Current monetary economy – Summary

Examen : 10 points des cours ; 10 points dissertation

- Money appeared with the increase of the exchange of merchandise

- It has changed in different ways in order to follow the evolution of exchange practices
- Currency is the intermediary between households and economy

Definition of currency:

“Currency is any object or record that is generally accepted as payment for goods and services and
repayments of debts in a given socio-economic context or country” = un bien spécifique qui permet à
toute personne qui en est titulaire, d’acquérir n’importe quel bien ou service n’importe quand et de
rembourser ses dettes.

ð Currency = every payment method which is available to the economic agents

ð Currency = circulating in our economy

I- Forms of money
Three different evolution stages (the evolution of currency is linked to the evolution of the society):
1. The barter system = le troc, monnaie marchandise
2. Metallic money
3. The actual money – Fiducial (pieces et billets de banque) and scriptural money (immateriel)

1. The barter system/ exchange of goods = le troc

- The beginning of civilization (primary civilization)
- Barter system / troc = Direct exchange of goods without money, without exchange on the
market (exchange of different products without currency exchanges) à money like we know
it did not exist
- There is no market (direct exchange between merchants; it was not the market which
determined the price)
- Système avec échange de sel par exemple

2. Metallic money
→ Basée sur des métaux précieux, la pièce correspond à la valeur du bien. S’impose assez vite car les
métaux sont indivisibles et rares (or, argent, cuivre…).

Metals that replace the barter system – it is sustainable ( ça ne va pas se périmer au cours du temps)
, divisible and rare.

Goal = To avoid fraud that will statements that may coinage

3 Steps :

i) Money weighing: = monnaie pesée

- System To avoid fraud (ex. Money weighers in China; controllers of holders of balance,
control the quality of payments in Rome (porteur de balance))

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 ii) Counted currency: = monnaie comptée
- Gold – appearance of bullion - lingots d’or
- Problem with that : possibility of fraud (balls or discs of non-precious metals in the inside) →
necessity of intervention
- Intervention of solid money

iii) Coinage currency 18eme 19eme: (coinage = Prägung) = monnaie frappée

- Superior authority guarantees the value of the money à Shaped piece with the seal of the
prince = taillée avec le sceau du prince pour eviter les fraudes
- To avoid fraud the states imprinted the money
- Importance to guarantee the stability of the monetary system by the state/ kingdom (real
and close link between circulating currency and the economic functioning)
- No possibility to create money by oneself
- Progressed economic system
- Everything is pegged to gold (until WWI)

3. The actual money – Fiducial and scriptural money

- Appearance of the fiduciary money and scriptural early 16th century with merchants of
Amsterdam.
- It became too difficult to weight the money. Merchants started to stock their gold reserves at
the central bank and received banknotes in return, in sum, Merchants decide to no longer
manage their money but to leave the management to the banks. The bank recovers the
money and gives bills in return. > ils vont mettre en place ce système car il était difficile de
gérer cette monnaie.
- Central banks act as holders of the gold reserves and thus additionally as trust manager >
Banks and trust management
- Central banks have the monopoly on the issuance of the money supply (the issuing
depended on the amount of gold stock)
o Creation of issuing houses = creation d’institutions d‘emissions
o Last step: make it a legal tender (the banknotes had to be accepted and could not be
refused for repayment of debts e.g.) à France 1870 (Napoleonic France) =
o Forced currency: it was no more possible to exchange the actual currency into
metallic money à the fiducial money is born
o France decreed in 1936= establishes the role of currency in circulation
(establishment of a system of fiducial money)
- Central banks have the obligation of issuing the money supply.
- The actual money is no more based on gold – there is no more equivalent.
ð Very rapid evolution

The more the currency gains on importance, the more the state gains on importance as well.

II- The different functions of money

The 3 functions of money:

Every kind of money to be defined as such, in the economic sense, must fulfill those three conditions!

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 1) Intermediate currency in the exchanges
- In primitive societies, the exchanges were done under the barter system (troc)
- Buyers and sellers had to be interested in their respective goods (and be simultaneously
seller and buyer)
- The goods cannot be divided (difficult to exchange as the equivalent value of the different
goods varied)
- Comparison between goods is complicated
Money is an instrument which allows the exchange between 2 goods by avoiding the constraints of
the barter system. = La monnaie permet un échange entre deux biens en évitant les contraintes du
troc

ð The primary function of intermediate currency is the exchange of goods. Thanks to your
currency/money, you are able to buy or sell any goods or services.
ð Thus, the one who detains the goods or the service and wishes to sell is going to be able to
sell this good against a certain quantity of money and so can acquire other goods with the
obtained money.

2) Unit of account (Rechnungseinheit)

- Goods and services are expressed in money

- Their value can be compared, which allows to save information within the economic theory
ð Money is thus a valuable standard.

3) Store of value

- Money serves as value store = Money can be stored.

- There is the possibility of transferring the purchasing power from period A to period B –
- Immovable property, jewels, works of art also can store value.
- Another aspect of money is “liquidity”, that is its availability without any cost of
transformation. = However, money is liquid – can be used without any cost of
transformation.
- But money may lose its value during inflation: loss of value under the influence of the rise of
prices.

Le Bitcoin est-il une monnaie comme les autres?

- The bitcoin is fulfilling the three conditions to be defined as a currency

- However, it has no bank and is not a legal tender
- It has no bank. Thus, its’ value depends only on the supply and the demand.

III- Money
A) Qualities expected from a good money

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 1) Internal stability of money
There is no market without trust as trade and exchanges would stop. > depends on trust

- The money must be safe as the market depends on trust

- In a broad sense = safety of the “investment” or “placement” (trust and safety are
guaranteed if the currency keeps it value) > il faut quil y ait une sureté dans l’investissement
- Since the eurozone, the currency is mostly stable and therefore trust is high.

Factors having an impact on trust:

- Inflation = increasing prices
- Disinflation = slowdown of increase in prices
- Deflation = Decreasing prices
- Il ne faut pas qu’il y ait d’inflation ni de déflation

Necessary conditions:
For a working economic system, we need a controlled level of inflation of 2-4%

Pourquoi la déflation peut-elle être dangereuse ?

Deflation :

- Deflation can seem favorable in the short term

- A decrease in prices for households means a higher purchasing power and for enterprises
higher profits due to a greater demand
- In the long run, households tend to save in attendance for a further price decline
- Companies sell less (due to declining demand), lower prices, produce less, make less profits
and have to fire employees
- People have less purchasing power, thus buy still less, companies produce less… à
downward spiral
- The states generate less revenues due to lower demand (less VAT) and lower taxes
- In the worst of cases enterprises could go bankrupt (production costs > selling prices) à it is
the productive body which is affected
- People may start to buy imported products (due to local enterprises’ bankruptcies)
- Crises déflationistes > il faut absolument relancer l’activité pour éviter l’effondrement de
l’économie du pays.
-

Inflation:

- + l’inflation baisse, + le taux d’endettement augmente

- + il y a d’inflation, + le taux d’interet est bas
- Households are affected by higher prices and buy less which could lead to an inflationary
crisis
- To readjust the level of demand, companies just have to adapt/ lower the prices
- Due to lower prices the demand would rise immediately
ð It is therefore easier to handle inflationary crisis, than to handle deflationary crisis
ð The ECB still holds the fixed rates at a level of 0% to avoid a deflationary crisis
- The ECB as supervisor of inflation tries to maintain a stable inflation rate of 2% for a correctly
working economic system (monetary policy such as interest rates to control inflation rate)

Pas d'économie sans confiance

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 - The trust of the stakeholders is preliminary to a good economic functioning
- If there is a lack of trust in market (subprime; credit crunch) the mechanism won’t work
- Before trust was based on promises, swears and reputation (mechanistic society)
- Now trust is based on rules, laws, institutions and banks (organic society)

Mechanism:

- High inflation would decrease the purchasing power of the households .

- The high inflation and a level of mistrust leads to a shift of capital towards safe
investments (sector of property, gold…)
- ↳ Shift of capital towards safest-havens.

E.g.: Hyper-inflation in Germany(20’s), Venezuela or Zimbabwe:

- Highly decreased purchasing power

- High impact on economy
- Sometimes the easiest measure would be to change/ develop a new currency
- In Germany the hyper-inflation let to WWII

Measures to maintain trust:

- The households are covered against risk

o ↳ The possibility for the people to remove their money from their bank accounts is
guaranteed (solidity of banks)
o E.g.: Financial crisis: A deposit of 50 000€ in bank accounts is officially guaranteed by
the EU (fixed at 50 000€ as very few people provide of such an amount on their
current accounts)
o USA, is the role of FDIC (Federal Deposit Insurance Corporation) to assure the
deposits in case the bank fails → fonds pour payer les épargnants en cas de faillite de
la banque.
- Banks aim to guarantee the money to their clients so that no bank run will emerge, and
they are still able to sell their assets (actifs)

2) External Stability of money

- Necessary conditions = Capacity to preserve buying power abroad (exchange rate)

- Euro-zone advantage: Stability of the currency- reduced risk of fluctuation of the currency
thus more trust in the market

In case of strong depreciation of the money:

- Loss of purchasing power on the market of goods and services payed in foreign currencies.
- A l’Export si la monnaie se devalue on va etre + competitif
- In extreme cases the currency may become inconvertible.

Synthesis:

- Quality currency is primordial for good statement of economy: It is the base of the social
contract between stakeholders. à Tacit contract based on trust.

B) Role of the monetary authorities

↳ Relation between global money stock and level of prices

1. Impact of the variation of the money stock on the prices.

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 - Monetary mass = the total amount of money circulating in the economy (monetary mass
contains not only banknotes and coins, but all sorts of debt obligations, bonds, savings…
from the most to the less liquid)
- Relation between global money stock and level of prices:
o Growth of money stock > growth of production → Inflationary pressure (=tensions
inflationistes) (result of an increased credit demand. Banks use credits to create
money artificially. The production lacks behind and needs though time to adjust.)
o To increase the money supply (more credits) the ECB is actually lending on a fixed
rate of 0% (low interest rate = higher credit demand)
o If growth rate of monetary mass > growth rate of the GDP → increase of inflation
rate and general increase in production and though prices.
- Currently, the growth of the money stock is no longer connected to the production of bank
notes and coins (belonging to M1)
- Money supply comes very widely from the immaterial component of the money M2 and M3
o M1: bank notes and coins
o M2: less liquid, savings = mobilisable par les agents eco
o M3: rigid, long term savings = toute la monnaie qui circule dans l’economie + les
placements a long terme .

Cette supervision se fait sur l’évolution de la masse monétaire. La BCE utilise la masse
monétaire M4 (M1 = la plus liquide (billet, dépôt à vue), M2 = placement a vue rémunérée
(épargne, livret A, etc…), M3 = valeur mobilière PCM, M4 = intègre la dette souveraine des
Etats).
Remarque : L’effet richesse responsable des tensions inflationnistes ?
Les gens se croient plus riches et vont alors consommer plus en passant par le crédit à
danger trop de crédit
⚠M2 et M3 font grandir la masse monetaire

La création monétaire: un juste équilibre

→ At present, the growth of the money supply is no longer connected to the publishing of notes and
coins (M1)

Very widely coming from the immaterial component of the money M2 and M3.

Session 2
2. Oversight of the monetary authorities = surveillance des authorités monetaires

- The monetary authorities supervise the evolution of money, with conscious of its impact on
the general level of prices.
- The ECB (European central bank) e.g. uses the monetary mass as a tool for this monitoring.
- “Effet richesse” “wealth effect” = to consider yourself richer than in reality can encourage
consumption and thus lead to an inflationary pressure (US à housing bubble)

C) Impact of the variation of the money stock on the economic activity.

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Our economic market is mainly based on money. La monnaie est au cœur de l’économie de marché.
The financial crisis of 2008 and the following sovereign debt crisis are perfect illustrations (financial
crisis à pass of an excess of liquidity to a lack of liquidity).

The volume of money circulating (monetary mass) can thus be responsible for:

- Overheating (inflation, speculative bubble) = surchauffe

- Lack of money (credit crunch met after the Sub crime) = pénurie de monnaie
è A good balance between economic growth and realization of productive projects = Les
banques centrales cherchent à éviter ces derniers éléments et cherchent la stabilité, juste
équilibre entre la croissance économique et la réalisation de projets de production .

1. An excess of liquidity favors the economic activity.

Happens when low interest rates → lead to:

- Increased investments of households and companies

- Low rates for consumer credits help to answer to household needs
ð An excess of liquidity supports the economy

àLes entreprises et les ménages peuvent investir

àPar l’intermédiaire des crédits de consommation, répond aux besoins des ménages
Un excès de liquidité avantage/ va supporter l’économie

2. An excess of liquidity can lead to a crisis ⤵

- Excess in liquidity generally leads to inflation and full employment (=plein emploi, car exces
de liquidité = bcp de credit = bcp de production de la part des E pour repondre a la demande
de l’O des menages) .
- The current excess in liquidity does not result from an inflationary pressure but from the high
trade surplus and increased money from petrol
- The excess of world liquidity (money from petrol and trade surplus) are not necessarily
inflationary pressures.
- But they are concentrated on a few assets and feed speculative bubbles which move from
assets to assets
- = The problem is the concentration of the liquid excess on few assets which might feed
speculative bubbles which move from assets to assets (ex. the Asian markets, internet,
petrol, American real estate, raw materials…)
- Ex. American real estate: the American housing bubble has led the world economy toward a
credit crunch and therefore to a massive lack of liquidity., + internet, petrol, raw materials

Example:
The American housing bubble has led to the wolrd economy toward a crunch credit > a
entrainé une penurie de liquidité (banques refusaient de prêter aux ménages car craignaient
le non remboursement des prêts), qui a empêché l’économie de fonctionner.
La crise a été enclanchée par un exces de liquidité dû au tx de credit bas > prêts a bcp de
monde.
↳ healthy companies can be brought to close just for financial gaps
↳ crise des Subprime
Productive investments cannot find funding to complete > ne peut plus se repositionner
sur les marches.

