Money and currency relations are an integral part of modern life. We are used to treat them as a matter of course, not in need of regulation. But this is not so. Like all other areas of our lives, finance is a strictly organized system that lives by its own rules and laws. The money market is responsible for their regulation, which we will talk about now.
What it is?
This is a separate part of the financial market. Its peculiarity is that short-term loan and money transactions are carried out here, the duration of which can vary from one day to a year. With the help of this market sphere, the working capital of various enterprises is moving, and short-term loans can be issued. It is the money market that allows banks to issue short loans.
It should not be assumed that this phenomenon is characteristic only of a particular state, since in our time this economic sector covers the whole world. And this is no coincidence, since the volume of trading operations is growing every year, and therefore everyone needs more money.
Tools, lenders and borrowers
In this case, the instruments of circulation are treasury bills and similar commercial papers, various deposits, checks, as well as all other types of settlement documents. It is thanks to them that all short-term operations with foreign currency are made, and banks are able to issue long-term loans and borrowings. The lenders in this market are large banking organizations, but the list of borrowers is much wider and includes both state-owned companies and individuals, including foreign citizens.
In recent years, the debt market has acquired a huge role, thanks to which banks can exchange funds, while issuing short-term loans. This provides, among other things, economic stability and flexibility. It should be remembered that the money market in our country is formed by banking relationships by at least 70%. Without medium-term and long-term money, it cannot exist in principle. It is important to know that in our country the funds that circulate here are very often used to issue long-term loans and credits, which is bad, as it negatively affects the overall financial stability of the market.
The fact is that under such conditions the percentage of illegal capital turnover increases sharply, a lot of funds are spent on an underground brokerage game. Of course, the interest rates of this market directly depend on similar indicators in the economic sector, which were established in the state at a given time interval.
Equilibrium
The money market largely functions at the expense of the country's financial institutions, since it is they that ensure the equilibrium position of supply and demand. Simply put, in a truly stable state it can be maintained when the amount of money that consumers need is equal to the amount that can be offered by credit organizations. Of course, this statement is true also under the condition that the interest rate does not change in the direction opposite to the real level of income.
Simply put: in the case when the income of enterprises and the population grows, their need for money increases. The relationship between interest rates in the money market is such that interest increases exponentially.On the contrary, with a sharp drop in the level of welfare, when, it would seem, the level of need for funds also increases, borrowers simply are not able to pay their debt obligations at high tariffs. Because of this, the real turnover in the money market, as well as its rates, is gradually reduced to acceptable values.
Government tools to influence the financial market
Keynesian politics is one of the most effective ways of influencing the economy by the state. Its essence lies in periodic imbalances in this area. As a rule, a sharp change in refinancing rates is applied, which affects all areas of the production and social life of the state. Alas, the active use of this policy inevitably leads to the country falling into a liquid trap, since the interrelation of money market interest rates with the real production industry is too great.
Deciphering the concept
This is the name of a difficult economic situation when interest rates have already been reduced to the lowest possible level. Their further reduction is already impossible, and the increase will have a purely negative effect, since with a high demand for money and low incomes of the population, the financial hole will only deepen and expand. The way out of this situation is possible only with the active help and assistance of the same state, which should organize a financial trap. It should be remembered that any monetary policy in this situation will not give any effect at all.
Friedman's Rule
It should be remembered that the rule of M. Friedman also largely influences the ruble money market. In simple terms, in the long run, the demand for money is little dependent on interest rates. The long-term equilibrium, which is described by this rule, can be expressed as a special equation:
M = Y + Pe,
where M is the average annual trend towards an increase in financial supply;
Y is the average annual rate (expected) of an increase in the well-being of the population;
Re is the expected rate of inflation.
As for the latter, it is precisely the struggle against the manifestations of the inflationary process that should be devoted to state policy. M. Friedman’s rule states that interest rate regulation is permissible only in the market of short-term loans, whereas if necessary, long-term financial injections such actions are unacceptable.
Money market structure
The main player on which money supply in the money market depends is the commercial banking structure. They, firstly, accumulate all available free cash. Secondly, the offer of these finances to their customers depends on banks. It must be remembered that this market area is divided into several subcategories, which include all the payment systems available in the country and mutual settlements directly between enterprises and organizations. In any case, the main role is played here. short-term loans. Their share may exceed 80%. The most common loans are relatively small. As recent studies of domestic financial institutions show, their share in recent years has increased to 32%.
Why short-term loans? Everything is simple. The financial structure of banks depends on exactly the same loans they receive at international sites (the supply in the money market to ensure their activities should always be large). Until the recent events, everything was different, but now banks simply cannot take risks by investing in long-term projects with deferred profit.
How is the distribution in the credit market?
In recent years, the credit market is distributed as follows:
- Loans to organizations and enterprises - 70%.
- Loans issued by one bank to other similar organizations - 18%.
- Typically, the share of complex and past due loans is 12%, but some analysts say that over the past two years this figure has grown to 36%.
As a rule, the proportion of loans that are granted to enterprises and organizations for a period of six months to a year is about 32%. Interbank loans that circulate between the credit organizations themselves make up about 18%. What forces regulate this money market? Monetary policy in this direction is the responsibility of various international organizations (of the IMF, for example). These structures actually keep in check the entire financial life of the world, as they can instantly block access to cheap loans for any bank or even the state.
What about individuals?
As for the market for lending to individuals and small businesses, the situation here is much more diverse. But it was not always so. Until 1998, almost all categories of deposits from the population were divided into two large groups: demand accounts and short-term deposits. After the August events, public confidence in the banking sector fell dramatically, after which short-term deposits in the smallest possible amount of funds with the possibility of premature withdrawal became the most popular.
