Money and Financial Institutions: A Comprehensive View

Posted on Mar 22, 2025 in Economy

Item 13: Money and Banks

What is Money?

Money is anything that serves as a medium of exchange. Its core functions are:

  • Medium of Exchange: Money is generally accepted for transactions and debt cancellation.
  • Unit of Account: Money is used for pricing and accounting.
  • Store of Value: Money is a way to keep wealth; a financial asset.
  • Standard of Deferred Payment: Payments to be made in the future are usually specified in terms of money.

Money can lose value due to inflation. Legal currency is issued by an institution that monopolizes its issuance. Bank money is generated by certain financial intermediaries through deposits and loans.

Forms of Currency and Money Supply

The form of currency is the sum of cash in the hands of the public (the amount of money held by individuals and businesses). The money supply is calculated as follows:

  • M1 = Cash + Demand Deposits
  • M2 = M1 + Savings Deposits
  • M3 = M2 + Term Deposits
  • M4 = M3 + Quasi-Money

Definitions:

  • Demand Deposits: Have immediate availability to their owner.
  • Savings Deposits: Are implemented in notebooks and support nearly the same operations as demand deposits.
  • Term Deposits: Funds placed on a fixed-term that cannot be withdrawn before the agreed time.
  • Quasi-Money: Highly liquid financial assets.

Banking Transactions

Banks attract household savings to be deposited. They then make loans to individuals and businesses that need financing for consumer spending or investment. The types of banking transactions are:

  • Liabilities:
    • Sight deposits in current accounts or savings accounts
    • Time deposits
  • Assets:
    • Credits, loans, discounting of bills, special arrangements.
  • Intermediation:
    • Securities deposits, transfers, safety deposit boxes, permanent ATM service.

Loans and Credits

Loans and credits are ways to obtain financing for people and enterprises. In a bank loan, the borrower receives the requested amount immediately. In a credit line, the bank grants a certain limit of money available.

Banks and Financial Institutions

Banks in Spain

Banks in Spain perform the following functions: own and manage currency and precious metal reserves, promote performance and financial stability, oversee the solvency and conduct of credit institutions and financial markets, put coins into circulation, and perform other related functions.

European Central Bank (ECB)

The ECB has the following functions: running the monetary policy of the EU, carrying out foreign exchange operations, promoting smooth operation, and authorizing the issuance of banknotes and coins in Euros.

Instituto de Crédito Oficial (ICO)

The ICO, or state bank, acts to complement private banks and provide funding.

Other Financial Entities

  • Insurance Companies: Issue insurance policies, offering compensation in the case of an insured event.
  • Pension Funds: Provide pensions that supplement Social Security retirement pay. The money from these funds is invested in long-term assets.
  • Investment Funds: A group of people pool money to invest, with a management entity in charge of managing these investments.
  • Leasing Entities: Finance capital equipment or property in exchange for a periodic fee. At the end of the contract, the customer usually has an option to purchase the asset.
  • Factoring Entities: A company sells to its customers, but not all customers pay in cash. Factoring means that the factoring company manages the collection.

The Stock Market

The stock market is the market for securities where the offer is given by the issuance of new securities. Participants include savers who want to invest, companies that sell securities, the State (which issues Public Debt), and people who want to sell their securities.

  • Primary Market: Where new securities are put on sale.
  • Secondary Market: Where existing securities are sold. Stocks, bonds, and treasury bills are primarily traded on the stock market.

Financial Instruments

  • Stock: A title that represents the share of those who possess it in the ownership of a company in the form of an S.A. (Sociedad Anónima).
  • Bonds: A part of the debt of the company that issues them. The company agrees with the holders to return the amount paid within a period and at an interest rate (usually fixed).
  • Public Debt: Fixed-income securities representing part of a loan requested by the State.

Equity Indices

Equity indices are a weighted average used to determine whether stocks have risen or fallen at the end of each session. The best-known indices are the IBEX-35, Dow Jones, Nikkei, Nasdaq, Footsie, and Eurostoxx.