1. AP/ECON 3430 3.0 A MONETARY ECONOMICS I: FINANCIAL MARKETS AND INSTITUTIONS Fall 2016
Topic 2A: Financial System
Course Director:
Prof. Brenda Spotton Visano
© Brenda Spotton Visano 2016

2. © Brenda Spotton Visano 2016
Agenda
Part 2A:
Introduction to
Function of Financial Systems
Structure of the Financial System: Comparison of Canadian and Chinese Financial Systems
Principles Guiding the Design and Operation of the Financial System
Core Principles of Western Financial Systems
Core Principles of Islamic Banking
© Brenda Spotton Visano 2016

3. Functions of the Financial System
What does the industry produce? Financial services (payments, credit, advice, risk management)
Why? To facilitate the transfer of purchasing power from savers/lenders to spenders/borrowers
Potential Benefits? Better allocation of productive resources within and across time
© Brenda Spotton Visano 2016

4. © Brenda Spotton Visano 2016
Constituent Elements
Financial Instruments
Cash, bank account balances, loans, stocks, fixed income securities (bonds), derivatives
Financial Markets
direct “matching” of savers/lenders with spenders/borrowers (NASDAQ, TSX, NYSE, Shanghai SE)
Financial Institutions (FIs)
As Intermediaries, FIs indirectly match savers/lenders with spenders/borrowers
© Brenda Spotton Visano 2016

5. Setting up Financial Markets and Institutions
Who should own what?
Public ownership: the state on behalf of everyone?
Private ownership: Individuals? In private family trusts or publicly available to all via open trading?
© Brenda Spotton Visano 2016

6. How Canada and China are answering these foundational questions
© Brenda Spotton Visano 2016

7. % of GDP (concentration) Ownership % of GDP
FINANCIAL SYSTEM 
CANADA
CHINA*
% of GDP (concentration)
Ownership
% of GDP
FINANCIAL SERVICES INDUSTRY
500%+
(excluding direct finance)
Private with some Public
232%*
Public with some Private
Direct Finance/ Markets
- stock market (market cap of listed domestic companies)
103%#
Joint-stock
75%#
State owned
- bond/fixed income market
115%+
XXX
41%*
Central Bank
Not applicable
Bank of Canada:
State-owned
People’s Bank of China
#2015, World Bank dbase
*Elliott, Douglas J., and Kai Yan. The Chinese financial system: An introduction and overview. Brookings Institution, 2013.
+IMF Canada Financial Sector Stability Assessment Country Report No. 14/29
© Brenda Spotton Visano 2016

8. % of GDP (concentration)
FINANCIAL SYSTEM 
CANADA
CHINA*
Indirect Finance / Institutions
% of GDP (concentration)
Ownership
% of GDP
Deposit/retail banks assets
133%#
RB, CIBC, BMO, TD-CT, BNS, BN hold 90% of assets
Joint-stock
128%#
BOC, ABC, CCB, ICBC
 State-owned
Securities firms/ investment banks
Top 10 firms (27% AUM) under control of Big 6
Pension funds
13% CPP
 65% Private Pension Plans
(50% with Big 8)
CPP: state-owned
Private: Plan Members  
State-owned but
under reform
Insurance companies
38%
14%
 Joint-stock
Canada 2015: 6 largest banks hold 90% of bank assets: RB, CIBC, BMO, TD-CT, BNS, BN
China: Bank of China (BOC), Agricultural Bank of China (ABC), China Construction Bank (CCB), and Industrial and Commercial Bank of China (ICBC)
Big 8 Pension Plans: Ontario Teachers PP; Ontario Municipal Employees RS; Public Service PP; Quebec PP; Healthcare of Ontario; BC Municipal PF; Alberta PP; BC Public Service PP)
© Brenda Spotton Visano 2016

9. © Brenda Spotton Visano 2016
Core Principles
What principles should guide design?
Does it matter if there is a concentration of wealth?
Do private markets work “better” than states to direct resource allocation?
If you have surplus funds, should I pay you to use them when I need them?
Who should decide the principles of operation?
The state on behalf of everyone?
Individuals with the freedom to do as they want?
© Brenda Spotton Visano 2016

10. Comparison of Western and Islamic Core Principles of Finance
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11. © Brenda Spotton Visano 2016
Western Finance
Time has Value
Risk requires Compensation
Information is the basis for decisions
Markets determine prices and resource allocation
Stability improves welfare
Islamic Finance
Equitable distribution and access to wealth
Consistent with tenets of Islam
Avoid riba (interest)
Avoid gharar (risk, speculation)
Avoid haram (prohibited activities: gambling, pork and alcohol consumption)
© Brenda Spotton Visano 2016