Eco. 521 Assignment—16th April, 2019

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Table 2.1: Net sources of finance for corporations in Germany, Japan, the UK, and the US, average 1970–98
Germany Japan UK US
Internal 78.9 69.9 93.3 96.1
Bank finance 11.9 26.7 14.6 11.1
Bonds −1.0 4.0 4.2 15.4
New equity 0.1 3.5 −4.6 −7.6
Trade credit −1.2 −5.0 −0.9 −2.4
Capital transfers 8.7 — 1.7 —
Other 1.4 1.0 0.0 −4.4
Statistical adjustment 1.2 0.0 −8.4 −8.3
Source: J Corbett and T Jenkinson, ‘How is Investment Financed? A Study of Germany, Japan, the United Kingdom and the United States’ (1997)
One reason for the pronounced variation in the size and nature of financial systems is the different functions that they perform. In particular, the way in which corporate sectors finance themselves varies appreciably among countries. For example, stock markets play an important part in corporate financing in some but not all countries, whereas banks tend to be of considerable significance in most countries. Similarly, the significance of bond markets for the financing of corporations varies from the US, where it is critically important, to some Continental European countries, where it remains of modest importance. Table 2.2 shows the way in which corporations funded their activities over thirty years to the end of the last century in four countries: Germany, Japan, the UK, and the US. It records that the dominant source of finance is internal, namely the profits of businesses that are not distributed as dividends. These account for between three-quarters of corporate funding in Japan and Germany and over 90 per cent in the UK and the US. Most of that goes towards funding the replacement of the existing capital stock.

Bonds
Bonds are debt instruments whereby an investor effectively is loaning money to a company or agency (the issuer) in exchange for periodic interest payments plus the return of the bond’s face amount when the bond matures. Bonds are issued by corporations, the federal government plus many states, municipalities and governmental agencies. A typical corporate bond might have a face value of $1,000 and pay interest semi-annually. Interest on these bonds are fully taxable, but interest on municipal bonds is exempt from federal taxes and may be exempt from state taxes for residents of the issuing state. Interest on Treasuries are taxed at the federal level only. Bonds can
be purchased as new offerings or on the secondary market, just like stocks. A bond’s value can rise and fall based on a number of factors, the most important being the direction of interest rates. Bond prices move inversely with the direction of interest rates.

Mutual funds
A mutual fund is a pooled investment vehicle managed by an investment manager that allows investors to have their money invested in stocks, bonds or other investment vehicles as stated in the fund’s prospectus. Mutual funds are valued at the end of trading day and any transactions to buy or sell shares are executed after the market close as well. Mutual funds can passively track stock or bond market indexes such as the S&P 500, the Barclay’s Aggregate Bond Index and many others. Other mutual funds are actively managed where the manager actively selects the stocks, bonds or other investments held by the fund. Actively managed mutual funds are generally more costly to own. A fund’s underlying expenses serve to reduce the net investment returns to the mutual fund shareholders. Mutual funds can make distributions in the form of dividends, interest and capital gains. These distributions will be taxable if held in a non-retirement account. Selling a mutual fund can result in a gain or loss on the investment, just as with individual stocks or bonds. Mutual funds allow small investors to instantly buy diversified exposure to a number of investment holdings within the fund’s investment objective. For instance, a foreign stock mutual might hold 50 or 100 or more different foreign stocks in the portfolio. An initial investment as low as $1,000 (or less in some cases) might allow an investor to own all the underlying holdings of the fund. Mutual funds are a great way for investors large and small to achieve a level of instant diversification.

There are, however, certain broad areas of consideration and concern that should be addressed in the lending policies of all banks regardless of size or location. These include the following, as minimums:
• General fields of lending in which the bank will engage and the kinds or types of loans within each general field;
• Lending authority of each loan officer;
• Lending authority of a loan or executive committee, if any;
• Responsibility of the board of directors in reviewing, ratifying, or approving loans;
• Guidelines under which unsecured loans will be granted;
• Guidelines for rates of interest and the terms of repayment for secured and unsecured loans;
• Limitations on the amount advanced in relation to the value of the collateral and the documentation required by the bank for each type of secured loan;
• Guidelines for obtaining and reviewing real estate appraisals as well as for ordering reappraisals, when needed;
• Maintenance and review of complete and current credit files on each borrower;
• Appropriate and adequate collection procedures including, but not limited to, actions to be taken against borrowers who fail to make timely payments;
• Limitations on the maximum volume of loans in relation to total assets;
• Limitations on the extension of credit through overdrafts;
• Description of the bank's normal trade area and circumstances under which the bank may extend credit outside of such area;
• Guidelines, which at a minimum, address the goals for portfolio mix and risk diversification and cover the bank's plans for monitoring and taking appropriate corrective action, if deemed necessary, on any concentrations that may exist;
• Guidelines addressing the bank's loan review and grading system ("Watch list");
• Guidelines addressing the bank's review of the Allowance for Loan and Lease Losses (ALLL); and
• Guidelines for adequate safeguards to minimize potential environmental liability.

i. Tightness of the market: – it is measured using the bid-ask spread and it determines the cost of unwinding a position at short notice for a standard amount.
ii. Depth of the market: – this assesses the actual transaction volume that can be instantly executed without affecting the market prices.
iii. Market resilience: – this describes the momentum at which the market price recuperates to their equilibrium position after a major shock from the transaction.

