It is an aim of a financial market to provide a source of finance to particular target groups. This section deals largely with the financial instruments used by the market participants to raise funds, how these instruments are issued and how they are traded.
The participants in the money and bond market are investors and borrowers. To highlight financial instruments from the borrowers′ point of view it makes sense to divide the group of borrowers in two distinct categories:
The `Crown′ market consists of the Reserve Bank and the central government whereas the borrowers in the `Non-Crown′ market are financial intermediaries such as banks, corporations, state owned enterprises, local authorities, etc. as you can see in the table above. (Potter, 2000 [A]; Potter, 2000 [B]) The financial instruments in these two markets will be analysed separately in the sections to come:
The `Crown′ market consists of the Reserve Bank and the central government whereas the borrowers in the `Non-Crown′ market are financial intermediaries such as banks, corporations, state owned enterprises, local authorities, etc. as you can see in the table above. (Potter, 2000 [A]; Potter, 2000 [B])
The financial instruments in these two markets will be analysed separately in the sections to come:
Table of Contents
1 Financial Market Instruments for New Zealand
1.1 Crown Debt Instruments
1.1.1 Government Stock
1.1.2 Treasury Bills
1.1.3 Reserve Bank Bills
1.1.4 Kiwi Bonds
1.1.5 Government Bond Coupons
1.1.6 Inflation-Indexed Bonds
1.2 Non-Crown Debt Instruments
1.2.1 Corporate and State Owned Enterprise Bonds
1.2.2 Bills of Exchange
1.2.3 Promissory Notes
1.2.4 Certificate of Deposit
2 Major Trends in the NZ Financial Market
3 Importance of a Financial System’s Stability
3.1 Introduction
3.2 The Importance of Financial Markets
3.3 Sources of Financial System Problems
3.4 Surveillance of Financial Instability
3.5 Conclusion
Objectives and Topics
The primary objective of this assignment is to examine the structure of financial market instruments in New Zealand and analyze the fundamental importance of maintaining financial system stability within a modern economy. The research explores how financial systems intermediate activity and how various macro-prudential indicators are utilized to identify and mitigate systemic risks.
- Classification and analysis of Crown and non-Crown debt instruments.
- Historical development and deregulation trends within the New Zealand financial market since 1980.
- The critical role of financial markets in capital aggregation and economic efficiency.
- Identification of macroeconomic and microeconomic sources of financial instability.
- Evaluation of macro-prudential indicators for monitoring and preventing financial sector crises.
Excerpt from the Book
3.4 Surveillance of Financial Instability
Disruption in a financial system causes severe costs to the economy in order to restore its stability. Direct costs can be declared as the fiscal costs required to re-establish the system’s stability. Furthermore indirect costs do have a serious impact on the economy as well including costs arising from the closures of businesses, disrupted business activities, the increasing lack of investors’ confidence and the reduced credit availability.
However, with the causes and costs of financial crises discussed in the previous sections, it is obvious that there is the need for measures to be taken to monitor and thereby to minimize possible threats to the financial system applying appropriate proactive tools and instruments. The process of monitoring possible threats in the system and signifying risks to the financial institutions involves monitoring the potential leading indicators of financial instability, which are called ‘macro-prudential indicators’. They include banking system indicators, macroeconomic indicators and financial market indicators and are summarized below:
Banking system indicators are concerned with the financial condition of the banking industry as a whole. Although information of this sector can be quite useful to assessing its risk profile, weaknesses such as time-lags or overestimation of that information as well as the tendency to look to the past health of the system rather than looking for potential future threats limits its usefulness significantly.
Summary of Chapters
1 Financial Market Instruments for New Zealand: This chapter categorizes debt instruments into Crown and non-Crown sectors, detailing specific securities like government stock, treasury bills, and corporate bonds used for raising capital.
2 Major Trends in the NZ Financial Market: This chapter traces the evolution of the New Zealand financial market since 1980, focusing on the impact of deregulation and the floating of the dollar on market competition and financial sophistication.
3 Importance of a Financial System’s Stability: This chapter discusses the essential role of financial stability in economic growth, the sources of systemic instability, and the methods for monitoring such risks through macro-prudential indicators.
Keywords
Financial Markets, New Zealand, Crown Debt, Non-Crown Debt, Financial Stability, Deregulation, Reserve Bank, Macro-prudential Indicators, Systemic Risk, Economic Crisis, Banking Sector, Capital Allocation, Monetary Policy, Credit Growth, Financial Intermediation.
Frequently Asked Questions
What is the primary focus of this assignment?
This work provides an overview of financial market instruments in New Zealand and investigates the necessity of maintaining a stable financial system to avoid economic disruption.
What are the central themes discussed?
The central themes include the classification of debt instruments, the historical deregulation of the New Zealand financial sector, and the implementation of surveillance mechanisms to ensure financial system stability.
What is the main goal of the research?
The goal is to analyze how different financial instruments function and to explain how macro-prudential indicators serve as early warning systems for identifying vulnerabilities in the financial sector.
Which scientific methods are applied in this work?
The paper utilizes a descriptive and analytical approach, synthesizing literature from regulatory bodies and economic experts to compare different financial instruments and evaluate indicators of stability.
What does the main body of the text cover?
The main body is divided into three parts: an analysis of Crown and non-Crown debt instruments, an overview of market trends since 1980, and a deep dive into the factors affecting financial stability and surveillance techniques.
How can the work be characterized by its keywords?
The work is characterized by its focus on financial instruments, systemic stability, macro-prudential monitoring, and the institutional framework governing the New Zealand financial market.
How do macroeconomic and microeconomic sources of instability differ according to the text?
The text explains that macroeconomic instability often stems from poor policy or external shocks, while microeconomic failings usually involve internal issues like poor risk management, insider dealing, or fraud within financial institutions.
Why is the "stripping" of government bond coupons significant?
Stripping allows for the separation of a security into its principal and interest components, creating new types of tradable assets that offer investors more flexibility in managing their portfolios.
- Quote paper
- Thomas Kramer (Author), 2000, The Economics of Money and Financial Markets in New Zealand, Munich, GRIN Verlag, https://www.grin.com/document/1898
