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Lesson 1 Winter 2013 1. Introduction, how to understand the role of the bank within the financial system 2. 3. 4. 5. 6. Banking terminology – key definitions, wording Financial system – what does it mean, components, tasks, aspects Bank – structure, key areas of the activities, assets, liabilities Czech financial system – components, tasks, legislation Central bank – main goals, relation to EU legislation, impacts to the market 7. International monetary system, floating and fixed rates 8. European Union – currency – EUR, impacts to CZK 9. Banks and the Foreign Exchange Market i. Historical review ii. The European monetary system iii. Exchange rate – what does it mean and why 10. Basic terminology for Foreign and Money Market 11. Foreign Exchange and Money Market Operations in Practise i. Foreign exchange market ii. Money Market 12. Summing up the semester Summer 2014 1. Wrap up of the winter course i. Key products of the financial system for non-financial customers 2. Deep dive into Foreign exchange market and Money Market i. Spot, Forward, Futures, Options ii. Deposits, corporate desk 3. Methods of the international settlement through banks I. i. Nostro, vostro accounts ii. SWIFT 4. Methods of international settlement through banks II. i. Value dating ii. Back office – tasks, activities 5. Transport documents used in international trade I. i. The meaning of open account payment term ii. Specimen bill of lading 6. Transport documents used in international trade II i. The function of a bill of lading ii. The different types of bill of lading 7. Incoterms i. The purpose of Incoterms ii. The 14 Incoterms 8. Short-term finance for exports i. The definition ii. An overview of the short-term facilities available for exporters 9. Medium and Long-term finance for exports i. Introduction ii. The type of products – forfaiting, leasing 10. Documentary credits for imports i. The risk, which a bank runs when it issues a documentary credit ii. How to reduce and issuing risk 11. Actual development on the financial market i. Euro countries ii. CZK market 12. Summing up the semester Introduction, how to understand the role of the bank within the financial system Financial system - definition The financial system is the system that allows the transfer of money between savers (and investors) and borrowers. A financial system can operate on a global, regional or firm specific level. A set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions." According to Franklin Allen and Douglas Gale in Comparing Financial Systems: "Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow intertemporal smoothing of consumption by households and expenditures by firms; and they enable households and firms to share risks. These functions are common to the financial systems of most developed economies. Yet the form of these financial systems varies widely." Function - collection of money - distribution of money By other words: The bank is the financial institution accepting your deposits, and allowing you to make withdrawls from your banking account. It is because of this important role, that banks are heavily regulated within most countries, and operated within a specific system known as fractional reserve banking; “Where they hold only a small reserve of the remaining funds, and lend out the rest for profits”. The common roles of a bank, is to act as a payment agent through paying or collecting cheques depositied into a customer's account. Banks also allow you to perform and accept a variety of other forms of payment methods, such as a wire transfer, or an automated teller machine (ATM). GLOBAL FINANCIAL SYSTEM The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic actors that together facilitate international flows of financial capital for purposes of investment and trade financing. The system has evolved substantially since its emergence in the late 19th century during the first modern wave of economic globalization, marked by the establishment of central banks, multilateral treaties, and intergovernmental organizations aimed at improving the transparency, regulation, and effectiveness of international markets FINANCIAL SYSTEM COMPONENTS A financial system consists of systemically important financial institutions, their customers and other stakeholders, and financial regulators. Contemporary globalization and economic integration have increased the interdependence of financial systems around the world and the importance of financial institutions that operate by design at an international or multinational level. The World Health Organization (WHO) defines "global financial system" as "...various official and legal arrangements that govern international financial flows in the form of loan investment, payments for goods and services, interest and profit remittances. The main elements are the surveillance and monitoring of economic and financial stability, and provision of multilateral finance to countries with balance of payments difficulties. The organization at the centre of the system is the International Monetary Fund (IMF), which has the mandate to ensure its effective running." The Financial Times lexicon defines it as an "..interplay of financial companies, regulators and institutions operating on a supranational level. The global financial system can be divided into regulated entities (international banks and insurance companies), regulators, supervisors and institutions like the European Central Bank or the International Monetary Fund. The system also includes the lightly regulated or nonregulated bodies - this is known as the 'shadow banking system'. Mainly, this covers hedge funds, private equity and bank sponsored entities such as off-balance-sheet vehicles that banks use to invest in the financial markets." A BANK WITHIN THE FINANCIAL SYSTEM A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses. Due to their influence within a financial system and the economy, banks are highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords. Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy but in many ways was a continuation of ideas and concepts of credit and lending that had its roots in the ancient world. In the history of banking, a number of banking dynasties have played a central role over many centuries. The oldest existing bank was founded in 1472 History Banking is a modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Lucca, Siena, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. One of the most famous Italian banks was the Medici Bank, set up by Giovanni di Bicci de' Medici in 1397. The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472. It is followed by Berenberg Bank of Hamburg (1590)[6] and Sveriges Riksbank of Sweden (1668). The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths. One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350–325 BC, presented in the British Museum in London. The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza (Τράπεζα) means both a table and a bank.