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 In front of this reality, states have understood the absolute necessity to promote a financial
system which works and re-injects liquid assets into the economy.

3. A lack of liquidity can lead to crisis

- Financial gaps can lead healthy companies to close
- Productive investments cannot find funding to complete profitable projects

ð In front of this reality, states have understood the absolute necessity to promote a financial
system which works and reinjects liquid assets into the economy

IV - Bank and “stock exchange” – BG (“stock market” USA) –

two ways of financing
3 ways of financing/ 3 ways to finance :

1. Personal savings (self-financing) = auto financement

2. Monetized bank credit: nobody saves (banking intermediation = intermediation bancaire) à
liquidation of bank instruments by converting them into cash) > les banques vont intervenir
pour se financer, la banque va donner un credit qui va etre supérieur a ce qu’il y a en
epargne a la banque .
3. Financial markets which act as intermediaries between savers and borrowers: transfer of
savings and not new currency (financial of market intermediation).

A) Internal and external

Financing of economic activities:

- Internally through self-financing = epargne de coté des menages

- And/ or externally by resorting to the monetary and financial system.

1. Needs and resources for financing economic agents

a) Various needs and resources = les ⍯ besoins et ressources

Economic agents ( 3 types : state(l’Etat), companies, households(les menages) ) must finance their
significant and diverse needs and thus find necessary means to do so.

Significant and diverse needs:

- Households: food, clothing and accommodations > besoin primaire

- Companies: raw materials, work and making investments (for the company in the long term)
(such as buying new equipment)
ð Satisfying these needs requires purchasing goods and services, which must be paid.

We can differentiate:

- Investments: mobilization of significant financial resources in an occasional manner

(=manière ponctuelle). (Pour les E, l’investissement dans les machines est important pour

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 leur pérennité, pour l’Etat investissements dans les infrastructure et pour les ménages, c’est
dans l’immobilier)
- Everyday needs: mobilization of resources in more modest amounts, but in a recurring
manner.

b) Needs for financing: = besoins de financement

Needs are generally classified according to their duration: = classifiés suivant leurs durées

Short term:

- Householding consumption
- Ongoing enterprise operation =( « Fonctionnement courant des E » , tout ce qui permet
d’assurer la production, elles vont devoir acheter les matières premières, vont devoir acheter
des services à d’autres E, et ensuite payer les factures, et enfin les salariés ) (to ensure
production, electricity, transport, pay employees…)
- States → Pay state employees, ensure operation of schools, army, police… (short term
investments of the state) > paiement des fonctionnaires de l’Etat

Long term:

- Increase the stock of production means an anticipation of future production. = Augmentation

du stock de production pour une ⤴ future .
- We distinguish:
o Immaterial investments (intangible): (= investissement incorporel ou immateriel)
purchase of software and patents, spending on professional training, R&D,
advertising…
o Physical investments (tangible): acquisition of long-lasting production assets by
companies (machines, buildings); investment by the state in public infrastructure;
acquisition of housing by household = biens de production durables pour les E.
o Also, investment by the State to develop public infrasturure (roads, airports, schools
= un bien public) as well as the acquisition of housing by households

c) Resources for financing

Economic agents receive revenues that allow them to finance their needs. (= Les agents éco
perçoivent des revenues du W et K allant leur permettre de financer leurs besoins). In case of
insufficiency, they can appeal to external financing.

Different forms of resources:

Internal resources:

Épargne brute des ménages = Revenues perçus par les ménages

- Households receive income in exchange for work (W and K) > (revenue from their primary
distribution) and/ or receive transfer payment (revenue from redistribution ex: allocation
logement, indemnité chomage, maladie)
- Companies receive the fruit of their production (les E perçoivent le fruit de leur production
amortissement + profit net)

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 - The state collects tax, social security contributions…(levies, taxes and national insurance
contributions collected by the central government, regional government and social security
bodies)
- Savings (epargne) = portion of income not consumed, enables financing future needs and
thus be self-financed.
o Depreciation (= amortissement): company makes a profit and puts aside sums to be
able to make future investments (=cash flow) = l’E realise des benefices et quelle met
des sommes de côté pour réaliser des investissement futurs.
o Cash flow: profit (benefice net) + depreciation
- A company distributes a part of its profits to the stakeholders (dividends) = une E côtée en
bourse va voir diminuer sa capacité de financement car elle va devoir distribuer ses benefices
aux propriétaires de l’E sous forme de dividendes.
o Self-financing: cash-flow – dividends

External resources:

At the national level this corresponds to “gross corporate savings” = épargne brute des Entreprises

- Individual: borrowing from a person in his/ her family; the bank

- Company/ state: ex. emission of bonds

At a national level the cash flows correspond to “gross corporate savings”

- Companies make the highest investment in a given economy.

- However, the amount of investment however depends on the level of economic activity and
employment.
ð Ensuring conditions for financing these investments has proven to be important for the
economy.

2. Needs and funding resources in the national economy

Definition of financing capacity: economic agents don’t reinject their total amount of income into
the economy, he does not spend all of its income à savings (=part of unconsumed income) à those
savings are invested to produce consumer goods and financial instruments. THUS savings =
investment.

Production =production of consumer goods and financial instruments.

Équilibre emplois-ressources

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 3. Situation of economic agents in a country

Each individual agent has a funding need or funding capacity. peut être emprunteur et preteur .

a) Economic agents generate funding capacity

- Households generate savings (savings = main means to cover the financial needs of other
economic agents) = les menages degagent de l’epargne allant pouvoir constituer l’essentiel
des moyens pouvant couvrir les besoins de financement des autres agents éco.
- This is occasionally the case for other institutional sectors à in France in the 90’s,
companies generated funding capacity; at the same time, they reduced their investment
because real interest rates were high; furthermore, they reestablished their margins thanks
to distribution of added value that was more favorable to them

b) Economic agents generating funding needs

We distinguish two economic agents:

1. Companies
2. State (since 1975, France has shown a need for funding, which has increased dramatically in
the recent years) La France est déficitaire depuis 2005, qui s’accroit ,à 122% du PIB
3. Situations of countries
If economic agents residing in country :
Expenses > income ↔ investment > savings → country generates a need for funding .

Conversely:
Expenses < income ↔ savings > investment → country shows a need for funding (capacity)

→ Fundings needs capacity can be seen in the the balance of current transactions. (balance
transaction courantes)

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 → Which summarizes all the country’s foreign purchases and sales of G & S.

Studying current account balances reveals 2 groups of countries :

Countries regularly having a surplus balance of current accounts : oils exporting
countries(including Russia) + countries whose products are highly competitive In the market
Countries regularly having a deficit balance of current accounts :

Economic agents can finance their needs with their own savings.

Insufficient cashflow requires economic agents to seek additional means outside. =

insuffisance de l’auto financement
The question is : how to ensure that economic agents that have the capacity to lend, actually
lend their savings to whose with funding needs ?

B) Funding

External funding: Distinction between direct and indirect funding:

Direct:
- When performed on short-term capital markets (money market) à trésorerie
- Or long-term capital markets (financial market) à investissement
Indirect:
- The economic agents satisfy their needs throughout an intermediary
- when resulting from credit transactions by financial institutions .
- since the glorious 30s the banks gained on importance (mass consumption, direct cheque
payment…)
- financial globalization in the 80s (Hayek à financial globalization and emerge of financial
crisis)

The financial system connects :

Ø Agents who have funding capacity with

Ø Agents who have needs to be funded

Nationally as well as internationally à Transferring funds from economic agents who have savings,
to economic agents who wish to spend at a level higher than their revenue.

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After the two petroleum chocs governments (especially Great Britain and USA with Margret Thatcher
and Ronald Reagan) needed new fundings (new phenomena) and supported a liberal economic
system such as a deregulation of the financial sector to satisfy their needs other than from the
national financial market. Up from this moment the financial market started to grow bigger and more
important than governments.

1) Distinction between direct and indirect funding

a) Direct funding = financement direct
- Borrowers obtain funds directly from lenders by selling securities to them on the
financial market.
= Debt claims on the borrower’s future income or assets… = ces titres vont donner des droits de
créances sur les futurs revenus de l’emprunteur ou sur ses actifs

ð Two possibilities for direct funding: Emission of bonds (obligations) à bond holders are paid
on a fixed rate, not with standing the annual profit of the company) or emission of shares
(shareholders are paid based on the company’s profit and after the company paid all its
creditors). The actual market is more favorable to bonds, due to its unstable situation.

La bourse et le financement des entreprises

- The company decides individually which share of their capital they want to open to stock
exchange (min 25% to be traded for the first time on the stock exchange; ideally 49% of
the capital of a company is traded on the stock exchange so that the company can
maintain the main strategic power)

Agents Agents
Marché
prêteurs emprunteurs
Achat de titres Émission de titres

b) Indirect funding
- Borrowers obtain funds from financial intermediaries allocating credit.
- Lenders (les preteurs) deposit their funds within financial intermediaries

à “indirect funding”, “indirect finance”, or even “intermediated finance” because both lenders and
borrowers operate via intermediaries.

Agents Agents
Banques
prêteurs emprunteurs

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These 2 financing modes coexist. For example, a company can both issue bonds and borrow from a
bank.

2) Direct funding circuit

Based on the security maturity periods, we may distinguish:

- Financial market for long-term securities (investments);

- Money market for short-term securities (marché monétaire → trésorerie).

A) The financial market = le marché financier

2 types of securities are exchanged on the financial market in order to fund long-term needs, that is,
investments:

Bonds: = obligation
- A security representing a certificate of debt. = un titre de créance
- Yields fixed revenue (interest) and is reimbursed when term is reached.
- Very safe investment, in case of bankruptcy, the company still has to pay the bond holder as
he takes the role of a creditor.
- Businesses, local communities, and the State can issue bonds (the state can only issue bonds
as the state is us so we cannot be sold)
- In France, the bonds issued by the state are treasury. (OAT)

Stock and shares: Actions et parts sociales

- Certificates representing a company’s capital share.
- Stockholders acquire a part of the company’s capital and become part owner of the
company. With the ownership of a part of the company they also have a say in the
administrative council.
- Unlike stockholders, shareholders are associated.
- Shares are not freely transferable because the person (associate) himself is as important as
the capital he brings (the intuit personae present in partnerships and LLCs)
- They are issued at the time of incorporation or during subsequent capital increases
- These securities entitle the holder to a portion of profits (dividends);

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 - They are only reimbursed upon dissolution of the company and after repayment of all
creditors
ð Riskier than bonds
ð In return, the associate benefits from increasing profits or valuation of company assets

↳ Only incorporated businesses may issue stocks or shares.

B) Money market

Money market securities short-term debt

Ø To fund cash needs => trésorerie

Two “compartments” :

1) Interbank market (central bank and commercial banks) = marché interbancaire

- Refinancing banks that need liquidity = c’est sur ce marché que les banques vont se
refinancer =. Sur ce marché qu’a lieu la politique monetaire
- On this market, The central bank implements monetary policy on the interbank market to
influence the monetary circuit, the exchange rate, to influence the inflation and thus the
economy
- Money lending by the central bank to commercial banks as last resort

2) Market for debt securities: marché des titre de creances negociables = marché de trésorerie
- Companies (financial and non-financial)
- And the state

Several securities are traded in this market. Each security refers to a specific issue:

- Firms issue treasury bills = E > billet de tresorerie

- Credit institutions issue deposit certificates = Etablissements de credit émettent certificats de
depot
- Firms and credit institutions negotiable medium-term notes = bons a moyens terme
negociables (= moyen terme)
- The state issues treasury bonds (the state issues about 2000€ of treasury bills per minute.
Such bills are issued to cover the needs for financing the officials. Since short, France turned
to the concept “prélèvement à la source” to avoid too high treasury advances. = etat émet
bons de tresorerie
ð Such securities can be middle such as short-term securities.

Only large companies have access to this market to finance their cash reserves. The market for
negotiable debt securities was created in France in 1985, consequently to the financial globalization.
Until then, the only way to finance cash requirements was to apply for a short-term loan from a
financial intermediary and only the state could issue treasury bills. = une seule possibilité jusqu’à
cette periode etait de partir demander un pret a court terme chez un intermediaire financier > seul
l’etat pouvait émettre des bons du tresor

3) The indirect funding circuits

Various financial intermediaries. We may distinguish 2 categories of financial intermediaries :

i) Depository institutions = les institutions de depots

15
Banks and savings banks receive deposits from their customers and extend credit. The banks collect
the client’s deposits based on a contract and use them to extend credits. Those deposits can be
short-, medium- and long-term deposits (ex. short-term deposit = compte courant)
↳ les banques et les caisses d’epargne > recoivent les depots de leurs clienteles et accordent des
credits

j) Contractual savings institutions = institutions d’epargnes contractuelles

Their funds are regularly paid by their customers (clientele) on the basis of long-term contracts.