Today the situation is similar. Analysts say that now only deposits for a period of a month to six months are most actively opened. Many instruments that the money capital market usually operates in these conditions become completely illiquid.
Payment Systems Development
The sphere of payment systems has been developing dynamically over the past few years, and players from all over the world have been fighting for a long time on this field. “Visa”, “Master Card” - today they are known in any country. Few people remember this, but in our country, domestic payment systems appeared in 1992, when there was an urgent need for integration with the global financial market. The most famous are the Golden Crown and the Union Card. As a matter of fact, it was then that the first money market model arose, which, with minor changes, continues to function in our state to this day.
Securities
As a rule, this term refers to securities that provide borrowing of funds. it savings certificates checks, bills and other varieties. Income from them can be obtained in two ways: either buy at a price lower than market, or receive interest on a profitable acquisition of assets that have gone up. As a rule, the maturity of this type of securities does not exceed one year, and therefore, they can be considered as serious sources of income only if a sufficiently serious portfolio is acquired.
Why are they called cash?
There are several explanations for this at once: firstly, the money market rate largely depends on them, since these funds are in constant circulation between the banks themselves. Secondly, when issuing securities, real money is received, which can be put into circulation or used to pay off existing debt obligations. It should be noted that some of their categories may well be used as ordinary money: commercial or treasury bills are well circulated within the state, they can pay tax fees, pay for goods delivered, etc. As we said, obligations on them most often operate no more than one year.
Consequently, the income from them in any case will be one-time. What is the economic essence of the existence of securities in principle? The fact is that the uninterrupted circulation of banking, state, private capital, the possibility of quick payments on budget expenditures depend on them. In addition, securities are very important in terms of the operational sale of goods and services.Simply put, they have a very important role in ensuring the continuous circulation of the money supply and its uninterrupted supply.
So, the money market in Russia today holds largely thanks to them, since securities allow banks to release all surplus available funds in the shortest possible time, releasing them into circulation and thereby not contributing to the further development of the inflationary process. It also allows them to correctly balance all their assets and liabilities.
Core tools
The term “money market instruments” usually refers to debt management. As a rule, operations with currency in this area are carried out in a special, over-the-counter space. Because of this, private investors in this section are not particularly interested in principle. This is a very important and complex market, thanks to which banking organizations can cover all their liquidity needs, and the Central Bank generally uses it to control national payment systems. There are four main tools here:
- Treasury bills.
- Commercial bills.
- Certificates of deposits.
- Commercial securities.
So, treasury bills, which are issued exclusively by the state, imply the obligation of the latter to pay cash to the bearer. Because of this, they are issued at a discount to their face value. Interest cannot be paid on them, as well as the coupon rate. The bill just can be cashed. Moreover, often this period comes within three months after its issue. So real money can be obtained from it, and the money market again acquires a certain stability.
That is, real profitability is determined by the interest rate laid in the basis of the discount. Suppose it is ten. If you imagine a standard bill of exchange worth, say, a thousand rubles, then it will be issued at a price of 975 rubles. Thus, the owner will receive an income of 25 rubles. It should be noted that the government issues treasury bills constantly and with high regularity. This makes it possible either to withdraw cash from circulation, limiting the ability of banks to issue loans, or to return it by buying back securities.
Thus, there is always a stable demand in the money market. Banks actively use these tools on exchange and over-the-counter platforms, as they want to receive at least some kind of income. In some cases, they can be acquired by large investment companies in order to ensure the possibility of obtaining at least some funds when conducting risky transactions.
Commercial bills
Again, issued by some companies to pay for some of their debt obligations. They can also be used as additional evidence of the solvency of the company. Of course, the organization that received the bill of exchange will not receive much benefit from it, but securities of this type can be sold to the bank with profit. A banking organization buys not only it, but also the obligations of the issuing company to repay its debt obligations. In this case, the rate on the bill directly reflects the degree of risk during the foreign exchange transaction and the cash market does not particularly respond to it.
Securities of commercial organizations
In general, they are completely similar to the bills described above. But there is one important difference: the previous type of securities, although it even had certain limitations, was still a completely independent financial instrument. The class of securities described by us now is issued exclusively for some kind of financing program. We can say that such a commercial document is a complete analogue of a short-term bank loan.Thus, in this case, the issuer is not involved in shifting its own debt obligations to a third party.
Certificates of deposits
This is such a paper that documents the placement of a deposit with its issuer. Simply put, the certificate in this case is the absolute equivalent of a savings bank book. That is, the money (credit) market again receives an effective tool for managing financial flow. It should be remembered that certificates of deposit always issued in transferable form.
Their interest rate is always fixed, which makes it difficult to obtain high income from the sale. So, when issuing a certificate for 10,000 rubles at an interest rate of ten, and with annual repayment, the amount of 10,100 rubles will be paid. Such payments are called “debt plus interest” and provide balance in the money market. The latter is achieved due to the impossibility of obtaining high interest income: money supply is in circulation, but it does not lead to higher inflation.
Very often, credit certificates are issued in the name of the bearer, that is, when they appear on the secondary market they are sold at a significant discount. The size of the discount in this case reflects the basic interest rates in effect in the current period of time in the country's economy.
Main conclusions
So, the structure and essence of the money market is largely determined by direct financing. It is the possibility of obtaining loans at favorable interest rates and the process of issuing securities that can satisfy the growing demand in foreign currency or withdraw its surpluses from circulation as soon as possible. The presence of reliable borrowers and loan organizations brings the necessary stability and flexibility to the financial industry. Thus, it is this market that determines the economic course of the state. And a lot depends on it.