Central bank liquidity
Central bank liquidity is the ability of the central bank to supply the liquidity needed to the financial system. It is typically measured as the liquidity supplied to the economy by the central bank, i.e. the .ow of monetary base3 from the central bank to the financial system. It relates to central bank operations liquidity, which refers to the amount of liquidity provided through the central bank auctions to the money market according to the monetary policy stance. The latter rejects the prevailing value of the operational target, i.e. the control variable of the central bank. In practice, the central bank strategy determines the monetary policy stance, that is, decides on the level of the operational target (usually the key policy rate). In order to implement this target, the central bank uses its monetary policy instruments (conducts open market operations) to regulate the liquidity in the money markets so that the interbank rate is closely aligned to the operational target rate set by the prevailing monetary policy stance.
More technically, central bank liquidity, a synonym for the supply of base money, results from managing the central bank assets in its balance sheet, in accordance to the monetary policy stance4. Consider the balance sheet of a central bank. In the liabilities side, the main components are the autonomous factors and the reserves. The autonomous factors contain transactions which are not controlled by the monetary policy function of the central bank6. The reserves refer to balances owned by credit institutions and held with the central bank in order to meet settlement obligations from interbank transactions and to fulfil reserve requirements, i.e. the minimum balances that banks are required to hold with the central bank. The need for banknotes and the obligations of banks to fulfil the reserve requirements create an aggregate liquidity deficit in the system, thereby making it reliant on refinancing from the central bank. The central bank, being the monopoly provider of the monetary base, provides liquidity to the financial system through its open market operations. Thus, these operations appear in the asset side of the central bank’s balance sheet. The liquidity provided by the central bank through its operations, i.e. its assets, should balance the liquidity deficit of the system, i.e. its liabilities. Therefore, the central bank provides liquidity equal to the sum of the autonomous factors8 plus the reserves. The central bank manages its market operations so that the inter-bank short-term lending rates remain closely aligned to the target policy rate.
Funding liquidity
The Basel Committee of Banking supervision defines funding liquidity as the ability of banks to meet their liabilities, unwind or settle their positions as they come due(BIS, 2008)11.

Traditionally, banks basically function as financial intermediaries and collecting points of fund for different groups within the society. Therefore, banks are expected to maintain adequate liquidity in order to efficiently perform their daily obligations such as meeting depositors’ demand or withdrawals, settling wholesale commitments and provision of funds when borrowers draw on committed credit facilities (FSC, 2010). They must also ensure sufficient funds in order to be able to finance increase in assets (Bank, 2004). Hence, banks automatically transform short-term, liquid liabilities into long-term illiquid assets (ECB, 2002). This function serves to protect customers against liquidity problems, but, however, exposes banks themselves to such risk which in extreme case or worst scenario is capable of causing bank runs regardless of soundness of the bank (ECB, 2002). The Central
Bank argued that such liquidity problem in a bank is capable of spreading to the other banks and thereby causing a real bank panic.
The term liquidity is characterized by ambiguity due to so many facets and definitions, therefore, to use it productively and purposely, it needs further and clear definitions (Goodhart, 2008). Literature on finance agrees that in the real sense, liquidity is easy to identify than to define. In economics literature, the understanding of liquidity represents an economic agent’s ability to exchange his/her current wealth for assets or others such as goods and services. Two important issues are emphasized in this meaning of liquidity. The first one describes liquidity as a flow concept while the second issue relates liquidity to the ability to realize these flows (ECB, 2002). Failure to achieve this would render the financial entity/firm illiquid. The Basel Committee on Banking Supervision (2006) describes liquidity as a reservoir of funds that management can readily have access to in order to meet funding requirements and business opportunities.
However, the Swiss Takeover Board in 2007 argued that there is no precise definition for liquidity, and the issue of definition should be left open. Hence, the Board suggests that, it should be the Supervisory authority’s prerogative to define liquidity in its jurisdiction and decide the criteria to be used for determining the liquidity and illiquidity of a security and a firm and should publish a report to clarify the liquidity concepts. In a similar vein, both Vento and Ganga (2009) and David (2007) agreed that in financial parlance, liquidity has multiple connotations. However, Vento & Ganga (2009) went further to define liquidity in a broader sense as “the amplitude of a financial firm to keep up all the time a balance between the financial inflows and outflows over time.”
Market Liquidity
The last two decades witnessed increasing banks’ usage of the financial markets as a means of financing long-term assets such as loan (Deutsche Bundesbank, 2008). Banks have also, increasingly used both the interbank markets through which banks source for funds among themselves, and the markets for innovative financial instruments such as repurchase agreements, credit derivatives and securitizations to complement their traditional sources of finance such as savings deposits (Deutsche Bundesbank, 2008).