EX:

- Insurance companies (life and non-life insurance) collect premiums from their customers. =
vous placez dans un but de rendement sur le long terme
- Pension funds receive pension contributions from employees and employers… (such a
system is very common in the Anglo-Saxon countries. The more you pay into the pension
fund, the higher your pension will be. In France the pensions are collected and redistributed
by hedge funds where active worker pay for pensioners.) = retraite par repartition et
capitalisation

They invest received funds in securities that they buy on financial markets. Such companies have to
work permanently as they cannot collect the funds. They have to reinvest it to get higher revenues.
Since the 80’s those institutions extended their work to an international level.

These include:

- Financial corporations: leasing companies and consumer credit companies. In France, these
entities are often subsidiaries(filiale) of bank or companies, and benefit from funding from
their parent company (elles se refinancent après de leur maison mere). = societé financieres
> font des credits bails et consommation
- Collective investment funds (OPCVM): Undertakings for collective investment in Transferable
Securities (UCITS). They collect savings of the public which they invest on financial markets
by buying bonds and shares. = fonds collectifs d’investissements = organismes de placements
collectifs = vont mettre ne place des titres, vendent des parts de ces titres au public, et vont
les placer sur les marchés financiers. > épargne pure.

Collection of savings = la collecte de l’epargne

In an economy, most of the available savings are provided by households. (Nowadays enterprises
started as well to do savings which is an irrational step as enterprises normally invest. Ex. General
motors did not invest in projects but in the stock market which made them lose all those funds in the
subprime crises).

Knowing how those savings are collected is therefore essential. (savoir comment cette épargne est
collectée est essential ) Monetary policy allocates savings where are needs for investments.

Household savings includes: (lӎpargne des menages inclue)

- Called non-financial savings, for acquiring property, = epargne non financière

- Financial savings that can be used to finance investments of other economic agents

16
Saving can be held in the form of liquid investments (such as deposits (=depot a vue) ) or placed in
financial assets (actifs financiers). = epargne financier pour financer les investissements des autres
agents économiques

A distinction is generally made between: 4 types d’epargne

- “Liquid” savings (deposits, savings accounts (livret A) and sustainable development accounts,
OPCVM monetaires, money market funds…). These accounts can be used to pay for
purchases directly or after a simple transfer by the investor, thus they are “liquid”. → M2 =
epargne liquide > bancaire
- Contractual savings (home savings plans, bank “popular savings plans” …) =epargne bloquée
de manière contractuelle > bancaire
- Non-monetary securities (bonds, equities, non-money market funds…) → sur marché
financier > epargne financière
- Investments in life insurance (as well as pension fund rights)= assurance vie > epargne
financière
Financial savings are placed in one type of account or another according to the investor’s interests
and preferences.

Selection criteria :

- Compensation, relative to rentability and tax levels = fiscalité

- Investment security = sécurité du placement
- Liquidity; that is, the ability to quickly transform savings into payment means (moyens de
paiement);
- Economic and social context (ex. The CAC 40 dropped due to the “gilets jaunes”) =
conjuncture de crise(crainte du chomage, financement des retraites difficultés) > justifie la
forte progression de l’epargne sous assurance vie car quand periode de crise, + difficile de se
financer pour la retraite alors on met de l’argent de coté pour avoir une retraite

Economic crisis situation, fear of unemployment, and difficulties of financing pensions justify today’s
problems on the financial market and strong growth of savings through life insurance (as the tax level
of life insurances is quite low).

V- Institutions central to intermediated funding

A. Credit institutions grant credit = etablissements de credit allant accorder des credit

Types of credit institutions:

Common feature of credit institutions = grant credit.

↳ But the resources enabling them to grant (accorder) loans differ from one type of institution to
another;

ð Distinction of banks from other credit institutions.

2 Types of banks-

1) Banks
Banks are the only financial institutions that have the right to receive deposits from their customers.
(seules institutions fi qui ont le droit de recevoir des depots de leurs clienteles)
We typically distinguish:

17
 - Private banks:
o capital held by private shareholders (such as BNP Paribas and Société Générale), is
publicly traded > coté en bourse
- Mutual banks: = banques mutualists = banques detenues par leurs sociétaires, souvent leurs
clients
o Capital owned by their members, who are often their clients (such as Crédit Agricole,
Banques Populaire (cooperative banks), Caisse d’Épargne
o They focus on their mutual aspect
o Cannot be listed on the stock = vous ne pouvez pas etre coté en bourse car les clients
sont les proprio, mais les banques doivent l’être, alors elles mettent en place des
structures spécifiques(sous forme de société) pour ouvrir une partie de leur capital a
des actionnaires privés pour ainsi etre coté en bourse (and if listed they have to
follow a specific regime)
o Can create specific structure: ex. they might open a portion of their capital to private
shareholders to be listed; ⤴
o Or consolidate with banks not belonging to the mutual sector (which is what Crédit
Mutual did with CIC)

2) Other credit institutions = autres investisseurs

May grant credit even if they do not have the right to receive deposits from their customers. = ils
peuvent accorder des credits alors qu’ils n’ont pas le droit de recevoir/prendre l’argent de la
clientèle.

- From their own funds or loans, they have contracted themselves. = sur leurs fonds propres
ou alors ce qu’ils ont contracté
- Specialized in certain types of loans (ex. mortgages) = specialisé dans certains types de prets

↳ These other credit institutions may be: regional development companies that can provide credit to
companies or local authorities under the conditions established by the Ministry of the Economy.
(ex:credit foncier)

Specialized financial companies:

- Consumer credit (such as Sofinco and Cofidis) = credit a la consommation

- Credit for businesses (such as leasing or factoring companies); mortgage = société de credit
bail (leasing automobile)
- Such financial companies can be subsidiaries of banks which provide them with funds
- They act as intermediaries between two economic agents

And thus, address individuals, businesses and public institutions (such as Crédit Foncier)

B. The benefits of banking intermediation

→ A majority of economic agents don’t have access to the financial markets. For some entities, it is
not possible to turn to the market for funding. Therefore, they refinance themselves via a simple
option: a loan > borrowing from credit institution if they want to fund a long-term project or an
occasional cash need.

↳ the banking intermediation which provides the big advantage of absorbing all the imperfections
linked to financial markets.

↳ May also prefer to go through an intermediary, rather than address the market directly.

This overcomes the shorcomings and failures of financial markets by promoting

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 1) Lower transaction costs =diminuyion des couts de transaction
2) Management of risks associated with loan transactions
3) Limited the consequences of asymmetric information

1. Banking intermediation enables reduced transaction costs

- Perfect competition: Neo- classical (all necessary information is exempt of errors, available to
all, free of charge…)
- Homogeneity and transparence: free circulation such as free entry and exit to the markets

In financial markets… this requires an enormous amount of transactions which requires:

- Identifying contracting parties (contractor and co-contractor) = identifier les co contractans

- Establishing several contracts up from the moment the fitting parties are found
- Tracking the implementation of these contracts (the invested money has to be used in the
previewed way) = suivre les contrats, verifier que les sommes sont versées
ð Much fees (beaucoup de temps demandé)
Transaction costs (linked to an imperfect market)

ð Significant time (beaucoup de temps)

Banks, therefore:

- Avoid transaction costs = evitent les couts de transaction

- Allow investing or borrowing under better conditions = car ces banques permettent de
realiser des placements d’emprunts dans de meilleurs conditions
- Bank’s role is to channel savings and grant loans = metier des banques est de drainer
l’épargne et d’accorder des credits
- Numerous operations provide them a high experience and economies of scale = vont faire
des operations en grand nombre, at ainsi faire des economies d’echelles > baisse des coits de
transaction

2. Banks bear (assument) the risks associated with loan operations

Normally the bank is supposed to assume the risk. Since the 1990s and as result of the international
competition, the banks focused more and more on riskier operations.

Lending = risk > preter est un risque

- Non-repayment of loan by defaulting debtor= losses for the lender (credit risk or
counterparty risk); =peur que le debiteur de soit pas solvable = « risque de credit, », « risque
de contre partie »
- Illiquidity (money which should enter in bank has not been repaid yet) =il n’a pas encore
l’argent necessaire
- Loss of earnings = loan made at interest rates lower than it would be possible to obtain today
by investing those same funds (interest rate risk) =manque a gagner > pret a realiser a un
taux inferieur au taux dinteret = “risque de taux d’interet”
o Ex. the direct interest rate applied by the ECB is currently at 0%. This means that particulars pay very
small interests for their loans as well as for their mortgage loans (7 years). Once the direct interest rates
will rise, it is about the banks to support the higher interests they have to pay to the ECB
- Risks to be assumed by the individual lender, unless the lender assigns risks to a lending
banking establishment. = les 3 risques seraient assurés par un preteur individuel a la place
des individus

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Therefore, banks allow: : les banques prennent le relai

- Transforming short-term savings into long-term financing; (les banques ont tellement
d’epargne deposes chez elle quelles peuvent preter pour de l’investissmeent grace aux
economies d’echelles )
- Transforming low-risk investments into riskier funding (possible as banks work with a lot of
quantities of money)

3. Banking intermediation limits the impact of asymmetric information

Assumption:

An individual lender lends funds only if he is certain to be repaid. Most often, the lender does not
have complete knowledge about the borrower (whether he/she is honest; whether the borrower can
meet his/her obligations). So, the borrower has more information than lender.

↳Un preteur indivuel prete ses fonds que s’il a la certitude d’etre remboursé. Je ne connais pas la
situtaion de l’emprunteur, je ne sais pas s’il est honete, s’il pourra rembourser ses obligations, il y a
donc asymetrie d’information car l’empreunteur connait + que le preteur.

ð “Asymmetry of information” because, in the contract, one party has more information than
the other.

2 Consequences:

1: Anti-selection (or adverse selection)

2: Moral hazard.

ð Without the financial system we would face those two consequences which would block the
market (market based on trust).

a) Anti-selection (or adverse selection)

Assumption: How can a business be able to obtain the necessary funding to achieve its investment,
for which it has no guarantee of success?
If the E is borrowing only from individual lender (preteurs individuels) the business would obtain no
funding (elle n’aura aucun financements car personne ne va lui preter par crainte de ne pa etre
rembourser a moins d’avoir un taux de remuneration tres atractif) (for fear of not being reimbursed,
unless a very attractive rate of compensation is offered).

2 Cases may arise:

- Only very risky projects are funded because of the high rates of return, to the detriment of
safer projects; (seuls les financement des prohjets tres risques vont voir le jour, car tx de
rendements tres elevés au detriment des projets + surs)
- No projects would obtain funding (aucun projets ne trouveraint financement)
- = soit on prend des projets risquès soit R

b) Moral hazard:

Assumption: There is no proof that the obtained loan will indeed be used as intended, and riskier
uses could be chosen. Fearing this possibility, investors may decide not to lend their funds. On ne
prete pas aux epargants car on se sait pas s’ils sont solvables. Les

20
 ð In either case, information asymmetry prevents the conclusion of transactions that could be
beneficial for both the lender and the borrower. Therefore, banks aim to absorb the
information asymmetry of the market through:

Banks have :
- The know-how = savoir faire
- The expertise
o ↳ Enabling them to properly assess the viability of a project; (vont leur permettre
d’evaluer correctement la viabilité d’1 projet)
o Banks are able to select funding projects they deem profitable, while rejecting
projects that deem too risky (ex. a loan cannot exceed 1/3 of our incomes, the bank
can ask for health certificates…) (vont accepter les projets rentables et rejeter les
projets risqués)
ð Banking intermediations (lintermediation bancaire) will therefore fund the most profitable
projects and refuse the riskiest ones. They transform available funds from savings into funds
that finance borrowers. The presence of banks facilitates the financing the economy and
promotes economic growth.

VI- Financial institutions are entities involved in the

functioning of financial markets

A. The role of institutional investors

1) Presentation of institutional investors

Institutional investors = investors other than individuals:

- Role = to place the savings they receive into financial markets.

- different from banks by their use of the savings they collect (as they cannot keep the
deposits but have to invest it directly into the financial markets. They have a bigger impact
on the financial sphere as the amount of money they invest is much higher than the funds of
investors (bigger impact on the current economy) ex. pension funds)

Activity of banks and institutional investors:

21
 - households have investment capacities while enterprises have investment needs
- institutional investors receive household’s deposits and place them on the financial markets
by buying shares
- ex. assurance company, OPCVM = Undertakings for collective investment in Transferable
Securities (UCITS)

3 types of financial institutions:

o UCITS : collects funds from individuals businesses… and use then to acquiere financial assets
o Pension funds: collect employer and employee contributions and invest in assets (ac tions) to pay
future pensions under funded pension.
o Insurance companies : receive contributions they invest in order to pay compensation for any
damage, injury or death

2) The influence of institutional investors (Study of household financial assets in major

European countries) (le poids des investisseurs institutionels)

ð European households rely (recourent) on institutional investors for a portion that varies
between 1/3 and 2/3 of their financial savings .

With significant difference between countries.

3 Groups of countries can be distinguished

1) Countries in which traditional banking intermediation remains high:

Spain & Italy, a large part of households’ financial wealth (patrimoine financier) is
deposited in banks (depot bancaire) ; Italians for example invest highly in treasury bills
(50% the Italian debts are hold by Italians)
2) On the other hand, countries in which the financial wealth of households consists mainly
of life insurance and investment products passing through (transitant par les ) pension
funds:

22
 The Netherlands and the UK, both of which have a funded pensions system (par
capitalization) ;
3) Intermediate countries in which the financial assets of households combine a large
proportion of bank savings products (epargne bancaire et ) and life insurance
contracts:
France & Germany

3) Reasons to leverage institutional investors: (raisons recourt investisseurs institutionel)

- Working with an institutional investor can:

à Reduce transaction costs:

Investors no longer have the identity investments on their own. The high volume handled by
institutional investor can produce:

- Economies of scale, and therefore, enable them to charge much lower management fees
than they could with individual management

àReduce risk: Institutional investor can build a diversified portfolio, which is much more difficult to
achieve for an individual investor;

àReduce information asymmetry: Institutional investors have greater expertise than individual
investors.

