IFF

Anthropocene

unofficial proposed geological epoch marking the period when human activity became the dominant influence on Earth's climate and ecosystems

THE FINANCIAL SYSTEM

A complex whole composed of interconnected Institutions,

Instruments and Markets, whose aim is to transfer savings from those who generate them to those who need them.

derivative

financial contract whose value is based on an underlying asset (such as stocks, bonds, or commodities), like options or futures.

Why do investors accept negative interest rates?

because a small guaranteed loss is often better than the alternatives during periods of severe economic turbulence. They essentially view the negative yield as a storage fee for keeping massive amounts of capital safely locked away in a highly secure asset.

crowdlending

a form of alternative finance where multiple individual or institutional investors pool their money to fund a loan for a person or business via specialized online platforms. The borrower repays the principal plus an agreed-upon interest, which is then distributed back to the investors

SEU (Surplus Economic Units)

These are entities that generate savings and provide financial resources to the system. According to the presentation's diagrams, examples of SEUs include households and non-profit institutions (NPI) in regions like Japan, the USA, and the Euro area, as well as certain governments

DEU (Deficit Economic Units)

These are entities that need financial resourcesand "import" capital to fund their activities. The presentation identifies governments, public and private companies, and certain households as typical DEUs

specific types of inefficiencies caused by asymmetric information between Surplus Economic Units (SEUs) and Deficit Economic Units (DEUs)

adverse selection and moral hazard

adverse selection

• Timing: This occurs before (ex ante) a financial transaction or contract is finalized.

• It is a problem where the "wrong" or most risky borrowers (DEUs) are the ones most likely to seek out loans or financial resources. Because the lender (SEU) lacks complete information about the borrower's true risk level, they may inadvertently select a high-risk borrower while low-risk ones are driven out of the market.

• The notes presentation that SEUs and DEUs accept the costs of financial intermediaries specifically to mitigate this type of inefficiency found in direct investments

Moral Hazard

(ex post) the transaction has taken place or the contract has been signed

.

Once a borrower (DEU) has obtained the funds, they may have an incentive to engage in activities that are undesirable from the lender's (SEU) perspective—such as taking on excessive risk with the borrowed money—because they do not bear the full consequences of a failure.

Like adverse selection, moral hazard is a cost that makes direct investment between SEUs and DEUs inefficient, justifying the existence of banks and other intermediaries who can better monitor borrower behavior

shadow bank

refers to the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but operate outside of normal banking regulations. It involves credit intermediation—such as lending and investing—where institutions raise short-term funds in money markets to finance longer-term investments. Anglo-Saxon model, based on the capital markets and with relevant

financial supermarkets

is a one-stop banking and financial institution that offers a wide variety of financial products and services under a single corporate umbrella. (banking, lending, insurance) Central European model, with banks as

keiretsu

a network of independent companies tied together through long-term business partnerships and cross-shareholdings. Japanese model, traditionally based on banking

CHARACTERISTICS OF FINANCIAL MARKETS

Amplitude Transparency Freedom Deepness Flexibility

Debt vs. Equity Debt Markets

involve borrowing and lending, where investors receive interest and repayment of principal (e.g., bonds, loans).

Debt vs. Equity Equity Markets

involve ownership stakes in companies, where investors earn returns through dividends and capital gains (e.g., stocks).

Direct vs. Intermediated Direct Finance

occurs when borrowers obtain funds directly from lenders through financial instruments such as bonds or shares.

Direct vs. Intermediated Intermediated Finance

occurs when financial institutions (e.g., banks) stand between savers and borrowers, channeling funds between them.

Monetary vs. Capital Money (monetary) Markets

trade short-term financial instruments, typically with maturities of less than one year.

Monetary vs. Capital Capital Markets

trade long-term securities and provide funding for investments extending beyond one year.

Free vs. Regulated Free Markets

operate with minimal government intervention, allowing prices and transactions to be determined mainly by supply and demand.

Free vs. Regulated Regulated markets

are subject to rules and oversight designed to ensure transparency, fairness, and financial stability.

Primary vs. Secondary Primary markets

are where new securities are issued and sold to investors for the first time, providing funds to the issuer.

Primary vs. Secondary Secondary markets

are where existing securities are traded among investors after issuance.

Organised vs. Over-The-Counter (OTC) Organized Markets

are formal exchanges with standardized contracts and centralized trading rules.