BANK EARNING
Banks are companies (normally listed on the stock market) and are therefore owned by, and run for, their shareholders. Banks need to make enough money to pay their employees, maintain the buildings and run the business.
There are three main ways banks make money: by charging interest on money that they lend, by charging fees for services they provide and by trading financial instruments in the financial markets.
Retail and commercial banks need lots of customers to deposit their money with them, as the banks use these deposits to earn enough money to stay in business.
To encourage people to keep their money in a bank, the bank will pay them a small amount of money (interest). This interest is paid from the money the bank earns by lending out the deposited money to other customers.
Banks also lend to each other on a huge scale. Most of this lending is on a short-term basis, usually no longer than three months, often just overnight
If a bank has a surplus of liquid (available) assets then the bank can make money by lending these assets to other banks in the interbank market. As money flows in and out, banks will both lend and borrow money on the interbank market as needs require.
The banks lend money to customers at a higher rate than they pay to depositors or than they borrow it. The difference, known as the margin or turn, is kept by the bank. For example, if a bank pays 1% interest on deposits, they may charge 6% interest on loans.
Lending takes the form of overdrafts, bank loans, mortgages (loans secured on property) and credit card facilities. The bank will work out the cost of making the funds available to the borrower and add a profit margin.
Loans approved by banks will vary in size, and may have fixed or variable interest rates but, in all cases, the bank will lend the money to the customer at a higher rate than they borrow it.
Deposits are the banks' liabilities. If everyone was to demand their money back at once, the bank would not be able to pay. Because they lend money out, banks are required to carry a cushion of capital so they have sufficient money to pay those customers likely to withdraw their money at any time.
Another way banks make money is through charging fees. Most retail and commercial banks will charge for specific services, for example, for processing cheques, for other transactions and for unauthorized borrowing e.g. if a client exceeds an overdraft limit.
Investment banks earn huge fees for advising large companies and public institutions on issuing bonds and shares (securities), and from underwriting these issues.
Investment banks charge fees for advising clients wanting to bid for other companies in mergers and acquisitions, or management buy-outs. These deals can be very complex and provide an important source of income as well as an opportunity to underwrite shares related to these deals.
Investment banks also make their money by trading securities in the secondary markets. Their aim is to sell these securities for more than they pay for them or purchase them for less than they sold them. The difference, called the turn, is kept by the bank.
Banks also buy and sell currencies of all the nations of the world, trying to take advantage of the different prices of these currencies against each other, which are changing all the time.

 To protect uninsured depositors, bondholders, and creditors in the event of insolvency, and liquidation. When financial institutions fail, regulators such as the FDIC have to intervene to protect insured claimants. The capital of a financial institution offers protection to insurance funds and ultimately the taxpayers who bear the cost of insurance fund insolvency. This leads to the third function of capital:
 To protect financial institution insurance funds and taxpayers. At this time, each of the government deposit insurance funds is fully funded. By holding capital and reducing the risk of insolvency, a financial intermediary protects the industry larger insurance premiums. Such premiums are paid out of the net profits of the financial institution. Thus, a fourth function of capital is as follows;
 To protect the financial institution owners against increases in insurance premiums. Finally, just as for any other firm, equity or capital is an important source of financing for a financial institution. In particular, subject to regulatory constraints, financial institutions have a choice between debt and equity to finance new projects and business expansion.
Percentage ratio of a financial institution's primary capital to its assets (loans and investments), used as a measure of its financial strength and stability. According to the Capital Adequacy Standard set by Bank for International Settlements (BIS), banks must have a primary capital base equal at least to eight percent of their assets: a bank that lends 12 dollars for every dollar of its capital is within the prescribed limits. Fundamental objective for holding adequate capital by banks
Strengthen the soundness of banks.
Stability of the banking system
Provide a stable resource to absorb losses
Loss absorption capacity based on the business risk
BANK EARNING
Banks are companies (normally listed on the stock market) and are therefore owned by, and run for, their shareholders. Banks need to make enough money to pay their employees, maintain the buildings and run the business.
There are three main ways banks make money: by charging interest on money that they lend, by charging fees for services they provide and by trading financial instruments in the financial markets.
Retail and commercial banks need lots of customers to deposit their money with them, as the banks use these deposits to earn enough money to stay in business.
To encourage people to keep their money in a bank, the bank will pay them a small amount of money (interest). This interest is paid from the money the bank earns by lending out the deposited money to other customers.

