Introduction into money, banking and financial markets with Helene Schuberth

Aug 9, 2017 by

by Khanim Yusifova and Rinzin Namgay

On Wednesday morning, we started with a new module: reforming the financial and monetary system. The first lecture was done by Helene Schuberth, the head of the Foreign Research Division of the central bank of Austria. She told us about money, banking and financial markets. The topic was not new to us as we are both students of economics and finance. However we were ready for new and alternative ideas on how financial markets can function.

First of all, Dr. Schuberth explained why we need banks. She noted that the economy has a basic need for financial intermediation, where investments and savings are funneled to those looking for capital to grow their businesses. Dr. Schuberth said that banks are well equipped to absorb credit shocks. Moreover, she mentioned that the recent financial crisis was created by macroeconomic factors such as macroeconomic imbalances, unequal distribution of income and wealth and incoherencies of the tax code. During the lecture, she accentuated the role of the summits by the G20 which have taken place since 2008. The main goals of these Summits were: improved capital requirement and liquidity standards; limits to leverage; common strict rules and oversight for financial products and markets; low tax jurisdictions; bank resolution mechanisms and oversight and regulation of the shadow banking system. Besides, she compared the US and the EU and emphasized some effective features of them: in the US, for instance, they have more effective crisis management and faster legislative processes, while in the EU they introduced capital regulations with Basel III (it is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk) and focused on reforms and the supervisory architecture.

Khanim’s perspectives

 In this lecture I learned that the main role in the financial market should belong to the Central Bank, as it manages the country’s foreign exchange and gold reserves, regulates and gives money to other banks, attempts to control money supply, sets the official interest (which is an instrument to achieve stability) and exchange rates and provides price stability. To me it looks like a solar system: the central bank is in the middle and everything revolves around it. Furthermore, I learned about the significance of government bonds. They are instruments of governments and are bought by large-scale investors (e.g. insurance companies, banks, householders and farmers). Also I was always interested how banks actually transfer money and Helena explained that banks have own correspondent accounts in each country and use it for money transfers.

Rinzin’s perspectives

 An interesting topic that was introduced was the productivity of banks. Productivity is the output per unit of input. Unlike manufacturing and agriculture in which we can come up with meaningful measurements of productivity like the number of units produced per hr etc, the productivity of a bank can be seen in the balance sheet. Banks are financial institutions that deal with money, bonds and other financial products, these are mostly virtual or abstract. Therefore measurements for efficiency like profit, ROI etc. are  the only way to measure the productivity and efficiency of the financial institution.

Economists believe that banks are required to absorb credit shocks but actually banks propagate and amplify these shocks. The primary function of a commercial bank is easy to understand but with the application of financial instruments, financial vehicles and investment institutions, the system becomes much more complex and that can lead to banks  effectively propagating and amplifying financial shocks.

As it can be exemplified by the case of Bhutan that is a remote country with relatively isolated banking and financial system but Bhutan was affected by the financial crisis in 2008. The financial crisis in the West affected India, which in turn affected the Bhutanese financial markets and banks. This shows that financial institutions are interconnected and suffer a kind of domino effect. An alternative banking system must be considered to prevent future financial shocks.  However, finding new alternative solutions is not easy, as functions of financial markets and banks have already been well established and the system is locked in. As we learned in another lecture, cooperative banks such as the Triodos bank model or small community based microfinance systems could be a solution to the present banking system.