B. The changing role of banks

1) The mutation of banks in financing the economy
a) Diversification of banking activities

Environment:

- Decline in their traditional activities of collecting savings and lending due to international
competition (as well from institutional investors)

Banks have diversified their business activities and derived from their basic activity.
Banking activities today include:

Retail banking:
Traditional banking business, addressing individual customers through their local branches

- Operations generally involve small amounts (close activity with individual clients)

Financial and investment banks:

Major customers, especially large companies. With the development of the financial sector, banks
started to specialize in work with big companies. They adapted their activity to the new environment.

Activities:

- Advisory services regarding mergers and acquisitions

- Arranging operations such as capital increases or bonds issues (when a company wants to get
stock listed)
If their activity decreases in the retail banking sector, it will increase in the financial and investment
sector.

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Asset management: gestion d’actifs

- Performing investment transactions (risk hedging operations and/or speculation operations)

- On behalf of their clients (institutional investors, businesses, individuals) or for their own
benefit (the investment banks engage in speculative activities)

Insurance business:

Just like insurance companies, all banks now offer their own liability insurance and life insurance
policies.
Banks now operate in 3 main financial areas:

- Banking
- Securities management (placement)
- Insurance

Diversification of activities, the retail sector proportion decreased a lot (many bank subsidiaries
close). By diversifying their activities, the banks chose to take higher risks in other sectors.
Ex.: A bank grants a loan to an individual to buy an apartment and may for e.g., offer an insurance to
cover that loan as well as home-owner’s insurance.

Selling 3 products to the same customer reduces the time spent finding information about customer
(would take 3 times longer in the case of 3 different vendors).

ð Economies of scale

b) Both forms of financial intermediation

Banks have become an essential intermediary (traditional intermediation role and business market
intermediation). They have also become, just like institutional investor, intermediaries between
issuers and purchasers of securities

2) Banks have been forced to take on new risks

a) Banks now rely more on financial markets

Background:

- Development of financial markets since the 80s

- Activity diversification (which led to structural changes)
ð Banks have changed both the structure for using funds at their disposal and the origin of
those funds:

24
The majority of a bank’s funds used to come from deposits made by customers. Today, banks finance
themselves on the markets. The bank activity is therefore more exposed to changes in financial
markets. Currently banks financing themselves by 52% on the financial markets compared to only 7%
in the 80s. In the 80s only 5% of their assets were due to shares, now it is about 47%. This states that
the share of the amounts of shares increased a lot which was one of the major causes of the
subprime crisis.

b) Banks outsource their risks

Method used = securitization of bank loans (titrisation des créances/ credits bancaires)

à Converting debt into securities: convertir des blocs de creances en titres

A bank that wants to perform a securitization operation sells its obligations to another financial
institution created for this purpose (special purpose vehicle). This institution is responsible for issuing
securities (émettre des titres) that may subsequently be sold on the market. This activity was mainly
common in the US but had a global impact due to the interconnected financial markets.

Risk outsourcing process:

The securitization (titrisation) process provides 2 major advantages for the originating bank:

- Recover cash and transfer of the debt to be able to issue new credits
- Eliminate the credit risk associated with the transferred receivables as banks transfer the
debt and therefore the risk to other investors

25
↳ The bank can then grant new loans on better rates, as there are more liquids available, to the
extent that the bank refinances at a lower cost. (the higher the liquids the lower the rates and vice-
versa, this process facilitated the financing of the economy).
Securization is therefore a way to improve financing for the economy via banking establishments.

Ø The securitization was initiated in the US through mortgages and highly developed in the
1990s and even more in the 2000s as the FED provided very low rates of refinancing. Those
activities were even in Europe, and also involves other types of loans, such as consumer
loans.

This method also has dangers:

Banks ( are more and more confident in the fact that they can offload their risks):

- may need to actually take more risks

- They are less cautious when granting loans and therefore did not collect enough information
about the debtor
- In addition, they transfer their risks to investors (such as institutional investors as it was the
case for AIG) who purchase securities

The danger clearly emerged at the outbreak of the subprime crisis but was prepared in the 80s with
the globalization of the financial market: Mortgages (=prets hypothéquaires) were granted to
customers who had a default subprime credits which triggered finally the crisis either because these
borrowers had already been involved with payment incidents or because they had low incomes.

These loans were qualified as “subprime” loans, as compared to reliable customers, qualified as
“prime”.

o Mortgages granted to customers who had a subprime crisis risk of defaultsubprime crisis.
o Either become these borrowers had already been involved with payment incidents.
o Or because they had low incomes.
o These loans were qualified as "subprime" loan as compared to really able customers
qualified as prime

Subprime crisis

Financial crises are neither new nor rare.

- The great economic crisis of the twentieth century began with the financial crisis in October
1929 (the first European countries affected by that crisis were Germany and Great Britain).
This crisis was based on an overproduction (roaring 20s) and an over-speculation on the
stock market. It was also the major cause for WWII.
- Over the past 10 years 5 financial crises: 1997 Asian crisis; e-market crash of 2000 (dotcom
crisis coming from a very prosperous market which was over-evaluated by investors); Enron
in 2001; and subprime starting in the summer 2007

Financial crisis (simplified) = a drop in the value of investment (= chute des valeurs de placements)

- A financial crisis is serious?

Normally, one does not die of appendicitis… but it could evolve into peritonitis, and if that is not
treated…

Ø The risk is that a crisis in the financial sector (banks + some major investors) is transmitted to
the real economy. ( le risque est que ca part sur la sphere reelle)

26
A financial crisis can foreshadow an economic crisis: impact on employment, growth etc…

- A case in point: the 1929 crisis and 2008 crisis

Origin of the current crisis: Act 1

The crisis known as the “subprime crisis”

“We lend only to the rich” (as those are the households with a low risk of credit defaults)

To start, there are poor households who dreamed of buying a home. Given their resources, and thus
the risk of defaulting on a loan, they can only borrow at higher rates than wealthier households:

They do not have the “prime” as richer households, their credits were therefore qualified as
“subprimes”. They do noy have the “prime”, lower rates offered to wealthier households. Hence the
term “subprime” in english. Typically, such borrowers had a poor credit history and have therefore
unfavorable conditions such as high interest rates.

“we do not lend only to the rich”

↳ Banks decided to offer loans to households (home mortgages) at variable interest rates, typically
low at the time the contract is signed (due to low intervention rates by the FED), but which may then
rise significantly. > rates are depending on the FED’s rates

To cover themselves in case of default, banks mortgage the home; they can foreclose/ reposses it
and sell it. Quand defaut de paiement, la banque saisi, la maison et la vend

Home mortgages granted to low income households, loans at variable rates (there is a difference in
between fixed rates, adjustable rates and variable rates)

Low starting interest rates, long repayment periods (a repayment period can cover up to 30 years).

The likelihood that rates would vary upwards in the more or less long-term was 100%

- Subprime: it all starts with a fairy tale…

To start, a household borrows money to buy a house.

The house is worth 100. The household, without any down-payment and despite low income,
borrows the entire 100. Le menage va emprunter la totalité du pret de la maison

- The subprime fairytale continues-

The price of the property increases due to a high demand and the house is worth 150€. La valeur de
la maison a augmenté car il y a beaucoup + de demande, l’offre n’arrive pas a suivre, alors le prix de
l’immobilier augmente

Since a home can guarantee multiple loans (une maison peut garanti plusieurs prets= ), some banks
offer new loans to households for another 50. Hard to resist, household borrow to buy more goods
such as a car. Les banques vont proposer aux ménages un nouveau prêt, difficile de resister, vont
alors investir dans d’autres biens a toux variables

The fairy tale then turns to a nightmare because an economy can’t continue to lend money for 0
interest rate.

The real estate market declines. The house is now worth less than the loan, less than 100 in our
example. At the same time, reimbursement expenses increase because (flexible) interest rates rise.

27
Poor households won’t be able to pay back anymore. La FED va augmenter ses tx d’interets et va ai si
se repercuter sur les taux des menages

- The subprime nightmare becomes reality

In response to the first loan defaults, banks require households to return the key to their house by
mail. Car prêt hypothécaire alors la maison appartient a la banque
These households are released from their debt but are left homeless. The bank collects a property
whose value continues to decline.

Origins of the current crisis: Act 2

Securitization (titrisation): tous les prets sont entrain de circuler sur les marchés financier

The creators of the crisis were the banks which granted to many loans to households which could not
pay their debts. The most affected agents of the economic crisis should have been though the banks.
But by securitization the original lenders (banks and institutional investors) transform debts financial
products and eliminate “bad debt”.

- By means of very complex financial innovations, subprime loans (credit subprime) are
converted into financial products (> titrisation) (ex. CDO = collateralized debt obligation)
- These risky financial products (bearing the risk of debtor default) are mixed with other
products of better quality and are sold to investment banks.

The banks basically unload their risk (non- payment etc…) onto investors. These “rotten securities”
spread throughout the financial system and therefore throughout the world as the entire financial
system is interconnected.

The trust began to fail: Investment banks begin to realize that some of the mortgages supporting
these securities will not be reimbursed.

The owners of these “rotten securities” seek to dispose (se debarasser) of them but they cannot find
any buyers. However, the entire financial system is filled with such securities and no one wants to
buy as no one knows exactly where those bad debts were.

Bankruptcy situation for some financial companies:

- Share prices of banks and insurance companies collapse in the US (too many sellers and no
buyers) > les banques s’effrondrent car les menages ne peuvent plus rembourser
- And in Europe

ð Since this moment, Governments intervene to avoid a “domino effect”

28
The high amount of bad debts in the financial system led to a major crisis as the financial system is
based on trust. As a result of the bad debts, economic agents developed a feeling of mistrust which
majorly lowered down the financial activity.

- In this climate of uncertainty, banks grant fewer loans to businesses and households, which
in turn adopt a sit and wait behavior. > l’economie se grippe > menages et E dans un
comportement d’attentif
- Eventually, the financial crisis spreads to the rest of the economy, as credit restrictions
weaken consumption and investment and thus slow growth (transformation of a financial
crisis to an economic crisis throughout the monetary intermediary)
ð Contrary to the great recession in 1929 which took 2 years to spread over the Atlantic to
Europe, the effect of the subprime crisis was immediate.

Video: Fight of the century - Keynes vs Hayek

- Keynes: bottom – up: the economy is mechanic. We have therefore to stimulate the economy
and encourage the households to consume.
- Hayek: Upside – down: the economy is organic. It will cure itself and eliminate the parts which
won’t work (ultra-liberal).
- During the crisis, governments intervened and injected a huge amount of money into the
economy to keep it going.

C. Passage from Debt-based economy to financial market economy

1. Up until the 1930s: financial markets held a privileged place

- Most long-term resources, discounted rates provide cash (cash discounts provided the
treasury) > l’essentiel des ressources longues sont les escomptes bancaires va faire la
tresorerie
- With banking service low, households have little access to credit.
- Savings absorb securities issued by the state and companies (only since ’68 every household
can provide of a bank account in France), its size is enhanced (favorisé) by:
o Monetary stability: The Germinal franc retained its value intact until 1914.
o Adequate social structure: a majority of poor people, significant minority of owners,
including the millions of pensioners who live on income from conservatively
managed assets (the pensioners disappeared after WWI with the establishment of
taxation on income for redistribution of wealth. Those pensioners reappeared in the
80’s in form of investors who gain revenues based on their financial capital) =
stabilité social
o La famille va assurer les arrets de travail, + les retarites , la famille est au cœur de
l’economie
o Maintaining the family as an economic unit (non-salaried for the most part) based on
property (land, workshops, shops, financial capital) = mechanic society

2. From 1945 to 1970: debt economy (= economie d’endettement)

- Increase in the purchasing power and the monetary creation

- Banking took off, with “book money”, scriptural money rising from under 40% to more than
85%, banks thereby multiply their money creation power. Envol de la bancarisation
- Social evaluation (wage-based employment, rising living standards, growing middle class)
deprives the family of its economic role, asset values collapse. The society gets more organic
than mechanic) > etat devient un etat providence, baisse de la valeur de la famille
- Period of urban migration after WWII due to mechanization of work normally done in urban
areas (horses replaced by tractors). Thanks to the mechanization, prices for corn decreased

29
 and living standards rose (creation of a worker and a middle class). The economic
environment changes society.
- Hedonism leaning towards immediate consumption spreads (mass consumption), saving
depreciates (epargne déprécié car on va faire beaucoup de Plaisir) ( living and behaving in
ways that mean you get as much pleasure out of life as possible, according to the belief that
the most important thing in life is to enjoy yourself)

o Banks incite their clients to borrow, taking advantage of inflation that reduces debt and
makes saving more random (up to 10% of inflation in the 70s)
- Funding through savings is no longer enough, banks begin to transform, the central bank approves
money creation with flexible refinancing (credit divider à tool which divides credits and therefore can
grant higher credits à increase in the monetary mass = inflation)
- Interest rates were therefore very low (based on inflation). The inflation did not provide any problems
as wages were indexed to it (in France until 83’s)
- The international debt-based economy takes off in parallel with the dramatic in external deficits (oil
crises) and the abundance of dollars (euro-markets, IX)
- The debt economy developed in a very short time (only 30 years)

3. From 1980-90: resurgence of financial markets

a. Context
Reversal of social power relations:

- The share of social power (marginal rate), rising from 26% of GDP in 1983 (globalisation + car
année ou Mitterand decide de désindéxé les salaires sur les prix ainsi les E vont augmenter
leurs taux de marges car recuperent une partie de leurs benefices. Une fois déxindéxatio, l’etat
n’interviendra plus jamais sur le taux de change) to 32% in 1996. This is a redivision of net
value-added in its favor, while the 1970s had been disastrous to it
- Capital and creditors take their stand: debtors pay, lenders earn a higher level of real interest.
Les preteurs vont gagner dû a moins d’inflation un Taux d’interet reel + elevé.

