1 - Financial Markets and Intermediaries Flashcards
What are the four main functions in an economy?
- Financial intermediation
- Pooling and managing risk
- Payments and settlement services
- Portfolio management
Intermediaries significantly reduce information and transaction costs by:
- Providing services and products that allow savers to become investors
- Ensuring the adequate provision of information
- Allowing borrowers to access a range of savers that can meet a variety of terms
Insurance companies, pension funds and investment institutions or vehicles (such as an open ended investment companies (OEICS) and unit trusts) all perform what function?
Intermediation function
Examples of pooling and managing risk
1.Pooled investment products
2.Insurance
3.Derivatives - options and futures
Payment and settlement services
Banks are main providers of payment systems that allow money to be exchanged and debts settled.
Settlement services are provided by clearing houses for buyers/sellers of securities.
Main financial institutions
- Central bank
- Deposit institutions
- Investment institutions
Role of a central bank as financial institutions
Setting monetary framework within which financial organisations operate.
Set short-term interest rates
Lender of last resort to banking sector
Financial institutions act as intermediaries, including deposit and investment institutions. True or false
True
Deposit institutions - what are they?
Commercial banks and building societies.
Universal banks offer financial services AND deposit/lending facilities.
Investment institutions
Invest funds they raise in tradable securities such as bonds and equities.
Include insurance companies and pension funds.
Role of the government? Four functions
- Provision of public sector services
- Regulation
- Intervention in the distribution of income
- Stabilisation of the economy
Explain the Provision of public sector services as one role of the government
Market failure. Providing services that private firms are unwilling or not allowed to provide. Include defence, law and order, maintenance of some infrastructure.
Explain regulation as one role of the government
Regulating firms and markets principally to protect the consumer.
Who are the 3 main regulatory bodies In the UK for financial services?
- FCA
- PRA - prudential regulation authority
- FPC - financial policy committee
Explain intervention in the distribution of income as a role of the government
Redistribution of income and wealth as a policy, as a result of private market transactions. Include state benefits and taxation
Stabilisation as a role of the government explained
Use of interest rates to reduce fluctuations in employment and income. Carried out by BOE Monetary policy committee (MPC)
Advantages of indirect investment through intermediaries e.g. pension funds, insurance companies, pooled investment funds
- Greater diversification
- Reduced transaction costs
- Access to specialty expertise
- Ability to invest in assets that may not be available to the individual investor
Four functions of the financial services industry?
Financial intermediation
Pooling and managing risk
Portfolio management
Payment and settlement services
Main financial institutions?
Central banks
Deposit institutions
Investment institutions
Role of the government?
Provision of public sector services
Regulation
Intervention in the distribution of income
Stabilisation of the economy
Example of investment institutions
Insurance companies - life or general
Pension funds
Advantages of indirect investment through intermediaries (insurance companies, pension funds and investment vehicles)?
Greater diversification
Reduced transaction costs
Access to specialist expertise
Ability to invest in assets not usually available to individual investors
What is a derivative?
A financial contract derived from and underlying asset that speculates price movements of the asset over time
Functions of the securities markets:
Raising capital
Creating Liquidity
Price discovery
Transferring risk