Organised vs. Over-The-Counter (OTC) OTC Markets

involve direct trading between parties, often with customized contracts and less centralized oversight.

Centralised vs. Decentralised Centralized Markets

concentrate trading through a single exchange or platform where orders are matched.

Centralised vs. Decentralised Decentralized Markets

operate through multiple participants and venues without a single central marketplace.

Traded vs. Non-Traded Traded Assets

can be bought and sold in a market, allowing investors to transfer ownership.

Traded vs. Non-Traded Non-Traded Assets

are not regularly exchanged in organized markets and are often less liquid.

Cash (Spot) vs. Derivatives Cash (spot) markets

involve the immediate purchase and sale of the underlying asset.

Cash (Spot) vs. Derivatives Derivative markets

trade contracts whose value is based on an underlying asset, index, or rate (e.g., futures, options, swaps).

National vs. International (Eurodollar) National markets

operate within a country's borders and are governed primarily by domestic laws and participants.

National vs. International (Eurodollar) International (Eurodollar) markets

involve financial transactions across borders; the Eurodollar market specifically trades U.S. dollar deposits held outside the United States.

Traditional vs. FinTech Traditional finance

relies on established institutions such as banks, stock exchanges, and insurance companies to provide financial services.

Traditional vs. FinTech Fintech finance

uses technology-driven platforms and innovations to deliver financial services more efficiently, often with lower costs and greater accessibility.

Financial Centres

the place where financial intermediates coordinate transactions and arrange the settlement of payments” “the grouping together, in a given urban space, of a certain number of financial services

IMF lending

smoothes adjustment to various shocks, helping a member country avoid disruptive economic adjustment or sovereign default, something that would be extremely costly, both for the country itself and possibly for other countries through economic and financial ripple effects (known as contagion).

IMF programmes

can help unlock other financing, acting as a catalyst for other lenders. The program me is a signal that the country has adopted sound policies, reinforcing policy credibility and increasing investors' confidence.

WORLD BANK

current goal is to reduce worldwide poverty by achieving the Millennium Development goals.

helps developing countries and their people to eliminate poverty with environmentally sustainable policies.

provides low or no interest loans to countries that have unfavorable or no access to international credit markets.

does not look for a profit.

primarily financed by selling AAA-rated bonds

BANK FOR INTERNATIONAL SETTLEMENTS

 international Central Bank cooperation.

 research in financial economics and data compillation.

 organized regular meetings in Basel - regulatory supervision: Basel Capital

Accord (1998), and its revisions Basel II (2001) and Basel III (2010).

 a bank for central banks.

 trustee in international agreements

 agency functions (as in the European Monetary System previous to the single

currency).

 emergency funding to some countries

FINANCIAL STABILITY BOARD

The FSB was created in 2009, and substituted the previous and less ambitious

Financial Stability Forum.

 Hosted by the BIS in Basel.

 In charge of identifying the development of systemic risk in the financial

sector, of framing the policy sector policy actions that can address these risks,

and of overseeing the implementation of those responses.

 Reports to the G-20 (Heads of State/Government, Ministers of Finance and

Central Bank Governors)

 Chaired by Randal Quarles (Vice Chair of the Fed). Previously, Mark Carney

(Governor of BoE)

European Financial Stability Facility (EFSF)

June 2010 a temporary crisis resolution mechanism. It has bailed-out

Ireland, Portugal and Greece, totaling 174 milliard €.

European Stability Mechanism (ESM)

April 2012 a permanent rescue mechanism. It has rescued Spain and

Cyprus. all eu members must join and pay a fraction of its capital

remittance

a transfer of money from one party to another. It most commonly refers to funds sent by foreign workers or expatriates to family and loved ones in their home country, but it can also simply mean a bill, invoice, or gift sent over a distance

Virtual currency

is a digital representation of value that acts as a medium of exchange, unit of account, or store of value. It is not legal tender, meaning it is not issued or guaranteed by a central bank or government, but is instead accepted by a community of users.

The word bitcoin may be confusing, as it is used with three alternative meanings:

The blockchain technological platform

• A protocol used in the blockchain platform to transfer assets.

• A virtual currency which uses the blockchain, the first and

largest of cryptocurrencies. Created in 2009 by the unknown

person (s) hiding behind the name Nakamoto

Cyryptocurrency pros

No need for central register

• Byzantine generals

• Privacy

• Opens the opportunity for the Internet of Money.