RISK ANAYSIS
Risk analysis is the process of identifying and analyzing potential issues that could negatively impact key business initiatives or critical projects in order to help organizations avoid or mitigate those risks.
Performing a risk analysis includes considering the probability of adverse events caused by either natural processes, like severe storms, earthquakes or floods, or adverse events caused by malicious or inadvertent human activities; an important part of risk analysis is identifying the potential for harm from these events, as well as the likelihood that they will occur.
Enterprises and other organizations use risk analysis to:
• anticipate and reduce the effect of harmful results from adverse events;
• evaluate whether the potential risks of a project are balanced by its benefits to aid in the decision process when evaluating whether to move forward with the project;
• plan responses for technology or equipment failure or loss from adverse events, both natural and human-caused; and
• Identify the impact of and prepare for changes in the enterprise environment, including the likelihood of new competitors entering the market or changes to government regulatory policy.
Benefits of risk analysis
Organizations must understand the risks associated with the use of their information systems to effectively and efficiently protect their information assets.
Risk analysis can help an organization improve its security in a number of ways. Depending on the type and extent of the risk analysis, organizations can use the results to help:
• identify, rate and compare the overall impact of risks to the organization, in terms of both financial and organizational impacts;
• identify gaps in security and determine the next steps to eliminate the weaknesses and strengthen security;
• enhance communication and decision-making processes as they relate to information security;
• improve security policies and procedures and develop cost-effective methods for implementing these information security policies and procedures;
• put security controls in place to mitigate the most important risks;
• increase employee awareness about security measures and risks by highlighting best practices during the risk analysis process; and
• understand the financial impacts of potential security risks.

cruthugwu.blogspot.com
UGWU RUTH CHIDIEBERE
ASSIGNMENT MONETARY ECONOMICS 521.
MAY 2019

NWOKOCHA NNEBUIHE IHECHI
PG/MSc/17/03025
ECO 521 ASSIGNMENT
8. Comparative Financial Systems
A 'financial system' is a system that allows the exchange of funds between lenders, investors, and borrowers. Financial systems operate at national and global levels.[1] They consist of complex, closely related services, markets, and institutions intended to provide an efficient and regular linkage between investors and depositors.[2]
A financial system no matter how rudimentary is a complex system. It is complex in its operation such that neither the system itself nor its operation can be measured accurately. Because of this complexity a simple definition cannot adequately capture what a financial system is. A financial system comprises financial institutions, financial markets, financial instruments, rules, conventions, and norms that facilitate the flow of funds and other financial services within and outside the national economy. The financial system can be described as a whole system of all institutions, individuals, markets and regulatory authorities that exist and interact in a given economy.
Money, credit, and finance are used as medium of exchange in financial systems. They serve as a medium of known value for which goods and services can be exchanged as an alternative to bartering.[3] A modern financial system may include banks (public sector or private sector), financial markets, financial instruments, and financial services. Financial systems allow funds to be allocated, invested, or moved between economic sectors. They enable individuals and companies to share the associated risks

The institutions, government and individuals form the participants in various markets; money markets (including foreign exchange) and capital markets (including security) markets. The participant buy (borrow) and sell (lend) money to different parties at a price (interest or dividend) within the market, which is determined by the forces of demand and supply. In a broader aspect a financial system can also be defined as a system that allows the transfer of money between savers (and investors) and borrowers operating on a global, regional or firm specific level. According to Gurusam, it is a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions. The components of financial system include;

Money is used as a medium to buy goods & services. It also is a standard unit of measurement and acts as a store of value. However, money may not be a good store of value since it loses value with inflation.
Financial Instruments are formal obligations that entitle one party to receive payments or a share of assets from another party. Examples of tradable financial instruments include loans, stocks, and bonds. Financial Institutions are firms that connect borrowers and lenders, provide savers and borrowers access to financial instruments & markets. There are two types of Financial Markets; the primary market and the secondary market. Central Banks are large financial institutions that handle government finances, they regulate the supply of money, and they serve as banks to commercial banks. A Financial Market is a place or network where financial instruments can be sold quickly & cheaply

NWOKOCHA NNEBUIHE IHECHI
PG/MSc/17/03025
ECO 521 ASSIGNMENT

7. Investment Instrument Policies
Investment instruments are assets that can be traded, or they can also be seen as packages of capital that may be traded. Most types of investment instruments provide efficient flow and transfer of capital all throughout the world's investors. These assets can be cash, a contractual right to deliver or receive cash or another type of financial instrument, or evidence of one's ownership of an entity.
Understanding Financial Instruments
Financial instruments can be real or virtual documents representing a legal agreement involving any kind of monetary value. Equity-based financial instruments represent ownership of an asset. Debt-based financial instruments represent a loan made by an investor to the owner of the asset.
Foreign exchange instruments comprise a third, unique type of financial instrument. Different subcategories of each instrument type exist, such as preferred share equity and common share equity.
Types of Financial Instruments
Financial instruments may be divided into two types: cash instruments and derivative instruments.
Cash Instruments
• The values of cash instruments are directly influenced and determined by the markets. These can be securities that are easily transferable.
• Cash instruments may also be deposits and loans agreed upon by borrowers and lenders.
Derivative Instruments
• The value and characteristics of derivative instruments are based on the vehicle’s underlying components, such as assets, interest rates, or indices.
• These can be over-the-counter (OTC) derivatives or exchange-traded derivatives.
Types of Asset Classes of Financial Instruments
Financial instruments may also be divided according to an asset class, which depends on whether they are debt-based or equity-based.
Debt-Based Financial Instruments
Short-term debt-based financial instruments last for one year or less. Securities of this kind come in the form of T-bills and commercial paper. Cash of this kind can be deposits and certificates of deposit (CDs).
Exchange-traded derivatives under short-term, debt-based financial instruments can be short-term interest rate futures. OTC derivatives are forward rate agreements.
Long-term debt-based financial instruments last for more than a year. Under securities, these are bonds. Cash equivalents are loans. Exchange-traded derivatives are bond futures and options on bond futures. OTC derivatives are interest rate swaps, interest rate caps and floors, interest rate options, and exotic derivatives.
Equity-Based Financial Instruments
Securities under equity-based financial instruments are stocks. Exchange-traded derivatives in this category include stock options and equity futures. The OTC derivatives are stock options and exotic derivatives.
Special Considerations
There are no securities under foreign exchange. Cash equivalents come in spot foreign exchange. Exchange-traded derivatives under foreign exchange are currency futures. OTC derivatives come in foreign exchange options, outright forwards, and foreign exchange swaps.

NWOKOCHA NNEBUIHE IHECHI
PG/MSc/17/03025
ECO 521 ASSIGNMENT

5. Liquidity Concepts and Definitions
Liquidity is a company's ability to convert its assets to cash in order to pay its liabilities when they are due.
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value. In other words: the ease of converting it to cash. Liquidity reflects whether there is a ready market for an asset—the ease of converting it to cash.
Cash is universally considered the most liquid asset, while tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid. Other financial assets, ranging from equities to partnership units, fall at various places on the liquidity spectrum. are several ratios that express accounting liquidity highlighted below
There are different ways to measure liquidity, including market liquidity and accounting liquidity.
Evaluating Liquidity
Liquidity depends on
1) the speed at which the assets should be turning to cash, or
2) the assets' nearness to cash.
For example, some temporary investments are marketable and can be converted to cash very quickly. Accounts receivable may be converted to cash in 10 to 40 days. However, inventory may require several months to be sold and the money collected. Hence, inventory is not considered to be a "quick asset."
To assist in evaluating a company's liquidity, the financial ratio known as the quick ratio or acid-test ratio is calculated by dividing the amount of the company's quick assets (cash, temporary investments, and accounts receivable) by the amount of the company's current liabilities
In investment terms, assessing accounting liquidity means comparing liquid assets to current liabilities, or financial obligations that come due within one year. There are a number of ratios that measure accounting liquidity, which differ in how strictly they define "liquid assets." Analysts and investors use these to identify companies with strong liquidity.
Liquidity is of paramount importance being a core issue of banking (Caruana and Kodres, 2008). Therefore, viability and efficiency of a bank is greatly influenced by the availability of liquidity in sufficient amount at all times. Banks must meet their due obligations and execute payments on the exact day they are due, otherwise, the banks stand the risk of being declared illiquid (Crocket, 2008).
Traditionally, banks basically function as financial intermediaries and collecting points of fund for different groups within the society. Therefore, banks are expected to maintain adequate liquidity in order to efficiently perform their daily obligations such as meeting depositors’ demand or withdrawals, settling wholesale commitments and provision of funds when borrowers draw on committed credit facilities (FSC, 2010). They must also ensure sufficient funds in order to be able to finance increase in assets (Bank, 2004). Hence, banks automatically transform short-term, liquid liabilities into long-term illiquid assets (ECB, 2002). This function serves to protect customers against liquidity problems, but, however, exposes banks themselves to such risk which in extreme case or worst scenario is capable of causing bank runs regardless of soundness of the bank (ECB, 2002).
The Central Bank argued that such liquidity problem in a bank is capable of spreading to the other banks and thereby causing a real bank panic. The term liquidity is characterized by ambiguity due to so many facets and definitions, therefore, to use it productively and purposely, it needs further and clear definitions (Goodhart, 2008). Literature on finance agrees that in the real sense, liquidity is easy to identify than to define. In economics literature, the understanding of liquidity represents an economic agent’s ability to exchange his/her current wealth for assets or others such as goods and services. Two important issues are emphasized in this meaning of liquidity.

