Economics of Financial Intermediaries Lecture Notes

Comprehensive vocabulary definitions covering financial intermediaries, banking regulations (TUB/TUF), markets (MTA/MOT), bond and equity valuation models, monetary policy tools (ECB), and the pillars of the European Banking Union.

Financial System

A structure composed of various combined actors that allow for the optimization of the transfer of financial resources from one operator to another.

Financial Instruments

The technical forms through which it is possible to grant or obtain monetary financing, representing wealth in the form of credit or capital.

Real Circuit

The part of the economic system where goods, services, and the workforce are exchanged.

Financial Circuit

The part of the economic system where money, or other means of payment and financial instruments (titles representing credit and debt), are transferred.

Closed Economy Saving-Investment Identity

$S = I$, where savings ($S$) equals investment in real activities ($I$).

Trend

The long-term fundamental tendency of an economic cycle, which generally shows constant growth in advanced economies over recent centuries.

Recession

A phase of the economic cycle identified when there are at least two consecutive quarters of negative growth.

Expansion

A phase of growth initially without overheating and later characterized by strong acceleration (boom) and saturation of productive capacity.

Allocative Function

The priority function of the financial system to facilitate the transfer of resources from units in surplus to units in deficit through investment/financing instruments.

Financial Assets

Instruments other than currency issued by a subject needing money; they appear as active components in the surplus buyer's balance sheet and passive in the deficit individual's balance sheet.

Direct and Autonomous Exchange

A transfer of financial means occurring directly between surplus and deficit operators without the involvement of intermediaries.

Indirect or Intermediated Exchange

A transfer where financial intermediaries take their own positions in the balance sheet, offering their own liabilities to surplus units and granting credit to deficit units.

Adverse Selection

Information asymmetry characterizing the moment preceding the conclusion of a financial contract.

Moral Hazard

Information asymmetry characterizing a financial contract during its execution, where the taker may condition the relationship to their advantage.

Monetary Intermediaries

Entities, specifically banks, involved in the creation and circulation of means of payment and managing the payment system.

Liquidity

The ability to convert an investment into money quickly without time delay and without capital losses.

Forward Contracts

Standard or informal agreements used for risk management by locking in terms for future commodity or financial transactions.

Financial Balance (SF) Formula

$SF = S - I = \Delta AF - \Delta PF$, where $S$ is savings, $I$ is real activity investment, $\Delta AF$ is the change in financial assets, and $\Delta PF$ is the change in financial liabilities.

TUB (Testo Unico delle Banche)

The Consolidated Law on Banking (established around 1993) which governs banks and financial intermediaries in Italy.

Banking Activity (Art. 10 TUB)

The joint exercise of collecting savings from the public and granting credit, which has the character of an enterprise.

TUF (Testo Unico della Finanza)

The Consolidated Law on Finance which defines investment services and collective asset management.

Pro-Solvendo Credit Assignment

A credit transfer where, if the debtor does not pay, the purchaser can turn back to the original seller for recovery.

Pro-Soluto Credit Assignment

A credit transfer where the purchaser takes on all consequences of non-payment and cannot seek recourse from the original creditor.

Mutual Recognition

The principle allowing a EU financial intermediary to exercise authorized activities in any member state based on the authorization from their home country.

Significant Institutions

Banks with assets over 30 billion euro or representing at least 20% of their country's GDP, supervised directly by the European Central Bank.

Order-Driven Market

A market where trades are concluded through the interaction of orders placed by all participating intermediaries, often organized by an automated book.

Quote-Driven Market

A market where trades are based on quotations (bid and ask) provided by dealers or market makers who act as direct counterparties.

Bid-Ask Spread

The difference between the highest price a dealer is willing to sell at and the lowest price they are willing to buy at; it serves as dealer remuneration.

MTA (Mercato Telematico Azionario)

The main Italian screen-based equity market, subdivided into Blue Chip, STAR, and Standard segments.

ETF (Exchange Traded Fund)

An open investment fund or SICAV traded on an exchange like a stock, aiming to replicate a specific benchmark index.

BOT (Buoni Ordinari del Tesoro)

Zero-coupon short-term Italian government bonds with maturities of 3, 6, or 12 months, issued below par.

BTP (Buoni del Tesoro Poliennali)

Medium-to-long-term Italian government bonds with fixed coupons and maturities ranging from 3 to 30 years.

Marginal Auction

A distribution method used for BTPs where all winners pay the same price (the marginal price) determined by the last successful bid.

Current Yield

An approximation of the yield to maturity of a coupon bond, calculated as $r = \frac{F}{P_{0}}$ where $F$ is the cash flow and $P_{0}$ is the price.

Investment Grade

Bonds classified in ratings categories deemed worthy of investment due to the issuer's reliability.

Duration

The weighted average financial duration of the return on invested capital; a measure of interest rate risk and price volatility.

Modified Duration

$-\frac{Duration}{(1 + r)}$, expressing the price sensitivity of a bond to changes in market interest rates ($r$).

Gordon Growth Model

A stock valuation model: $P_{0} = \frac{D_{1}}{k_{e} - g}$, where $D_{1}$ is the expected dividend, $k_{e}$ is required return, and $g$ is the constant growth rate.

ROB (Riserva Obbligatoria)

The mandatory reserve that credit institutions must maintain in accounts at National Central Banks, currently calculated with a 1% rate on specific liabilities.

NPL (Non-Performing Loans)

Bank credits where collection is uncertain due to the debtor's inability to pay, classified into Bad Loans (Sofferenze), UTP (Unlikely to Pay), and Past Due.

Bail-in

A crisis resolution system involving the write-down or conversion of shares, bonds, and deposits (over 100,000 euro) to absorb losses and recapitalize a bank.

EBA (European Banking Authority)

The European authority responsible for supervising the banking market as part of the SEVIF.

SSM (Single Supervisory Mechanism)

The first pillar of the Banking Union, composed of the ECB and national authorities, tasked with banking supervision across the Eurozone.

Basel III Capital Ratios

Standards requiring a minimum Common Equity Tier 1 (CET1) of 4.5%, Tier 1 of 6%, and Total Regulatory Capital of 8%.

LCR (Liquidity Coverage Ratio)

A 30-day liquidity requirement: $\frac{Stock\,of\,HQLA}{Total\,Net\,Cash\,Outflows} \geq 100\%$.

SGR (Società di Gestione del Risparmio)

Asset management companies responsible for the institution, promotion, and management of investment funds.

SICAV (Società di Investimento a Capitale Variabile)

An open investment company where investors are shareholders and the capital varies according to subscriptions and redemptions.

Factoring

A contract involving the assignment of commercial credits to a specialist company (factor) for management, collection, and financing purposes.

TAEG

The effective annual global interest rate for consumer credit, including all costs known to the creditor (interest, fees, etc.).

IVASS

The independent Italian authority responsible for the supervision of the insurance market.