The Byzantine Generals Problem

a game theory and distributed computing puzzle that describes how independent parties must reach a mutual agreement (consensus) without a central authority, even when some participants may be deceptive, faulty, or sending conflicting information

Cryptocurrency cons

Scalability

• Process capacity

• Latency

• Energy waste in mining

• Safety – Ponzi schemes and frauds

• Time for downloading the database

• Anonymity favours the creation of unhedged risks

• Anonymity facilitates crime

Central Bank Digital Currency

a digital form of a country's sovereign fiat currency that is directly issued and backed by a central bank. It serves as a digital equivalent to physical cash, functioning as legal tender to make secure everyday payments and manage savings

plutonomy

an economic system where growth is overwhelmingly powered and consumed by a wealthy elite

Why small countries develop OFC (offshore financial centers)s and/or Tax Havens?

because they lack the abundant natural resources or large internal markets of larger nations. By offering zero-to-low tax rates and strict financial secrecy, they attract massive amounts of foreign capital, allowing them to generate substantial national wealth.

Black list of Tax Havens

EU list reputational stigma?

Panama Papers

A 2016 leak of 11.5 million documents from Mossack Fonseca that revealed how wealthy individuals, politicians, and companies used offshore entities to hide assets and reduce taxes. The leak triggered global investigations and increased scrutiny of tax avoidance and financial secrecy.

Dutch Disease

describes the paradoxical economic phenomenon where a sudden, massive influx of foreign currency—typically from a major natural resource discovery or a surge in commodity prices—leads to the rapid strengthening of a country's local currency, which in turn stifles its manufacturing and agricultural sectors

paradox of thrift

an economic theory stating that while saving money is beneficial for an individual, if everyone saves more simultaneously during an economic downturn, it harms the overall economy.

SWF (Sovereign Wealth Fund)

A state-owned investment fund that invests a country's surplus revenues—often from natural resources like oil and gas—in financial assets such as stocks, bonds, and real estate. In the context of avoiding Dutch disease, used to invest resource revenues abroad instead of spending them immediately at home, which helps prevent excessive currency appreciation and protects the competitiveness of other industries. A well-known example is Government Pension Fund Global of Norway.

crowding out

a phenomenon where increased government spending and borrowing lead to a decrease in private sector investment

DELEVERAGING

the process by which individuals, companies, or entire economies reduce their total debt levels. Entities typically achieve this by paying down loans, cutting expenditures, or selling assets to lower their financial risk and restore balance sheets to stable, manageable levels

FUNCTIONS OF THE FINANCIAL SYSTEM

To provide the necessary funds for investment, at the appropiate time and with the minimun cost

To guarantee an efficient allocation of financial resources

To allow financial and monetary stability, fostering an active monetary policy

FUNCTIONS PERFORMED BY FINANCIAL MARKETS

The clearing and settlement of payments

The pooling and subdividing of resources

The transfer of economic resources

The management of risks

The provision of price information

The development of schemes to deal with incentive problems

global capitalization

the total market value of all publicly traded companies worldwide.

regulatory trilemma

International financial integration, National responsibility for financial policy, Financial stability

Central Bank

The financial institution in charge of supervising the monetary system of a given country or a wider monetary area, typically conducting monetary policy with the goal of achieving non-inflationary growth

Primary objective of European System of Central Banks

maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2.shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources.

FUNCTIONS PERFORMED BY THE ECB

to define and implement the monetary policy of the Union;

— to conduct foreign-exchange operations consistent with the

provisions of Article 111 of the Treaty of the Union;

— to hold and manage the official foreign reserves of the Member

States;

— to promote the smooth operation of payment systems;

— to contribute to the smooth conduct of policies pursued by the

competent authorities relating to the prudential supervision of

credit institutions and the stability of the financial system.

— to authorize the issue of banknotes within the euro area

Advisory functions • Statistical data gathering • International cooperation

SECURITIES MARKETS PROGRAMME (SMP)

The objective of this programme is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism.

Under the terms of this , Eurosystem central banks may purchase the following:

(a) On the secondary market, eligible marketable debt instruments issued by the central governments or public entities of the Member States whose currency is the euro.

(b) On the primary and secondary markets, eligible marketable debt instruments issued by private entities incorporated in the euro area.