Immediate causes:
- Deflation makes borrowing (emprunt) more expensive, and investment more profitable
investors turn to the stock market. (Les epargnants vont influer a la bourse )
- The economy toggled the financial markets up from the 80s
- End of the prosperous years between 45 and 70 à mass unemployment
- Deregulation and financial innovations offer better-suited products (des produits + adaptés)
(liberal revival) à Hayek.

b. The 3 Ds, globalization begins

Decompartmentalization: liberal inspiration (décloisonement)

- Globalized world capital market in which everyone can choose their financing or investments
across a wide range, as transfers are instantaneous (free choice of form of financing, period of
financing, country of financing…)

Deregulation: Innovations emerge. (déreglementation)

- New products offer investment vehicles or appropriate financing along with high mobility
adapted to a higher number of agents
- Innovation allant se multiplier, allant offrir des moyens de placements ou financement adaptés
ainsi qu’1 + grande mobilité

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 - ↳ That is, the ability to switch from one market to another, one term of obligation to another,
one currency to another…

This is the main driver of globalization:

- All products become competitors, costs and yields tend to unify around the world (initial aim
to include developing countries into globalization) = tout produits cont devenir concurrents,
allant entrainer les coups et rendements vont s’unifier au niveau Mondial
- These innovations open new markets by attracting savings.
- Facilitating transfers, they increase volatility and make it difficult to regulate currency
issuance. Originally the financial globalization was aimed to distribute more equally the financial means (underdeveloped countries).
However, the deregulation led to many crises, the first one in Asia due to an investment wave which was not used on its purpose and
which disappeared to rapidly.

Disintermediation:
- This movement is opposite of the “Glorious Thirty” (1945 to 75), it is a decline of bank financing
in favor of direct finance. (reflux du financement bancaire au profit de la finance directe)
- On enleve les intermediaires bancaires = baisse de l’infleunce des banques au profit des
marchés financiers

c. Heading towards the end of the debt economy? France as a case study

Changes in the economic environment = mutations de l’environement economique

- Starting in the early 1980s, the new economic and financial situation drove changes in capital
markets and innovations in financial products
- Economic crisis: After the petroleum choc the world found itself in a difficult situation of
payment imbalances. Those imbalances were at the origin of capital transfers from one
financial center to another.
- ↳ Competition between countries is increasing to attract or retain capital (as investment is the
driver of prosperity and some countries offered better financial conditions than others):
o This is a powerful stimulator of financial innovation as it provides opportunities for
competitive investment (start of financial paradises)
o In this sense, innovation in capital markets in France and EU respond to those
developed overseas, especially in Anglo-Saxon countries and open their capital
market, make it more competitive with financial innovations
ð Tilting and deregulation

The 1980s were also marked by a dual instability from:

i) Currency exchange, due to the abandon of the fixed exchange rate system (end of
Bretton Wood in 71 with Nixon; floating currencies increase uncertainties for trading
à disadvantageous for the economy) > il n’y a plus de change fixe, mtn du change
flotant
ii) Interest rates, because of the new U.S. monetary restriction policy (increase of the
interest rates to reduce the monetary mass) > la FED remonte taux Interets car
poltique monetaire restrictive
iii) → Increased financial risk (interest rates & exchange rates)

It was inevitable that this would encourage finding new techniques to better manage these new risks.
However, there are not enough tools yet to regulate the system on a global level as modern economy
mechanic is still based on a Hayek-ideology.

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4. 2000’s
- In the USA there is a multitude of financial institutions. More and more investors intervene
on financial markets in the interest of lenders or borrowers. The American market is the
example for a financial market (e.g. big importance of hedge funds: if they are badly
invested, retirees won’t get any pension à contrary to countries like Germany or France)
- Capital market are open to many stakeholders and a large amount of K.
- The us economy is a typical example of a financial market economy because :
§ a multitude of financial institutions intervene in market (banks, saving banks,
insurance companies, pension funds)
§ companies fund most of their investments from their profits
§ marginally, banks resort to FED advances, and refinancing mainly on the
money market. (Vont chercher l’argent sur le marché monetaire car moins
cher que aller a la FED)
§ the FED plays the role of a lender of last resort, bit it is a lender without
constraints because commercial banks resort very mottle to this type of
funding.
§ Worldwide generalization (= generalization de la mondialisation)

- In the 2000s the financial market got more and more open to many different actors (shareholders) who exchange
on the financial markets à the power of financial markets began to exceed the power of the central banks
ð It took 20 years since the financial globalization that the financial sector became the global regulator of markets
- A listed company aims to generate the highest profits possible as the dividends distributed to the shareholders
would increase, thus stocks become more attractive and their prices will increase.
o To ensure high dividends to encourage shareholders to invest in the company, the gap between profits
and dividends rises
o A company to get listed has to open at least 25% of their capital to the market. If the share stocks price
increases (on the primary market), the capitalization increases, and the companies can make bigger
investments.
- Banks tend to refinance themselves increasingly via financial markets and decreasingly via the central banks (the
FED became a last resort lender)
- The financial globalization generalizes

- VII- Monetary policy

- The goal of a good monetary policy (regulator = central banks) = is to manage the monetary
mass and thus ensure the stability of progress and influence the economic activity . = agit sur
la masse monétaire pour stabiliser les prix et influe les activités eco, c’est une politique
conjoncturel (= court terme)
- Central banks use special instruments to influence the liquidity of banks and thus interest
rates
o In the EU, the central bank is responsible for the monetary policy. The political
decisions taken must especially be very credible for the economic agents/ entities.
Their impact depends on the elasticity of consumption of households and the
investments of companies based on the interest rates (elasticity = lower interest
rates means higher demand).
o The ECB bank defines and conducts monetary policy for the euro zone
o Dans ses statuts, the ECB seeks price elasticity, which sets the stage for considering
other objectives.

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 o Since the creation of the euro zone in 1999, euro zone monetary policy has been led
by the European central bank.
o The European system of central banks unites the national banks of the European
union’s 27 members states around the ECB.
o Currently, the prime rate (taux directeur) in the Eurozone is 0 to encourage poor
households to borrow and thus to spend to accelerate the economic activity
- The major goal of the ECB is stability of prices which impacts each decision taken on other
objectives (in 2009 the ECB broke with its status and took decisions, normally it has not the
right to take).
o The decision to create a Eurozone was taken in 1992; since 1999 it really exists and
since 2002 scriptural money is circulating
- The Eurosystem reunites 19 countries around the ECB (ECB + central banks of the 19
countries of the eurozone = Eurosystem). The eurosystem only includes the ECB and national
banks of ECB.
- The governor of the ECB defines the monetary policy of the euro zone:
o Strategic summit = it unites governors of the central banks of the Euro zone + 6
members of the directory committee
o However, major decisions can be taken independently by the director of the ECB
Christine Lagarde

A) Monetary policy instruments

Video: Une politique monétaire européenne

- The ECB is in need and in capacity of financing. Its decisions mainly affect SMEs and
households as bigger companies directly cover their needs on financial markets
- Like other central banks, the ECB created creates money, taking securities tendered by banks
as its assets
- The ECB creates money through assets provided by banks and paying for those “securities
with central bank money”

o1. Operations by the ECB facing the open markets (prime rate = most important
instrument of the ECB). The Central banks buy bank’s assets and inject in return
liquidity > Most of these operations are carried out by national central banks as part
of a regular procedure called call-for-tender (open market)
o 2. Payment facility: the central banks provide liquidity to financial institutions (from
day to day) .the ECB may also provide liquidity on-demand to financial instituitons
through lending facilities and deposits
o 3. Obligatory reserves deposits of banks at the ECB (to provide higher levels of
security). For security purposes, it requires them to maintain a minimum deposit,
called reserve requirements.
ð Three essential instruments of the central bank.

1) Open market opeations (tenders) = appel d’offres

= prime rate
- Bid for tender: every week the central banks of the zone publish bids for tender. Each week,
central bank in the euro zone conducts tenders to provide liquidity to the market in the
market in the form of taking possession (temporary holding) of securities held by commercial
banks for a period of 2 weeks. Commercial banks provide several assets to sell with a
provisional hold of two weeks by the ECB. After those two weeks, the ECB retransfers those

33
 assets to the banks and the banks in return repay the gained liquidity (reprennent leurs titres
de creances) à the aim is to inject liquidity to the markets (done by the procedure to
exchange assets (provided by commercial banks) and liquidity (provided by the ECB)
- Those operations initially aimed a period of 2 weeks but evolved to 3 months, or 1-year
periods
- These operations are completed each month by bidding over the longer term (3 months) and
exceptionally by tendering much longer maturity.
- These operations are performed at an interest rate called the finance rate (REFI). The
refinance rate is the main instrument of the monetary policy.
- Such operations are realized with the prime rate which is the main instrument of the
monetary policy
- It provides the possibility to banks to receive on a short-term liquidity they originally provide
in forms of assets

2) Payment facility – Standing facilities

- Commercial banks can obtain liquidity (au jour le jour), overnight with the euro system
outside tender operations, at a fixed rate higher than the refinance rate. This is referred to as
the marginal lending facility (cap rate)
- Banks can also deposit their cash overnight with Eurosyetm at a fixed rate lower than the
refinancing rate. This is referred to as the deposit facility.
- These 2 rates do not affect the functioning of the money market, as banks prefer to respond
to calls-for-tender, as rates tend to be more attractive.

- Instruments qui permet aux banques d’avoir de l’argent liquide pour un besoin ponctuel et si
trop d’argent d’aller déposer de l’argent auprès de la banque européenne. Mais il est
volontairement pas intéressant par rapport à l’open-market.

- Taux de dépôt : C’est le taux correspondant à la rémunération que les banques

obtiennent en plaçant leurs excédents de trésoreries auprès de la BCE

- In case of need of daily liquidity (linked to the Eurosystem and excluded of the bid for tender)
- A bank with means of liquidities, neither gains nor loses money if it keeps the money in the own
bank. To make profits however on those liquidities, the banks transfer that money to the ECB
which works as an intermediary and which provides those liquidities to banks in needs on a daily
basis. This type of refinancing is realized on rates higher than the prime rates. It is thus more
interesting to cover the needs of liquidity via the open market where rates are lower.

3) Mandatory reserves
- There is a minimal lower-limit of obligatory deposit of banks at the ECB which will be
remunerated on the prime rate (requirement of the Eurosystem) (the central banks of the
Eurosystem apply the rules designed by the ECB. The national banks (not central banks) thus
need to deposit obligatory reserves at the ECB)
- A required minimum level of bank deposits with the eurosystem, equal to 1% to the deposits
of their clients, earning Interest at the refinance rate and paid at the rate of refinancing.
- This measure aims to provide stability in the Eurozone
- The higher the deposits (higher capitalization of banks) the higher will be the amount they
have the right to lend
- The obligatory reserves decreased from 2% to 1% to support the injecting of money into the
economy

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 - This measure aims to block and to influence the monetary mass
- The statement of the prime rates influences each rate on the market

→ In fixing tender rates and standing facility rates, the ECB influences all market rates. This is the
reasons why the rates set by the ECB are called “references rates”.

In each economy ECB interest rates affect the behavior of demand of the different
agents/entities!!!

> The levies are:

1) Decrease of reference rate

2) Decrease of interest rates on the interbank market (directly linked to the prime rate)
3) Decrease on the borrowing/lending rates of banks (affect PMEs and households)
4) Increase of credits and the monetary mass
5) Increase of household’s consumption and company’s investment
6) Increase in production

Each inflationary or overheating risk leads to ECB to react inversely, to consider tightening monetary
policy and thus interest rates will increase = restrictive monetary policy

B) Limits of monetary policy

- Credit crunch (limit of credits started in 2008). Following the liquidity crisis that occurred
during the 2008 banking crisis, there has been a “tightening” of a credit offered to businesses
and individuals (credit crunch) = les banques vont limiter quantitativement leurs nombres de
prets
o Banks limit their lending quantitatively
§ Regardless of the rate that the borrower agrees to pay
§ And regardless of any orientation driven by government and monetary
authorities.
o Creditworthy borrowers are only able to access credit lines under prohibitive
conditions: high rates, multiples safeguards

- A trust crisis was the result of the financial crisis in 2008. Banks stopped lending, even on very
advantageous conditions for them as multiple guarantees, very high prime rates and thus very
high borrowing rates. This trust crisis led to a quantitative limit of credit offers.
- Central banks tried everything to insist the banks to provide credits, but information asymmetry
did not encourage banks to lend. à Information asymmetry = only the borrowers knows if he is
able to cover the debt. To avoid bad borrowers, banks did not lend at all which mainly affected
SMEs and households, those economic actors who can’t go on the financial markets.
- Banks tended to reduce their risks which in turn affected the economy

- Liquidity trap = injection of money into the economy which is not used by households or
SMEs and thus does not help the real economy
o This phenomenon was describes by Keynesian analysis. A policy of increasing the
money supply seeks to stimulate domestic demand through lower interest rates
o But it may face a limit :
• Below some minimum interest rate level, the tendency to hoard any
additional monetary unit becomes very strong.
• As agents prefer to hold on to their money balances rather than
consume or invest more
• Which makes monetary policy inefficient

35
 • The liquidity trap phenomenon was observed in Japan starting in the
second half of the 90’s. Liquidity created by the central bank did not
reach the real economy
C- Specific constraints on monetary policy in the euro zone

ASSESSMENT OF EMS
Main objective:
- Creation of internally and externally stable zone despite the crisis in 1992-93
- Monetary discipline let to economic convergence that reduced inflation and aligned interest
rates.
- On January 1, 1999 the euro became the official currency for 11 member countries

36
European central bank
https://europa.eu/european-union/about-eu/institutions-bodies/european-central-bank_fr
= The European Central Bank (ECB) manages the euro and formulates and implements the EU's economic
and monetary policy. Its primary objective is to ensure price stability, thereby underpinning economic
growth and job creation.

