New on FinoLib · Volume I: Global Economy
New on FinoLib, my finance education website: I have published an article called 2008 Financial Crisis, Capital Markets and Types of Banks, from Volume I: Global Economy. Here is what the article explains, written as a short expert briefing; the full piece, with every worked example, is one click away.
3.6 Capital Markets — Where Stocks and Bonds Live
The idea in plain words
Capital markets let companies and governments raise money by issuing stocks and bonds in the primary market. Those securities then trade between investors in the secondary market, where the issuer receives nothing.
Key points
■Operations work such as settlement, reconciliation and corporate actions happens predominantly in the secondary market, while origination (IPO), debt capital markets and equity syndicate desks work in the primary market.
■When a large bond is issued or an IPO is priced, it flows from primary to secondary within days, and operations teams must handle the transition.
A closer look
Capital markets are the venues where companies and governments raise money by selling financial instruments — primarily stocks and bonds — to investors. They are the bridge between those who have capital (investors) and those who need it (companies, governments). Every time a government issues a bond to fund infrastructure, or a company sells shares to fund expansion, it is using the capital market.
Recap
Capital markets let companies and governments raise money by issuing stocks and bonds in the primary market; those securities then trade between investors in the secondary market, where the issuer receives nothing. Knowing which market a transaction sits in tells operations teams who owns it, who settles it and who answers for errors.
3.7 Types of Banks — The Full Ecosystem
The idea in plain words
The banking ecosystem spans commercial banks, investment banks, custodians, central banks, development banks, private banks and cooperatives, each with a distinct job.
Key points
■A custodian bank is like a secure safe-deposit vault for the stocks, bonds and cash of pension funds, insurance companies and sovereign wealth funds; it does not own what it holds.
■Custodians such as State Street and BNY Mellon track, safeguard, settle and report on those assets, and are a daily counterparty for capital markets operations.
A closer look
A bank’s return on equity is its return on assets multiplied by its leverage. A deposit-funded commercial bank earns a thin return on assets and uses moderate leverage; a trading-heavy investment bank earns less per dollar of assets and relies on more leverage; a custodian earns fees and holds little risk on its own balance sheet.
A worked example
Worked Example — Different Return, Different Fragility (Illustrative)
Compare two banks. The commercial bank has assets of $100bn and equity of $8bn and earns 1.0% on assets. The trading bank has $100bn of assets and equity of $5bn and earns 0.5% on assets. Bank Leverage Return on assets Return on equity Commercial $100bn ÷ $8bn = 12.5× 1.0% 12.5% Trading $100bn ÷ $5bn = 20× 0.5% 10.0% Result: the trading bank earns a lower return on equity and is also more fragile: a loss of 5% of its assets ($5bn) would erase all its equity, against 8% for the commercial bank.
Recap
The banking ecosystem spans commercial banks, investment banks, custodians, central banks, development banks, private banks and cooperatives, each with a distinct job. Custodians such as State Street and BNY Mellon hold assets they do not own and are a daily counterparty for capital markets operations.
3.8 The 2008 Financial Crisis — When the System Almost Broke
The idea in plain words
Subprime mortgages were securitized, rated AAA and sold worldwide. When house prices fell, losses hit heavily borrowed firms funded with short-term money, lenders pulled back, and Lehman Brothers filed for bankruptcy in September 2008. The crisis produced Basel III and the Dodd-Frank Act.
Key points
■A firm with $30 billion of assets funded by $29 billion of borrowing and $1 billion of equity is levered 30 to 1, so a fall of about 3.3% in its assets wipes out all of its equity.
■Lehman Brothers, a 158-year-old investment bank, filed for bankruptcy in September 2008, and the global economy entered its worst recession since the 1930s.
A closer look
The 2008 global financial crisis is the most important financial event of the past century after the Great Depression. Understanding it is not optional for anyone in finance — it reshaped regulation, monetary policy, and institutional behavior in ways that are still being felt today, and it is the origin story of almost every regulatory requirement, risk management framework, and control process in modern banking.
The Simple Version
US lenders made home loans that many borrowers could not repay, packaged them into securities, and sold them around the world with top ratings. When house prices fell, the losses landed on banks that had borrowed heavily and funded themselves overnight. Lenders stopped trusting each other, credit froze, and governments had to rescue the system.
What the full article covers
In the full article I take you through these sections:
■3.6 Capital Markets — Where Stocks and Bonds Live
■3.7 Types of Banks — The Full Ecosystem
■3.8 The 2008 Financial Crisis — When the System Almost Broke
It includes worked examples, a look under the hood at the mechanics, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume I: Global Economy
Read the full article on FinoLib
The complete article, 2008 Financial Crisis, Capital Markets and Types of Banks, with every worked example, diagram, quiz and source, is free to read in Volume I, Global Economy on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance