange that serves as the unit of account and a store of value.
Money Supply
The money supply is the amount of money circulating in an economy and is defined as the sum of currency held by the public and bank deposits.
Demand for Money
Demand for money refers to the amount of notes and coins (legal tender money) that economic agents wish to hold.
Legal Cash Ratio
The legal cash ratio is the percentage of lawful money, imposed by the central bank, kept inactive by the various entities of the banking system to meet any withdrawals of money from their customers and the general interest.
Banking Panic
A banking panic occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might be, insolvent. When a bank run progresses, it generates its own momentum, a type of self-fulfilling prophecy: the more people withdraw their deposits, the likelihood of default increases, and this encourages further withdrawals. A bank run can destabilize the bank to the point it has to face bankruptcy.
Financial Panic
A financial panic occurs when many banks suffer panic at the same time. A systemic banking crisis is one in which all or most of the banking capital in a country is destroyed. The resulting chain of bankruptcies can cause a long recession.
FGD (Deposit Guarantee Fund)
The FGD is a fund financed by banks, savings banks, credit unions, and the Bank of Spain to pay depositors in case of insolvency of any financial institution. Thanks to the FGD, savers’ money is insured but up to certain limits: in Spain, the FGD only returns a maximum of €100,000 per client and entity.
Monetary Policy
Monetary policy is the set of actions taken by the European Central Bank (ECB) to achieve the objectives pursued by the monetary authority by extending or reducing the amount of money in circulation and the alteration of interest rates.
EURIBOR
EURIBOR is the arithmetic mean of the interest rates of loans offered daily on the interbank market by the largest 44 banks in the Euro area. Specifically, the major banks report the types of loans they made each day. The top 15% and bottom 15% are removed, and the average is calculated for each term in which the index is calculated.
Inflation
Inflation is defined as a widespread and sustained rise in the prices of goods and services in an economy. It is said to be general, affecting almost all goods and services, and that it is a constant process that has not been caused by temporary reasons.
Implicit GDP Deflator
The implicit GDP deflator is an indicator that reflects the changes in the prices of goods and services included in the GDP.
CPI (Consumer Price Index)
The CPI is a weighted indicator or measure that reflects the price changes of goods and services consumed by an average Spanish family.
Inflation Rate
The inflation rate is the variation, measured as a percentage, of the CPI over the previous period.
Core Inflation
Core inflation reflects the trend of prices, i.e., developments are steadily eliminating the sharp swings that upset it.
HICP (Harmonized Index of Consumer Prices)
The HICP is a common index of the evolution of prices and inflation for the EU countries that have adopted the Euro and that allows comparisons.
Financial System
The financial system is a structure composed of a set of intermediaries, regulated by government agencies, channeling the savings of resources to finance private consumption (or families), business investment, and government spending.
Financial Intermediaries
Financial intermediaries are institutions or entities that connect “savers” and “investors”. However, their function is generally not limited to bringing together these two types of agents, but usually goes further. It includes savings on amounts that savers want and is available to investors on the amounts that suit them to be reversed.
Primary Financial Market
The primary financial market is where companies or public administrations in need of funds sell their securities to the public (institutional or retail investors).
IPO (Initial Public Offering)
An IPO is what a company has to do if it decides to go public. No entry means money for the company; it just means that people that were previously outside the company can now become owners.
SPO (Secondary Public Offering)
An SPO is a type of public offering made through an extension of capital. The main difference is therefore that while in an IPO, the operation is for existing values, the SPO refers to values to be conveyed.