→ Located in Frankfurt (President: C. Lagarde/ since Nov 2019)

→ Consists of 6 members of Executive Board
→ ECB + 19 governors of national central banks = ESCB
→ Independent from Member States
→ Main roles:
• implementation of monetary policy, support of Union's general policies
• maintain price stability
• conduct foreign exchange operations
• control over supply of reserves (exclusive right = issue banknotes)
• control over smooth operation of payment systems
• supervision of credit institutions

→ The ECB works with the central banks of the 27 member states of the EU. Together they form the
European system of the European system of central banks (ESCB).

The ECB also coordinated cooperation between central banks within the euro area, which includes 19
member states of the EU that have adopted the euro.

This cooperation space among a limited number of central banks is called the “eurosystem”.

1) Inflation as a target
Many economists believe that the 2% target set by the ECB is too low. But the general consensus is
that the “right” level of inflation for advanced economies is probably between 1-1,5 %and 3-3,5%.

37
 2) A congenital defect: one single refinancing rate
How can the ECB which has only a single director interest rate for the entire euro zone, adjust its
monetary policy to cope with heterogeneous economic situation?
ð The refinancing rate set by the ECB is unique
ð Therefore, depending on the region, the rate may be too high or too low

Confronted with asymmetric shocks (economic, political, or social crisis specific to a

particular country) monetary policy which treats different situations in a unique manner,
appears partly ineffective.
Member states can only resort to budget policy to handle the fine-tuning their country’s
economy.

Dessine-moi l’éco « peut-on concilier diversité des modèles européens et monnaie unique »
https://www.youtube.com/watch?v=g9GXK2WjoXY

VIII – The ECB

1) Reminder
- With 1944 - Bretton Woods there was only one convertible currency, the $. This currency
was pegged to gold.
- A major question was how to reconstruct Europe: à creation in 1951 of the European
Economic Community with the treaties of Rome
- The global currency was the $. One of the main problems was that it was still also a national
currency. There were thus many more outflows than inflows of the $ which created a huge
deficit in the USA, and which led to a progressive value decrease (and thus a loss of trust)
- Europe started to disconnect from this fixed currency in 1968. In 1971 the end of the fixed
convertibility dollar/or was decided → flottement des monnaies (les cours des monnaies va
sans cesse varier) and ended in ’76 with the Jamaica agreements
- The preparations of the € as single currency started in the end of the ’60:
o European monetary snake between 1972 and 1979: the currencies floated
reciprocally within a fixed bottom and top limit. Once a currency surpassed such a
limit, the central banks intervene to correct the error.
§ 1972: Paris summit: The EU created “the snake in the tunnel” = an exchange rate mechanism
to manage the floating of currencies (the snake) within narrow margins of fluctuation against
the dollar (the tunnel)
§ → failure, as few European countries could manage it (= Le Serpent monétaire européen
(1972-1978) fût un dispositif économique mis en place à l'initiative du président Pompidou, qui
limitait les fluctuations de taux de change entre les pays membres de la Communauté
économique européenne (6 pays à l'époque). Pour chaque monnaie, un seuil d'intervention à la
vente et un seuil d'intervention à l'achat, en fonction du taux de change par rapport à chacune
des autres monnaies, étaient définis. Ainsi, une monnaie ne pouvait pas fluctuer par rapport à
une autre de plus ou moins 2,25 % autour de sa parité bilatérale.) Pour eviter la concurrence
entre les monnaies. Les banques centrales interviennent
§ The goal was to create a common currency and to modify the European
monetary system with a single unit of account. The monetary snake provided
a reference and helped the banks to support one another. At this period the
Deutsche Mark was very strong and served as reference currency.
o The European monetary system was established in 1979
§ 1979: Brussels Summit: creation of the European Monetary System (EMS) =
system of exchange rates used to keep participating currencies within a narrow
band and based on fixed but adjustable exchange rates (aka Exchange Rate
Mechanism I / ERM I) (= Créé en 1979, le système monétaire européen (SME) avait pour objectif

38
 de resserrer la coopération en matière de politique monétaire entre les pays de la Communauté, afin
d'aboutir à une zone de stabilité monétaire en Europe.
§ Les principaux éléments qui le composaient étaient : l'écu, le mécanisme de change et d'intervention et
divers dispositifs de crédit.)

o Creation of the single market in 1986 which favored the creation of a single currency.
§ 1985: adoption of the Common Market (“Single European Act”)
§ → problem with currencies being ofter converted / high transaction cost
§ (=Entré en vigueur le 1er juillet 1987, l'Acte unique permet la transformation du
Marché commun en un marché unique limitant les frontières intérieures. Il ouvre la
voie à l'Union européenne qui prendra forme avec le traité de Maastricht.)
o The decision to create a Eurozone was taken in 1992; since 1999 it really exists and
since 2002 scriptural money is circulating
o The economic monetary zone: sovereign and equal states accepted to abandon their
national currency. Normally there are two forms of politics: the structural politic
which aims to cover the long term and the monetary and budgetary politics which
aim to support the functioning of the state during the year (short period). By creating
a Euro zone the states abandoned their monetary policy and transferred this power
to a supranational institution. A measure that never existed before.
§ The juristic exceeds the politics (the ECB cannot be affected by any exterior
influence) à pleads on purposes are no more possible. The ECB establishes a
complete liberal ideology.
§ Pas la totalité de l’UE sont dans la zone économique monetaire
§ Abandon de la vision keynésienne (plein emploi) et juste stabilité des prix
§ Statuts construit en fonction d’idéologie
§ Durée de mandat de 8 ans ne peuvent être démis de leurs fonctions.
§ Banque centrale la + indépendante au monde
o The ECB manages the prime rates, an instrument which serves more as an information levy than a regulation levy as
the most important economic actors have access to the financial markets
o The ECB is a last resort lender. In case of bankruptcy of our commercial national bank (must be part of the
Eurosystem) the ECB insures a credit of 100 000€ (to avoid a bank run and to maintain stability à counts only for the
amounts exceeding 100 000€; with inferior sums, the ECB only insures the owned amount of money)
o Directors of the ECB cannot be fired of their function (with one renewable mandate)
o Contrary to the FED which is responsible of its actions in front of the congress, the ECB is completely independent,
but still has to explain its politics to the European parliament
o The ECB is completely independent from any political interventions (most independent central bank globally)

2) Advantages of the €
- No more currency fluctuations in all the zone; no more losses neither gains on exchanges due
to the stability of the €. + eliminate les frais de change
- Facilitation of pan-european exchanges in between companies. (faciliteles echanges
commerciaux transfrontaliers entre entreprises)
- A stabilized economy (excluding asymmetric chocs) encourages growth and thus leads to a
growth and higher amount of choices for costumers .
- Increase in tourism and sales (especially internet sales) all over the Eurozone
- The € provides more importance to the EU on an international level. In terms of change, The
€ is the second most important currency globally after the $ , and the most important
currency in terms of liquidity (amount of € circulating higher than amount of $ circulating in
the €zone)

39
3) A new repartition of monetary power
- Better repartition of the monetary power
- End of the monetary sovereignty (only the ECB can create money and thus influence the
circulating monetary mass and no longer the states)
- € represents European solidarity and identity. It was the starting point of a European identity
for European citizens > sentiment de communauté grace a l’euro
- The major role of the ECB is to influence the financial markets and politics. The ECB cannot
intervene directly but sends signals about the need and the capacity of financing
- Other financial actors have much more influence on the financial market as the bank
reserves deposits in the central bank are much lower as the sums mobilizable via the
speculations on the market > en effet les reserves de change d’une banque centrale sont très
insuffisante face aux capitaux mobilizable par la speculation monétaire sur les marches. La
banque a des difficulté car crééé de toute piece
- Thanks to the ECB we have a unique management of currency and a unique European
monetary policy. > gestion partagée de la monnaie unique et de la poltique monetaire au
sein de la BCE. Avec cette monnaie on a un + grand poids a l’international
- However, countries have still a small level of sovereignty. Based on the global importance of
the € this sovereignty gets more important
- Members of the directory council get nominated by the national governments (minimal
impact of the countries)
- Previewed arbitrary by ECOFIN. That economic and financial council will be established
permanently. However, the final decisions are taken by the director of the ECB.
§ Le Conseil Ecofin est composé des ministres de l'économie et des finances de
tous les États membres. Les membres de la Commission européenne
compétents participent également aux sessions.
ð The governments conferred the monetary power to the ECB but maintained the budgetary
power

4) Evolution of the role of the ECB

- Creation the 1.1.1999: this central bank was the first of its kind. In 2008 a major crisis hit this
very new bank.
- Even with such crisis the ECB reached to maintain its inflation goals (1999-2019 inflation of
1,7% annually)
- This positive result was achieved even with:
o Trust crisis in between the banks (credit crunch as they stopped lending to each
other)
o Difficulties for banks to refinance themselves
o Melting of their liquidities > elle se financent entre elles
o Successive breakdown of certain asset values (ex. American subprimes as starting
point) à The result were successive bankruptcies and risks of financial bankruptcies
ð Central banks, inter alia the ECB, provided various measures to prevent this financial
breakdown.
- Based on the subprime crisis, the ECB was forced to adapt to the difficult situation, to
coordinate with other central banks and to intervene massively into the economy, with
massive injections of liquidity e.g. to prevent the financial breakdown. à such a major
intervention into economics by the central banks was never seen before (reason why the
great recession became that dramatical)
- The subprime crisis destabilized the banking sector

40
At the beginning of the crisis, the ECB was still bound to its original status and doctrine to follow a
liberal policy and to not buy public debts of the member states of the Eurozone.

- Therefore, in 2008 the ECB followed the measure of the FED (retardive application) and
decreased the prime rate from 4,25% to 0%
- Additionally, governments adopted budgetary policy measures to safe the banks. Beside of
the actions of the ECB, the states conducted a Keynesian policy = POLICY MIX: combination of
monetary and budgetary policies to inject liquidity into the economy.
- Keynesianisme = intervient pour relancer l’activité
- Dettes souveraines = Les etats ne peuvent plus rembourser leurs dettes
o Nowadays, budgetary policy follows the model of austerity. The problem is that
austerity measures are contrary to the monetary policy which aims to encourage
consumption. The EU is thus currently in a phase of stagnation.
- The subprime crisis ended in 2009. Governments had to create big public deficits to safe the
banks which finally led to the sovereign debt crisis.

ð With the crisis the ECB had no other choice but to adopt unconventional policies:

A) Four unconventional policies:

Abaissé substantiellement ses taux d’intérêt puis comme les taux sont à 0%.

1) Quantitative easing:

Ø = Augmenter les liquidités des banques et rachetant les investissements/ dettes d’états > le
risque va être récupérer par les banques centrales, allant réduire le risque pour les banques >
tout ca afin de réduire la volatibilité des taux d’intérêts.
Ø Les emprunts d’etats sont vendues sur le marché primaire et racheté sur le marchés secondaires
par les banques.
Ø + l’etat s’endette +le tx directeur va être elevé
Ø Tension sur les detes d’etats concernant le marché bancaire car c’est souvent les banques qui ont
une partie de la dette. Le moyen de securiser ceci est que les banques rachetent ses obligations
d’etat > donc plus de spéculations > donc plus de volatilité
Ø Création de monnaie banque centrale > réduit le risque pour les banques (passe de 1000 milliards
à 4 630 milliards)
Ø Donne cette liquidité en marché interbancaire
Ø Taux directeur = taux auquel la bce prête de l’argent aux banques

Dessine moi l'éco - Qu'est-ce que le quantitative easing?

- To adjust the level of inflation of 2% annually, the ECB decreases the prime rate which
increases the injection of the monetary mass. Demand should rise, and thus consumption.
That measure however, was not sufficient to make increase the inflation level. The ECB
therefore applied the measure of quantitative easing. That consists in injecting directly
money to the banks by buying their treasury bonds. Since the crisis the amount of money
injected that way increased from 1000 Mrd. € to 4 630 Mrd. €. The banks thus face lower
risks due to higher liquidities and tend to provide more credits (helicopter money).
- The ECB provided coverings of day-to-day needs of liquidity (at a higher rate as prime rates)
as the interbank market was very instable. This step aimed to reduce volatility of interest
rates, based on tensions on the financial markets. A higher liquidity = a higher capacity of
payment and thus an increased trust level.