Maastricht criteria: economic and legal convergence

Price developments: inflation not higher than 1,5% over the average of the three best performing countries

Fiscal developments (deficit): deficit under 3% of GDP

Fiscal developments (public debt): debt under 60% of GDP

Exchange rate developments: no devaluation in the previous two years

Long term interest rates : interest rates not higher than 2% over the average of the three best performing countries in terms of price stability.

Legal convergence: independence of the Central Bank and other legislation to be adopted

liquidity trap

a paradoxical economic situation where low interest rates fail to stimulate borrowing, spending, or investment. Because people and businesses expect adverse economic conditions, they hoard cash rather than spend or invest it, rendering traditional monetary policy ineffective.

Federal reserve objective

“dual mandate" of maximum employment and price stability

INTERNATIONAL ROLE OF THE EURO

International Debt Markets

Increase of market share

Decrease of other similar currencies

Issued by US and UK residents

Key role in Scandinavia, Central and Eastern Europe

London is the main financial centre for this market

High rate of international debt compared to total debt

Forex Market

Inherited the Deutsche Mark role

“shelter currency” in Scandinavia, Central and Eastern Europe

Foreign Trade

Half of Euro area foreign trade is denominated in euros

Japan: imports (40%----- 52%)

exports (18%----- 29%)

Third countries

50 countries all over the world have included explicitly the euro as an objective of

their exchange rate policies.

European politics

Assumption of an international role

It is not an explicit objective of neither EU Commission or ECB.

Should it be? - the exorbitant privilege of the US $

FUNCTIONS PERFORMED BY THE BANCO DE ESPAÑA AS A MEMBER OF THE ESCB

1. To define and implement monetary policy

2. Foreign exchange operations.

3. To promote the good and smooth functioning of the payment systems.

4. To put in circulation legal tender banknotes

OTHER FUNCTIONS PERFORMED BY THE BANCO DE ESPAÑA

1. To possess non transferred reserves.

2. To supervise some financial markets.

3. To promote the stability of the Financial System and that of the payment systems.

4. To put coins in circulation.

5. To produce and publish statistics

6. Financial and Treasury agent of the Government.

7. To advise the Government

8. Other functions.

MAIN FUNCTIONS OF CREDIT INSTITUTIONS

•Receive deposits •Provide loans and credits. •Factoring. •Leasing. •Payments. •Issuance and management of payment instruments. •Provision of guarantees. •Intermediation in interbank markets. •Operations over securities. •Issuance of securities. •Advisory functions. •Wealth management. •Depositary of securities. •Commercial reports. •Safes rental.

STEPS IN THE LIFE OF A CREDIT INSTITUTION IN EUROPE

a) Creation of new CI or establishment of CI not yet authorised in the EU

b) Opening new branches in Spain

c) Opening new branches and freedom to provide services in another EU country

d) Opening new branches and freedom to provide services in an non- EU country

credit institution

a company or legal entity authorized to take deposits or other repayable funds from the public and grant credits for its own account. This category forms the foundation of the banking system and includes traditional commercial banks, savings banks, and credit unions.

COMPULSORY RULES FOR C. I. SOLVENCY.

a) Minimun Reserves

b) Solvency ratio

c) Limit to large exposures

d) Limit to fixed assets

e) Provisions for insolvency

f) Provisions for pension funds (IC employees)

g) Provisions for country-risk

• Foreign Exchange Rate Risk

• Interest Rate Risk

• Political Risk

COMPULSORY RULES FOR C. I. CONTROL.

a) Accountancy

b) Customer protection***

c) Participation in capital

d) Money laundering

e) Register at the Central Bank.

INSTITUTO DE CRÉDITO OFICIAL ICO

A state-owned corporate entity attached to the Ministry of Economy and Finance of Spain with two roles:

As a Specialised Credit Institution: the provision of medium and long-term

financing for productive investments by enterprises established in Spain.

In this area, ICO works in two ways:

1. mediation or second-floor loans; 2. direct operations

As the State's Financial Agency: the provision of financing, on the Goverment's express instructions for victims of serious economic crises,

natural disaster or similar situations. In these cases ICO operates once the public funds have been allocated and/or though the compensation of

interest rate spreads.

In addition, ICO manages official financing instruments for export and

development.

What does INSTITUTO DE CRÉDITO OFICIAL ICO do

Fosters the development of investment projects in Spain

Small and medium-sized enterprises

Corporate growth

Entrepreneurs

Co-operate in the financing of the public sector

Large-scale projects in Spain

• Facilitate technological innovation

• Upgrade the Spanish film industry production

• Stimulate large-scale investments by Spanish enterprises abroad

• Back exports and official aid to development

• Micro-Credit Fund

• Favour the use of renewable energies, energy efficiency and

environmental policies

• Microcredits

• AXIS, COFIDES, CERSA.