NWOKOCHA NNEBUIHE IHECHI
PG/MSc/17/03025
ECO 521 ASSIGNMENT

3. Bank Earnings
Gross earnings are income before taxes or adjustments, it is calculated as revenues minus expenses. Bank’s gross earnings is one measure among many of how well it uses its resources to produce a profit. In this educational article, we list the 2018 top banks in Nigeria by earnings.
A company’s gross earnings are reported periodically on its income statement. The first line of the income statement reports a company’s total sales and revenues for a given time period, while the COGS and gross earnings often appear on the second and third lines of many income statements. The difference between revenue and the COGS is a company’s gross earnings. The COGS includes costs directly related to the company’s product such as materials for manufacturing, inventory for shops and labor costs. Indirect costs are not included in the COGS.
Once a business has calculated its gross earnings, it may then subtract the rest of its business expenses including costs such as utilities, loan repayments, office supplies, contractor fees and many other expenses. The difference between the business’s gross earnings and its operating and capital expenses is its profit.
Why Bank earnings are important
Even if you don't own a bank stock you should be paying to attention to their earnings, as ActionAlertsPLUS Research Analyst, Zev Fima, explains:
"Bank earnings provide a unique perspective on both the domestic and global economic backdrop. Banks are uniquely positioned to discuss consumer and business sentiment across industries because they are the money centers extending lines of credit. As a result of this they have direct insight into demand for borrowing, and you don't borrow more when you are fearful of an economic slowdown."
A few of the metrics that investors should watch out for are Net Interest Margin, Tangible Book Value, and Loan Growth.
When it comes to the banks themselves, something investors are going to want to look out for is investments in technology and digitization. Fintech is increasingly pushing deeper into what has traditionally been the banking industries space. As a result, banks need to compete by investing more in technology, which is a key reason Goldman Sachs and MasterCard (MA – Get Report) teamed up with Apple (AAPL – Get Report) to create the Apple Card.

NWOKOCHA NNEBUIHE IHECHI
PG/MSc/17/03025
ECO 521 ASSIGNMENT

1. RISK Analysis
Risk is the possibility, likelihood or chance that something unpleasant or unwelcomed will happen that is capable of damaging an asset, or all of the original investment or the possibility of financial loss. More precisely, risk is the possibility of damage or any other negative occurrence that is caused by external or internal vulnerabilities, which may be avoided through pre-emptive action. Risk is commonly associated with uncertainty, as the event may or may not happen. It is an essential part of business, because enterprises cannot function without taking risks as business grows through risk taking. Hence, risk is related with opportunities and threat, which may harmfully affect an action or expected outcome.
Types of Risk
In financial terms, risk can be categorized into two main groups, viz.,
Systemic (Non-Diversifiable) and
Un-systemic (Diversifiable) risk) as depicted below:
a) Systemic Risk/Non-diversifiable – Systemic risk also referred to as undiversified or market risk, can be defined as risk that cannot be eliminated or avoided by diversification; it can only be mitigated through hedging. This type of risk cannot be controlled and virtually impossible for any organization to protect itself from it.. It cannot be planned for, as it normally arises due to the influence of external factor on enterprises. Systemic risk is also macro in nature as it affects a large number of firms. It influences a large number of assets. Interest rates, recession, war or any important political event, for example, could affect several assets in a portfolio.
b) Un-systemic Risk/Diversifiable – Sometimes known as "specific risk" or diversified risk, diversifiable risk is the risk that can be eliminated by diversification. Unlike systemic risk, un-systemic risk occur mostly as a result of internal factors prevalent in an organization. This type of risk is controllable; hence, it can be planned. In effect, it is micro in nature as it affects only a particular organization. Thus, diversification is used to protect business from un-systemic risk. This class of risk affects a very small group of assets. Examples of this category of risk includes: operational risk, business risk, financial risk and liquidity risk.
Financially, risk usually refers to as the probability that there may be difference between the actual return and the expected return (Rose and Hudgins, 2010).
The banks’ financial intermediation function through funds mobilization and application of funds makes risks to be part and parcel of the banking system. Risk is very important particularly when it comes to investment decisions (Rose & Hudgins, 2010).
Therefore, the ability of a bank to efficiently manage its risks determines its survival and success in the banking business. As failure of substantial number of banks emanating from liquidity risk may destabilize the whole financial system and impair the growth of the economy in general. Greuning & Bratonovic (2003) generally, classified banking crisis into four broad categories, namely:
i. financial risk,
ii. operational risk,
iii. business risk and
iv. event risk
Regardless of the type, Chorafas (2007) affirmed that banking risk and its probability are a function of the following;
i. The type of loss that is addressed.
ii. Risk factor(s) characterizing loss likelihood.
iii. Prevailing market volatility and
iv. Amount of leverage behind the transaction or inventoried position.
Although, all these risks are of great importance to the banks, however liquidity risk represents the cumulative effects of other risks and of a surge in its importance owing to the ongoing global financial crisis.

