1 - function & structure of FS Flashcards
4 essential functions of financial services (SLID)
S = SAVINGS protected and channelled into capital management
L = LIQUIDITY i.e. savers can readily access while borrower requirements can be met
I = INSURANCE to transfer risk away from individual
D = DIVERSIFICATION disperses risks across number of products
4 key components to financial services structure (FAIM)
F = FIRMS e.g. banks, pension providers, building socs and insurance companies
A = AUTHORITIES e.g. PRA, FCA, PRC, BoE, HM Treasury
I = INFRASTRUCTURE i.e. payment, clearing and trading systems
M = MARKETS e.g. on-exchange and OTC markets
F1. 4 important firms for savings (GIMB)
G = GOVERNMENT provides gilts and NS&I premium bonds
I = INSURERS provide policies to mitigate against risk and protect savings and other assets
M = MARKETS enable investment via stocks & shares to encourage asset growth without borrowing
B = BANKS/BUILDING SOCS turn ST savings into LT lending/growth via interest and diverse services
F1. Government gilts and NS&I
Government uses savings of private individuals to fund own borrowing through provision of fixed-interest investments e.g. gilts, essentially a loan to the government. Fixed coupon (interest) rate every 6 months.
2021 - green gilts introduced, funding green projects.
NS&I = National Savings & Investments, issuing prem bonds with lottery chance of high interest payment.
F1. 3 important impacts of Government on economy (TPP)
T = TAXATION e.g. offering tax relief on investment wrappers, NI tax…
P = POLICY e.g. taxation rates, but particularly INTEREST rate setting (controlled by Chancellor of Exchequer J Hunt)
P = PROVISION e.g. state benefits, pensions, NEST & welfare including NHS and benefits
F1. What might individuals and companies need protection for? (PEAT)
P = Profit potential
E = Earnings e.g. income protection/life cover
A = assets (physical) e.g. building insurance
T = transactions (financial)
F1. 2 objectives of capital markets
Capital market objectives:
1. enable investment for growth above CPI
2. help companies raise money without borrowing from banks
F1. Two types of product developed to meet capital market needs of investment and growth without borrowing (S&S)
- Shares (buying): individuals or corporations buy ownership of & of company and receive proportion of profits in dividends. Grants right to vote in meetings.
- Stocks/bonds (lending): individuals or corporations lend company money in exchange for interest payment. Higher interest than from savings accs from banks due to higher risk. Similar to government gilts.
F.1 What is fractional reserve banking?
Banking system wherein only a fraction of total deposits to bank are required to be accessible for withdrawal at one time.
F1. Bank deposits and loans: assets or liabilities?
Deposits: liabilities. Banks need to repay deposits at some point as they are in essence loans from private individuals.
Loans: assets. Banks make money off the interest charged on the loan in addition to the repayment of the loan capital.
F1. Banks vs building socs
Banks are owned by shareholders and pay dividends to them; building socs are member-owned and do not have to pay dividends to shareholders, thus have more capital to pay higher interest to members and charge less interest on loans.
Impact of increasing taxes?
Impact of Brexit?
F2. Name 4 authorities & functions (PPFF)
PRA
FCA
PRC
FPC
What is the process whereby government re-injects liquidity into economy by buying back gilts and bonds?
Quantitive easing, as seen in 2008/9 crisis and COVID pandemic