41
 ð Those instruments were adopted without changing the general policies of the ECB.
ð In 2008, 2011 & 2016 the ECB cooperated with the FED to raise funds of $ to support
companies in difficulties
ð QUANTITATIVE EASING VIA THE OPEN MARKET

2) Qualitative easing
- Récupère sur les banques tous les actifs pourris sans risque puisque monnaie banque
centrale.
- The ECB starts to exchange with banks their high-risk assets with ECB owned low risk assets
- The ECB increases the range of accepted assets for guarantee
- The ECB increases the deadlines of loan repayment accorded to the banks
- The ECB developpes closed purchases (= achats fermes) of specific assets (without exchanges
against other assets) via the open market (this measure is normally against the doctrine of
the ECB)

a. A refinancing period originally fixed at 2 weeks, increased to an authorized term

of 4 years.
b. Bank deposits in the central banks exceeding the level of then 1% mandatory
deposits, were “fined” with a negative interest rate of -0,4% to encourage the
banks to inject their liquidities into the real economy rather than to safe it.
= taux d’intérêts négatives (-0,4%) pour obliger les banques à investir dans l’economie reelle.

Rebuy of government bonds = rachat de titres publics (quantitativising)

- Dispositif de rachat des titres d’etat sur le marché secondaire (car on doit effectuer l’achat au
prix de marché)
-
- Originally the ECB is not authorized to buy government bonds
- In 2010 the aim however was to maintain the cost of refinancing of states in difficulties and
to assure the liquidity and profondeur(=durée et intitules des prets)of certain financial
market sectors.
- The bank crisis and the sovereign debt crisis however continued to push and feed one
another, (continuent de s’alimenter l’une l’autre) and hit especially the countries of the
Eurozone in difficulties (Greece and Spain)
- In September 2012, as the ECB realizes that it won’t be able to solve the crisis, Mario Draghi
announces an unlimited outright monetary transaction (OMT = programme de rachat illimité
des obligations publiques) of member states in difficulties. The step of announcing such a
program was necessary to prevent the meltdown of the Eurozone. However, monetary policy
for being efficient must be transparent and credible. A director of the ECB would never
publish such a message without introducing the following necessary steps. However, once
the head of the ECB announces sth, markets will react. The idea of Mario Draghi was to
announce the OMT but never to realize it to end the speculations (to influence the financial
markets which are way more powerful than any central bank).
ð In March 2013, no single OMT was realized but the markets stabilized thanks to the non-
conventional step of Mario Draghi.

B) The role of control and supervision of the European banks

- In 2012 the European council decided to establish a European bank union (based on the
model of the monetary snake) complementary to the monetary and budgetary policies.

42
 - Establishment of a mechanism of unique supervision of the banks in the Eurozone as first
pillar of such a bank union. This mechanism started on March 1 of 2014.

C) A mechanism to prevent the spillover of crisis to other countries: the European Financial
Stability Facility (EFSF)
1) A mechanism to prevent the spillover of crisis to other countries: the European Financial
Stability Facility (EFSF)

Starting point: The treaties of Lisbon provide no mechanism to support countries in risk of
bankruptcy. This drawback was discovered when Ireland and Portugal started to get financial
difficulties.

- ECOFIN takes the decision to establish a mechanism, based on the pillar of European
financial solidarity in between the member states of the euro zone.
- 8 octoble 2012, succède au Fonds européen de stabilité fi (FESF).
- The EFSF was developed as a temporary dispositive applied in the period of transition to the
development of a permanent financial mechanism to help governments in need.
- EFSF, created by ECOFIN, is an anonymous intergovernmental association, based in
Luxembourg. The main idea is to allow countries with good ratings (like Germany and France)
to borrow money on low rates on the financial market to lend those amounts in turn to
countries in need. This measure enables countries in need (with a lower rating) to borrow on
the financial market via country intermediaries and thus on a comparatively lower rate
(supplementary interest rate applied by Germany and France due to the crisis). Through such
operation, the EU reached to raise 60 Mrd. €.
- The EFSF is only a temporary mechanism established to prevent the breakdown of the
Eurozone to help countries in difficulties. That facility will be dissolved, once the debts are
repaid (provisionary stop of repayments for Greece).

2) The European Stability Mechanism (ESM)

- Creer un fonds commun de créances pour pallier la défaillance d’un etat memebre de la zone
euro.
- Aim to create a common debt obligation (créance) fund to face financial default problems of
European member states (à raise of a certain amount of resources to face financial
obligations of EU members)
- 8.10.2012: the ESM replaces the EFSF
-

Vidéo : comprendre le mécanisme européen de stabilité

ð The major goal was to stabilize the Eurozone

ð The biggest evolution was the creation of a Bank union

43
 3) The European bank union = union bancaire
- To restore a healthy and secure financial stability in the Eurozone.
- Creation of 28 new instruments to regulate and monitor the financial sector to enable a
better management
o Une régulation, une surveillance et une gouvernance plus efficace du secteur
financier.
- Goal: avoid that in the future the taxpayers will have to pay for the failures of the banks .
- A key idea of the bank union is to erase the errors of banks on a European level.
- Following to the financial crisis the states had to increase their public deficit and debt to save
the banks and the economic system. Those extreme measures were the trigger of the
sovereign debt crisis.
- The aim was thus to cut the vicious cycle between banks and national public financial means.

Functioning:

- Initial situation: the banks are seeking for help of the states. The budgetary situation of the
member states deteriorates (as budgetary policy aims periods of one year). The cost of
refinancing and interest rates on public debts increase (the higher the debt, the lower the
solvability of it). The balance sheets of banks decline and the crisis worsens.
- The bank union aims to cut the vicious cycle between banks and sovereign borrowers
(states). The banks are insisted to help one another in crisis situations instead of the
taxpayers.

o Regulations of obligatory levels of higher equity and liquidity to increase the

resistance of banks in case of crisis.

44
 o In such a scenario, the banks are now able to help themselves rather to be saved by
taxpayers. If a bank faces bankruptcy it will now be saved rather by its shareholders,
its creditor or by itself.
o The ideology for banks “European for the best, national for the worst” will be erased.
Since they are submitted under the supervision of the European mechanism the
responsible will now not longer be the states, but the EU.

- The Bank union completes the EU and the EMU. Thanks to that union, we have now a system
of centralized rules.
- That new frame will apply uniformed rules to all banks in the 28 member states (those rules
are compulsory for the 19 countries of the Eurozone, other countries can adhere voluntarily)
- The uniformed rules are:
1) Prevent banking crisis
o A common frame for the exit of crisis, including a procedure of ordered liquidation
(that directive resulted in a guaranteed deposit of 100 000€ per person and per bank
account in case of a crisis)
o Common application of those rules in the Eurozone
o In 2014 the ECB becomes the supervision authority of the 6000 existing banks in
Europe. A stress test was applied to the banks (crisis simulation over 3 consecutive
years)
2) In case a bank would face bankruptcy the Single Resolution Board (Mécanisme de
Résolution Unique) would apply to ensure a more efficient management and a better
resolution of the crisis (ex. the problem of Italian banks in difficulties is no more an
Italian, but a European problem)
o The Bank union represents a major step to a deeper economic and monetary
integration of the EU
§ Necessary measure in that era of massif bailouts which are recovered in fine
by taxpayers
§ Restoring of the financial stability by supporting the real economy through
e.g. job creation
2 steps:
1. Uniformed regulations: new rules for a better bank capitalization and a better risk control
2. ECB Banking Supervision: The ECB, in cooperation with the national supervision
authorities, supervise the 130 most important European banks.
3. Single Resolution Board: as last resort, the SRB can decide to save a bankrupt bank, using
funds fueled by member states and contribution of banks

45
 à The creation of the Bank Union led to a safer banking sector in the Eurozone.

L’union bancaire peut-elle résoudre tous les risques inhérents au système financier ? REDIGER

Méthodologie : plan détaillé (4 questions sur le cours et dissertation avec réflexion avec un fil
conducteur)

Functioning of the ECB Banking Supervision “mecanisme de supervision unique”

- the ECB covers the totality of the bank union which remains to the economic and monetary
union (total of Eurozone)
- au prealable, “evaluation complete des bilans bancaires »
- the initial problematic was that the ECB did not know the asset situation of all the +/- 130
banks in the Eurozone
- the aim was thus to proceed to a complete evaluation of the 130 bank’s balance sheets
(remaining to the zone of responsibility of the ECB) to identify their capacity of solidity
- the banks must be able to resist against macroeconomic chocs (ex. financial crisis, crisis of
unemployment, housing crisis… = asymmetrical crisis)
- the ECB thus proceeded to:
o asset quality review and stress test (= simulation of a consecutive crisis of 3 years)
o such a crash test was done in the USA already in 2008. In Europe such stress tests
were impossible before as we did not have a unique picture of the entire bank
sector.

Goal:

- evaluate the weaknesses of banks

- reestablish the trust and the stability in the bank sector
- avoid a crisis scenario

The stress tests were realized based on the balance sheets of 2013. The result was that 25/130 banks
did not resist to that test and would not have been able to face a new severe economic crisis
(essentially eastern and southern (Italy, grece, slovenie) European banks were concerned with a
theoretical deficit of 25 Mrd. €).

46
 Those banks that did not pass the test had to recapitalize themselves within 15 days, by selling for
example their assets. Since the test each bank reached to recapitalize themselves, except of Dexia
which is about to be dismantled since 2008.

A vast check-up is now an essential condition to restart an economy. The advantage of such a
transparent global exercise is that we now know perfectly the problems of the banking sector, which
banks are facing such, were to recapitalize… within the Eurozone.

C’est un exercice de transparence inédit.

France:

- 13 institutions which represent 95% of assets of the sector: (banques commerciales)

1) BNP Paribas (80% du PIB de la France)
2) Banque postale
3) BPCE (banque populaire caisses d’épargne)
4) Crédit agricole
5) Crédit mutuel
6) HSBC France
7) Société générale
ð Banque de Peugeot, Banque de Renault…
ð There is a dense concentration of banks with a very high level of power (4 too big to fail
banks = banks that could trigger a breakdown of the system)

The creation of the bank union

- Starting point in 2008 until 2016 with first rules of resolution à progressive evolution to a
bank union which manages the entire bank zone since 2016. If a bank is in difficulties, it will
be set under control to get recapitalized by the system.

Thanks to that policy interest rates are very low:

- High interest rates of 7% in Italy and Spain has been lowered down to a rate of 2 – 2,5%.
Because of their high public deficit, they receive low notes by the notation agencies which
thus means higher rates. Thanks to the system of the open market, the ECB directly buys
their public debts which avoids any speculations on them and thus allows them to borrow at
lower rates.
- France = 25 Mrd € of economy for France
o Negative at a period of 5 years
o 0,6% at 5 years
o 2% at 10 years

47
 - The interest rates are not aimed to be increased before this summer (moreover in 2020). The
increases will occur in steps of 0,25% to encourage anticipated investments (investors may
invest before an increase in interest rates)
- The USA directly increased their rates from 0 to 2,25%

IX– FinTech
- Fusion of finance and technology
- Starting point in the 80s – 90s with the emergence of the new technologies (generalization of
the internet). This emergence means as well an increased transfer of individual consumer
information to companies
- Banks adapt and focus on rentability operations linked to consumer accounts (since 80s
charging of cheques, credit cards… this further supports a collection of information)
- Since the 90s we could observe a phenomenon of multi bankarization with an emerge of
online banks (in France, only 6% of the population is client of an online bank and 30%
of all new accounts are online)

Why are online banks coming?

- Link customer/advisor - staff
- Less busy agencies
- Fewer human relations at the banking level because self-service banking is the new
relationship mode nowadays > we will work more and more on self-service (internet
banking, get in touch with an advisor on the internet)
- 80's: British banks are the first.
- In France, it will be necessary to wait late for the arrival of the Internet to convince
customers to use it.

• Automation of low-value tasks in the bank

• Customers are going to come on board with these new trends > More and more
customers are accepting dematerialization
• For the customers = this dematerialization brings ease and speed of new services via
the Internet.
• The French banking landscape with 6 major institutions, dominant players: BforBank,
Boursorama Banque, Hello Bank, Fortuneo Banque, Monabanq, ING Direct.

- The development of FinTech mainly emerged after the crisis in 2008 due to the
mistrust in the financial sector à the primary aim/ objective of FinTech was to to put
oneself outside the world of finance , to fight against the information basing by banks
as they know (lutter contre l’information donnéee aux banques car ces dernieres
peuvent savoir): > on veut sortir de cette domination des banques
o Who we are,
o With whom we exchange,

48
 o Where we exchange,
o When we exchange.
o … à Banks have a perfect knowledge about us.
Only in 2015 FinTech start-ups experienced a major growth. Before, that financial sector was mainly
excluded of the wave of new technologies (contrary to emergence of Amazon, Blablacar, Airbnb will
modify the loan…).

↳ Until the subprime crisis :

Finance = field not or little attacked by the wave of innovation possible by the technlologist
Finance preserved = sector protected from the inside because of special recruitment and
remuneration systems.

Reason for that was the exceptionally high remuneration. In 2008 with the breakdown of
wall street, many traders lost their jobs and started to put up the first FinTech start-ups.
They disposed of the necessary techniques, the know-how, the intellect… to respond to
precise needs in the financial sector → ainsi vague d’innovation dans le secteur bancaire

In 2015 there was a:

- Explosion of the capital risk fund amounts invested into those start-ups
- Investment by big financial agents
- 47 Mrd. $ were invested into those start-ups in 2015

ð The startups increasingly intervene into the banking or the insurance sector, but more
globally into the financial sector with the aim to rethink the traditional banking services
thanks to the new technologies. à concurrence to banks

Those start-ups are:

- Innovative
- Young
- Use numerical techniques, mobile devises, AI, etc.

Those start-ups do :

- Banking services
- Proposition of payment possibilities
- Credits
- Savings

49
 ð All in using innovative technologies to respond to financial needs

This evolution occurs in two steps:

1) New payment service (ex. pot, payment within civils…), financing, insurance, investment
consulting, gestion budgétaire
2) They propose platforms with alternative solutions added to the traditional finance.
The roboadvisors offer services from more and more complete (= financial management
platform) AND the neobanks will even allow to do without the services of a traditional actor.

Categories of FinTechs:

- The B2C FinTechs, adapted to customers

o Neo banks (100% online banks without agencies)
o Accounts and credit cards at low costs. Ex. Compte Nickel, Morning)
o Online pot (ex. Leetchi or LePotCommun)
o Payment applications (ex. Lydia)
o Personal finance management (Bankin, Linxo)= gestion de finances personnelles
o Instruments of herritage management (ex. Grisbee) = gestion de patrimoine(coach
financier digital)
o Automized investments (ex. Marie Quantier)

A major issue is that such start-ups need high amounts of investment as they expand. Consequently,
most of them are acquired by big banks (ex. Compte Nickel acquired by BNP Paribas)

- B2B FinTechs:
o Financial services for companies, SMEs or big accounts pour les aider dans leurs
gestion financières
o Ex. online currency transfer (transfert de devises en ligne) pour un coup inferieur a la
banque = Kantox
o Affacturage dématérialisée = gérer les factures d’entreprises a la place de
l’entreprise (Finexkap)

- B2B2C FinTechs:
o Connecting of project managers, creators, merchants, SMEs, customers and
professionals
o Crowdfunding with or without rewards (ex. KissKissBankBank)
§ Crowdlending (prets aux PME)
§ Crowdequity (financement en capital)

ð Covering of financial aspects

ð Those FinTechs all focus on a niche
ð We all use FinTechs without knowing it

50
 ð FinTechs often own banking licenses. If they don’t depend on the banking system, they will be
managed by European regulators (regulations are higher in Europe than in the USA).

InsurTech – FinTechs and insurances

- Comparative example: Fuo

- Collaborative example: Inspeer ou Otherwise
- 100% digital health insurances (ex. Alan)

French citizens have a very different approach to such FinTechs from Americans. They tend to keep
one bank over lifetime, as in the US, there are almost no more banking agencies or consultants.

Even though the financial crisis in 2008 and thus the trust crisis swept over to France, 83% of French
citizens don’t know the expression of FinTechs. Only 4% know more or less what that means, and
many people are using such services without even knowing it. However, the generation of
Millennialss is changing the way FinTechs are presumed and used.

51
France contributes to a large extend to the development of FinTechs:

- French entrepreneurs have the know-how in both finance and technology

- 285 FinTech start-ups in France
- Investments in FinTechs are increasing
ð FinTechs are regularly bought

ð
FinTech: a regulated market in France

- Adaptation of very specific rules

- Necessary limits and regulation to protect the consumer
- Two European directives concerning the stocking of data and bank accounts
- In France the regulatory mechanism is the AMF (ex. FinTechs operating in the area of
heritage have to communicate about the uncertainty of their operations as future is not
100% predictable)

52
 -
Banks/FinTech:

- FinTechs are partially questioning the work of banks. However, FinTechs still cover niches.
- The fundament of the banking and the payment system are information and knowledge
about the individuum (banks directly know and follow us as persons and not as codes as
done by FinTechs)
- FinTechs work on blockchains: they stock information about exchanges which are:
o Transparent and without control
o Horizontal functioning (all information is at 1 level, they don’t follow the individual
person, but a code contributed to each of us)
ð Real revolution as they revolutionize the storage methods
ð When we don’t pay a service, we become a product

Banks are working differently. However, banks start buying FinTechs and thus integrating the
blockchain system. FinTechs became very important on the financial market. They do not replace the
banks on that market but cohabit it in an intelligent way via the object that reunites them: the client.
However, as banks started to buy FinTechs, their original goal of fighting against the way banks treat
information is lost.

As the model of FinTech needs high investments many of such start-ups cannot stay autonomous as
they get bigger. They are thus:

- Rebought by banks
- Sign partnerships with banks
- Or get incubated by big banks

Banks realized that they have to adapt to the new movement and therefore are always looking for
new FinTechs they can acquire.

53
Banks are normally institutions of trust with a lot of experience on the financial markets. By buying
FinTechs, they acquire furthermore agility and fusion those two aspects of agility and trust.

The novelty of the big data (the cloud)

- The GAFA also collects private information about us to sell them. Such data is used to get a
precise profile of lenders to estimate their capacity to cover their debts (financial profile; ex.
in the USA a person who does little sport and eats too much has higher interest rates on
loans. à such measures are forbidden in Europe but not in the USA)
- Use of AI to classify individuals
ð When we don’t pay a service, we become the product as information about us are getting
sold to cover the debt.
- New form of international monetary flows (especially flows of foreign currencies)
- Such new forms are undermined by crypto money which is the direct result of FinTechs.

54
X– Cryptocurrency

A) The origins of the bitcoin

- Evolution after the subprime crisis (as response to the mistrust in the financial system)
- The bitcoin developed out of a niche market (such as the fintechs)
- Aim to establish a system without any financial authority and regulation as the actual
financial system was not efficient enough
- Creation in 2008 in California to escape several monetary barriers
- Functioning under the principles of offer and demand
- Functioning under the principles of blockchain

Video: On vous explique la folie autour du bitcoin (FranceTVInfo)

https://www.francetvinfo.fr/economie/bitcoin/video-on-vous-explique-la-folie-autour-du-
bitcoin_2514577.html

Fascination based on :

- A mysterious founder – Satoshi Nakamoto

- Only experts are able to control the functioning of the blockchain
- Online transactions without any intervention and control of governments or the central bank
ð The bitcoin is an anarchistic, self-controlling currency

- Particular currency as it exists only virtually

- Ne se materialize pas physiquement
- The bitcoin circulates in an open circuit
-

55
-

- Caractère déflationniste Car on une offre de bitcoin qui atteindra 21 millions d’unités et la
dernière unité sera émise en 2140

- Pure speculation:
o Novembre 2020, le cac 40 a accéléré sa hausse
o Le bitcoin a carrément explosé
o Avec en prime une augmentation de sa volatilité
o Ce qui n’est pas le comportement d’une valeur refuse (l’or..)
o Le bitcoin peut aussi perdre plus de 20% en une journée = il s’agit donc de pure
spéculation
o Sur la période covid : l’élément déclencheur de cette hausse soudaine du cours du
bitcoin semble être sa reconnaissance institutionnelle.
o Octobre 2020, PayPal va intégrer le bitcoin comme moyen de paiement international
o De même, le fonds d’investissement prestigieux (comme par ex Fidelity) ont
commencé à s’y intéresser.
o Autres raisons expliquant cet engouement :
§ Les algorithmes se déclenchent automatiquement quand la valeurs de l’actif
atteint un certain seuil -> qui amplifie le mouvement.
§ Vous avez la possibilité d’accheter non pas des bitcoins, mais leurs dérivés :
facilite l’execution des operations d’achat et de vente > en achentant les
derivés, vous allez aller tres vite
§ Le « copy trading » qui permet d’investir dans le bitcoin sans avoir les
connaissances necessaires
§ Investisseurs attirés par les publicités alléchantes et les enthousiasmes des
réseaux sociaux

56
 • Les millennials, adaptes du tout dématérialisé, veulent en être
o Quand le cours du bitcoin flambe > suiveurs vont acheter massivement et amplifient
le mouvement = phénomène moutonnier, spéculatif
o A ceci s’ajoute les politiques accommodantes des banques centrales > investisseurs
« se sont rués vers le bitcoin, en criant au scandale de la « manipulation » monétaire
des banques centrales… »
-
- High level of reliability as the currency is crypted (normally it is protected from cyber-attacks)
- 1370 currencies of this kind were identified in December 2017
- Since 2008 there were a huge amount of virtual currency created:
o Bitcoin
o The ripple
o The ethereum
o Cardano
o Nem
o The Litecoin (Google’s currency)
= the first 5 cryptocurrencies

The Ripple:

- Created in 2012 in order to facilitate and secure interbank payments

- 100 Mrd. of XRP issued and 39 Mrd in circulation
- The main difference to the bitcoin is that the XRP is a compensatory money
- The money is bought to realize placements (and not only to be bought for the speculative character)
- XRP highly adapted for transfers between financial institutions as operations:
o Transborder transactions are realized immediately
o Higher level of security as the XRP algorithm is almost impossible to hack

The ethereum

- Creation in 2015
- Instrument for “smart contracts” (the algorithms triggers the contract when all aimed conditions are attained) à ex. Airbnb,
Uber…
- Main difference to bitcoin is that the Ethereum secures the aimed contracts

The most known and used crypto currency remains the bitcoin. There are cryptocurrencies which especially
aim niches such as special needs or different geographic regions. However, a level of risk is linked to the crypto
currencies as there are no banking/regulatory institutions.

Central banks vs. Bitcoin

- At Contrary to the € or the $, the issuing of bitcoins depends on an IT-system (pilotée part un
programme informatique) as the issuing of € and $ depends on the level of economic activity
and other macroeconomic indicators. The issuing of the bitcoin is thus completely
anarchistic.
- Indeed, the bitcoin escapes any control of money institutions and thus fulfils its original aim
- Central banks normally have absolute control on the money mass, its circulation… The
question thus arises whether:

Does the bitcoin represent a significant threat to the monopoly of the central banks?

ð Not yet:
- Because Its use is still confidential
- It’s level of insecurity prevents it from fulfilling correctly the three main functions of a good
money:
o Intermediary for exchanges (we have firstly to exchange it)

57
 o Unit of account (the bitcoin gives a value to the products it represents. They can thus
be compared)
o Stock of value (the purchasing power can be transferred from instant A to instant B.
However, the level of instability is high as its value only depends on offer and
demand)
ð Experts are predicting that its functioning is going to stabilize itself
- Huge database (blockchain)
- The traceability is revolutionized (the high traceability overpasses the original function of
banks) ça peut revolutioner les transferts d’argent, ça a une enorme base de données avec la
block chain
- It is quite difficult to anticipate, that a currency could exist completely apart of the classical
financial system
o We always need banks to finance real economy and grant credits (attention à very
quick evolution). Furthermore, not everyone has access to cryptocurrencies.

The central banks still have a word to say: = les banques centrales n’ont pas dit leur dernier mot
- Ex. the Singaporean central bank uses the block chain and its own crypto currency to realize
transactions
- China, as a totalitarian country prohibited the bitcoin. However, they are about to create
their own crypto currency
- South Coria prohibited the bitcoin
- The Swedish “riksbank” is about to established dematerialized payments. Since 2010, the
part of liquid payments for merchandises fell from 40% to 15% (own crypto currency for
national payments)
o The riksbank undermines that their crypto currency only aims to become a
complement, to not exclude several social classes (ex. aged people)
ð The goal is to provide crypto currency just for a specific part of the population

La BCE envisage de lancer un euro numerique:

58
59
60
“There is no economy without bubbles”

- The bitcoin won’t become a currency for transactions as it is too volatile (mainly used for illegal traffic and speculations)
- Originally the bitcoin was created to escape financial regulations and speculations.
- However, a speculative bubble fed the value of the e currency: the price of this asset exceeded its original value
unproportionally
o An investor bets on this new financial star
o As many other investors do the same, the price of the asset in question increases excessively
o The moment when investors realize the building of the bubble, they start to try to get rid of the e-money and the
speculative bubble explodes

Study case of a speculative bubble: the original value of the bitcoin is clearly 0

- The remuneration of the holder of a bitcoin will never be a coupon or a dividend

- The bitcoin such us other crypto currencies are neither controlled nor guaranteed by the government (its value was pushed by
speculators to 14 000€ to sell it at the right moment)

Chronic:

- In the “mines” of bitcoin, all alarm bells are ringing: the value of the most used crypto currency falls (loss of 1/3 if its value after
a to high circulation which blew up its value artificially)
- Financial institutions are extremely cautioned
- The bank of international settlements:
“The bitcoin became simultaneously a bubble, a Ponzi mountain and an environmental disaster”

Crypto currency:

- It is primarily used for speculations

- It offers an intendable return, as it is backed on the money offered by the last buyers and backed to a material wealth (was
bought to be bought)
- It consumes large amounts of energy

Reasons for the current fiasco:

- China decides to put an end to the bitcoin

- Recent hacking of a Japanese e-currency platform
- South Coria prohibits the exchange of crypto currencies
- The decision of big American banks to prohibit credit card and bitcoin transactions to prevent an excessive indebtedness of their
clients
- Threat of the intervention of regulatory institutions

Nevertheless, the fame of the crypto-currencies does not risk to decrease currently

- Telegram announced the creation of their own crypto currency

- Former cam leader Kodiak decided to launch their own virtual currency, made for photographers

Positive aspects:

- The charity association Samusocial collects bitcoins to support SDF

- In cooperation with the bitcoin house in Paris they will transform the bitcoins into €. The money will be spent to buy new
computers.
- As the bitcoin works following the blockchain principle, there is no risk for tax relief

Trust crisis

- 1000 Mrd of $ in form of bitcoins in circulation won’t put the global finance system into danger
- However, a trust crisis in the bitcoin could spread over to the financial system which would lead to a systematic crisis
- Who to believe for the forecast of the live of this crypto money?
o Christine Lagarde forecasts that the extent of the crypto currency could gain the same significant importance as the
internet
o Warren Buffett, a known American billionaire predicts that the e-currency will come to a bad end

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