Establecimiento Financiero de Crédito (EFC)

A Spanish non-bank financial institution that provides credit and lending services (such as loans, leasing, or consumer finance) but cannot take deposits from the public like a traditional bank. It focuses mainly on specialised lending activities under financial regulation.

excessive leverage

a bank is using too much borrowed money compared to its own capital (equity). So if many of its investments go bad or lose value, the bank doesn’t have enough of its own cushion to absorb the losses—because it is “over-borrowed.” This is exactly one of the key reasons banks like Lehman Brothers collapsed during the 2008 financial crisis: small losses on highly leveraged positions quickly turned into insolvency.

Bad lending

a bank gives out too many loans that are risky or likely not to be repaid (e.g. to borrowers with weak credit or in overvalued sectors like a housing bubble).

When many of those loans default, the bank suffers heavy losses and may become insolvent—this happened to institutions like Caja Castilla-La Mancha (CCM), which was rescued after large losses from poor-quality lending during the Spanish financial crisis.

Mismatching (asset–liability mismatch)

a bank funds long-term loans (like mortgages) using short-term borrowing, so it must constantly refinance its debts.

If short-term funding dries up or becomes too expensive, the bank can’t roll over its obligations even if its assets are “good,” leading to a liquidity crisis—this was a key issue during the collapse of Royal Bank of Scotland in the 2008 financial crisis.

Fixed rate

An interest rate that stays the same for the entire life of a loan or financial product, so payments are predictable and don’t change with market conditions.

Floating (variable) rate

An interest rate that changes over time based on a benchmark (like Euribor or SOFR), so payments can go up or down depending on market interest rates.

Lack of control (fraud)

This happens when a bank has weak internal oversight, allowing employees to take excessive hidden risks or commit fraud without being detected.

Examples include the collapse of Barings Bank in 1995 due to rogue trading by Nick Leeson, and the 2008 Société Générale trading loss caused by Jérôme Kerviel, where massive unauthorized positions led to billions in losses.

Basel I

A 1988 international banking framework that introduced minimum capital requirements (banks must hold at least 8% capital against risk-weighted assets) to make banks more stable.

Basel II

A 2004 update that made capital rules more risk-sensitive and added supervision and disclosure requirements (three pillars: capital, supervisory review, and market discipline).

Basel III

A post-2008 reform that strengthened bank resilience by increasing capital quality, adding liquidity requirements (like LCR and NSFR), and limiting excessive leverage.

Ethical Banks

Banks that prioritize social and environmental impact alongside profit, avoiding investments in harmful industries and focusing on sustainability and responsible lending.

Islamic Banks

Banks that operate under Sharia law, meaning they avoid charging interest (riba) and instead use profit-sharing or asset-based financing structures.

Mutual guarantee societies

Institutions where small and medium-sized firms collectively guarantee each other’s loans, improving access to credit by reducing lender risk.

KIVA

A microfinance platform that connects individual lenders with entrepreneurs in developing countries to provide small, interest-free or low-interest loans.

GLOBAL SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS - GSIFI

Large financial institutions whose failure could cause serious disruption to the global financial system and economy due to their size, interconnectedness, and importance in financial markets. Because of this, they are subject to stricter regulation, higher capital requirements, and closer supervision to reduce systemic risk.

Risks of shadow banking

Shadow banks (non-bank financial intermediaries like hedge funds, money market funds, and securitisation vehicles) can increase systemic risk because they operate with less regulation and transparency than traditional banks. They often rely on short-term funding while investing in long-term or risky assets, which can trigger liquidity crises and contagion during financial stress.

Deposit insurance

A system where government-backed protection guarantees bank deposits up to a certain amount if a bank fails, helping prevent bank runs by reassuring depositors their money is safe.

Proprietary trading

When a bank trades financial instruments (stocks, bonds, derivatives) using its own money for profit, rather than on behalf of clients—this is risky because losses directly hit the bank’s capital.

Volcker Rule

A U.S. regulation introduced after the 2008 crisis that restricts banks with deposit insurance from engaging in proprietary trading and limits their investments in hedge funds and private equity to reduce risk-taking with insured deposits.