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Sem 5 Prep
← Money & BankingHow a financial system is put together

Formulas for this chapter

Financial deepening ratio

Deepening = Credit to the private sector / GDP x 100

When the question asks how deep or developed a system is. It is a stock over a flow, so only comparisons mean anything: this year against last, or one country against another.

Credit
Outstanding credit to the commercial or private sector
GDP
One year's output, at current prices

Market-based share of external financing

Market share = (Bonds + Equity raised) / (Bank credit + Bonds + Equity) x 100 Bank share = Bank credit / total x 100

When asked whether a system is market-based or bank-based. Bonds count on the market side, which is where most marks are dropped.

Bonds
Funds raised through debt securities in the market
Equity raised
Fresh equity raised in the primary market
Bank credit
Loans and advances from banks
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The ideaTheory

A city, not a single road

Last chapter the financial system was one pipe. That was a useful lie.

It is really a city: institutions (the buildings), markets (the squares where people meet), instruments (the contracts they sign) and services (the professions that help them).

Almost every question on this session asks you to name the parts of the city and say what each one does. So this chapter is mostly lists. The trick is to learn each list with its count, because a five-mark answer that names four of nine functions loses marks it did not need to.

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