ACHUAGU HENRY CHUKWUEMEKA
PG/MSC/17/02862
ACHUAGUHENRY@GMAIL.COM
RISK ANALYSIS
Risk analysis is the systematic study of uncertainties and risks we encounter in business, engineering, public policy, and many other areas. Risk analysis is the process of identifying and analyzing potential issues that could negatively impact key business initiatives or critical projects in order to help organizations avoid or mitigate those risks. Performing a risk analysis includes considering the probability of adverse events caused by either natural processes, like severe storms, earthquakes or floods, or adverse events caused by malicious or inadvertent human activities; an important part of risk analysis is identifying the potential for harm from these events, as well as the likelihood that they will occur.
Some institutions, such as banks and investment management firms, are in the business of taking risks every day. Risk analysis and management is clearly crucial for these institutions. One of the roles of risk management in these firms is to quantify the financial risks involved in each investment, trading, or other business activity, and allocate a risk budget across these activities. Banks in particular are required by their regulators to identify and quantify their risks, often computing measures such as Value at Risk (VaR), and ensure that they have adequate capital to maintain solvency should the worst (or near-worst) outcomes occur.
Enterprises and other organizations use risk analysis to:
• anticipate and reduce the effect of harmful results from adverse events;
• evaluate whether the potential risks of a project are balanced by its benefits to aid in the decision process when evaluating whether to move forward with the project;
• plan responses for technology or equipment failure or loss from adverse events, both natural and human-caused; and
• Identify the impact of and prepare for changes in the enterprise environment, including the likelihood of new competitors entering the market or changes to government regulatory policy.
Steps in risk analysis process
The risk analysis process usually follows these basic steps:
1. Conduct a risk assessment survey: This first step, getting input from management and department heads, is critical to the risk assessment process. The risk assessment survey is a way to begin documenting specific risks or threats within each department.
2. Identify the risks: The reason for performing risk assessment is to evaluate an IT system or other aspect of the organization and then ask: What are the risks to the software, hardware, data and IT employees? What are the possible adverse events that could occur, such as human error, fire, flooding or earthquakes? What is the potential that the integrity of the system will be compromised or that it won't be available?
3. Analyze the risks: Once the risks are identified, the risk analysis process should determine the likelihood that each risk will occur, as well as the consequences linked to each risk and how they might affect the objectives of a project.
4. Develop a risk management plan: Based on an analysis of which assets are valuable and which threats will probably affect those assets negatively, the risk analysis should produce control recommendations that can be used to mitigate, transfer, accept or avoid the risk.
5. Implement the risk management plan: The ultimate goal of risk assessment is to implement measures to remove or reduce the risks. Starting with the highest-priority risk, resolve or at least mitigate each risk so it's no longer a threat.
6. Monitor the risks: The ongoing process of identifying, treating and managing risks should be an important part of any risk analysis process.
The focus of the analysis, as well as the format of the results, will vary depending on the type of risk analysis being carried out

NAME: ONWE JOSHUA CHUKWUMA
REG NUMBER: PG/MSC/17/02670
COURSE CODE: ECO 521
COURSE TITLE: MONETARY ECONOMICS AND POLICY
DATE: 1ST MAY 2019
ASSIGNMENT: Discuss and Analyze the Following Concept in Monetary Economics
Risk Analysis
Risk Analysis is a process that helps you identify and manage potential problems that could undermine key business initiatives or projects. To carry out a Risk Analysis, you must first identify the possible threats that you face, and then estimate the likelihood that these threats will materialize. Risk Analysis can be complex, as you'll need to draw on detailed information such as project plans, financial data, security protocols, marketing forecasts, and other relevant information. However, it's an essential planning tool, and one that could save time, money, and reputations.
Corporate: As a component of risk management, it consists of
(1) Identification of possible negative external and internal conditions, events, or situations,
(II) Determination of cause-and-effect (causal) relationships between probable happenings, their magnitude, and likely outcomes,
(III) Evaluation of various outcomes under different assumptions, and under different probabilities that each outcome will take place

BANK CAPITAL ADEQUACY
A capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. The capital adequacy of banks is tightly regulated worldwide in order to better ensure the stability of the financial system and the global economy. It also provides additional protection for depositors. In Nigeria, banks are regulated by the central bank of Nigeria (CBN).
Monitoring the financial condition of banks is also important because banks have to deal with a mismatch in liquidity between their assets and liabilities. On the liabilities side of a bank's balance sheet are very liquid accounts, such as demand deposits. However, a bank's assets primarily consist of rather illiquid loans. While loans can be (and frequently are) sold by banks, they can only quickly be converted to cash by selling them at a substantial discount. The most commonly used assessment of a bank's capital adequacy is the capital adequacy ratio. However, many analysts and banking industry professionals prefer the economic capital measure. Additionally, analysts or investors may look at the Tier 1 leverage ratio or basic liquidity ratios when examining a bank's financial health. Banks are required to maintain a minimum capital adequacy ratio. The capital adequacy ratio represents the risk-weighted credit exposure of a bank.

AN ASSIGNMENT
SUBMITTED IN PARTIAL FUFILLMENT FOR THE REQUIREMENT OF THE COURSE: ECO 521 (MONETARY ECONOMICS)
BY
OJIEM PATRICK KELECHI
PG/MSC/17/O0457
LECTURER: DR. A. ORJI
MAY, 2019.

Monetary economics terminologies use in our daily transactions in banks or other various organizations such as risk analysis, bank capital adequacy, bank earnings and its balance sheet management, liquidity concepts here will look at the various types of liquidity and the role of the various types of liquidity, it's applicable policies, lending policies, investments instruments and policies and lastly a comparative financial system which illustrate the financial flows to banks and other financial intermediaries.
However, the study of Nigeria financial is of paramount interest to this course.

DISCUSS AND ANALYZE THE FOLLOWING CONCEPTS IN MONETARY ECONOMICS (RISK ANALYSIS, BANK CAPITAL ADEQUACY, BANK EARNINGS, BALANCE SHEET MANAGEMENT, LIQUIDITY CONCEPTS AND POLICIES, INVESTMENT INSTRUMENTS AND POLICIES, COMPARATIVE FINANCIAL SYSTEMS.

AN ASSIGNMENT
ON
ECO 521 (MONETARY ECONOMICS)

BY

MUORAH EBUKA MICHAEL
PG/MSC/17/O2955

LECTURER: DR. A. ORJI

APRIL, 2019
Introduction
Monetary economics is concerned with the effects of monetary institutions and policy on economic variables including commodity prices, wages, interest rates, quantities of employment, consumption, and production.
The study of monetary economics enables us to understand not just how an economy functions efficiently but also how monetary policy can help the economy adjust from one state to another and how it can find balance and grow.
Risk analysis is defined as the process of assessing the likelihood of an adverse event occurring within the corporate, government, or environmental sector. It is the study of the underlying uncertainty of a given course of action and refers to the uncertainty of forecasted cash flow streams, the variance of portfolio/stock returns, the probability of a project's success or failure, and possible future economic states. Risk analysts often work in synergy with forecasting professionals to minimize future negative unforeseen effects
Bank capital adequacy is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet.
Balance Sheet Management covers regulatory policy for investment securities, Bank-Owned Life Insurance (BOLI), liquidity risk, and interest rate risk for national banks, as well as the assessment of interest rate risk and liquidity risk for the national banking system as a whole.
Liquidity refers to the availability of cash or cash equivalents to meet short-term operating needs. In other words, liquidity is the amount of liquid assets that are available to pay expenses and debts as they become due. Obviously, the most liquid asset of all is cash.
A policy is a deliberate plan of action to guide decisions and achieve rational outcome(s) Stafford (2001). A bank’s lending policy is a statement of philosophy, standards, and guidelines that its employees must observe in granting or refusing a lending request. Minimum information requirements are outlined as well as the verification process and have to be followed before releasing any facility
An investment is an asset or item acquired with the goal of generating income or appreciation. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.
A financial system can be defined at the global, regional or firm-specific level and is a set of implemented procedures that track financial activities. On a regional scale, the financial system is the system that enables lenders and borrowers to exchange funds. A financial system is the system that covers financial transactions and the exchange of money between investors, lender and borrowers. A financial system can be defined at the global, regional or firm specific level. Financial systems are made of intricate and complex models that portray financial services, institutions and markets that link depositors with investors.

Completed

RISK ANALYSIS
A risk is the probability that an actual return on an investment will be lower than the excepted return. Risk implies future uncertainly about deviation from expected earnings or expected outcome. Risk measures the uncertainly that an investor is willing to take to realize a gain from an investment.
Risks are of different types, and originate from different situations. We have liquidity risk, sovereign risk, insurance risk, business risk, default risk, economic risk etc. various risks originated due to the uncertainly arising out of various sectors that influence an investment or a situation.
Risk analysis is the process of identifying and analyzing potential issues that could negatively impact key business initiatives or critical projects in order to help organizations avoid or mitigate those risks. Performing a risk analysis includes considering the probability of advance events caused by either natural processes, like severe storms, or floods or adverse events caused malicious or inadvertent human activities, an important part of risk analysis is identifying the potential for harm from these events, well as the likelihood that they will occur.

TOPIC: DISCUSS AND ANALYSE THE FOLLOWING CONCEPTS IN MONETARY ECONOMICS (RISK ANALYSIS, BANK CAPITAL ADEQUACY, BANK EARNINGS, BALANCE SHEET MANAGEMENT, LIQIDITY CONCEPTS AND POLICIES, INVESTMENT INSTRUMENTS AND POLICIES, COMPARATIVE FINANCIAL SYSTEMS.

AN ASSIGNMENT
SUBMITTED IN PARTIAL FUFILLMENT FOR THE REQUIREMENT OF THE COURSE: ECO 521 (MONETARY ECONOMICS)

BY

OBOZUA OBEHI DESTINY
PG/MSC/17/O2972

LECTURER: DR. A. ORJI

APRIL, 2019

INTRODUCTION
A concept is an idea or a principle that is connected with something abstract. Concepts in monetary economics are ideas that guide the activities in the financial markets (bond and stock market) and financial intermediaries (banks, insurance companies, pension funds). Financial markets perform the essential economic function of channeling funds from households, firms, and government that have saved surplus funds by spending less than their income to those that have a shortage of funds because they wish to spend more than their income. The risk involved in the activities is worth analyzing.