1.4 The Role of Banks in the Economy Flashcards
Define the term bank
A financial intermediary that channels funds from savers to borrowers
Define FInancial Intermediary
Someone who provides an indirect link between those who want to save and those who want to borrow
How do banks enhance the economy?
Provide spending money through credit which increase spending and boosts GDP
Why may banks reduce the amount of credit they provide?
If they don’t have enough financial deposits when interest rates are low (e.g. credit crunch)
Define collateral
Assets that can be reclaimed should a loan not be paid
How does a change in interest rates affect the amount of borrowing and saving?
Interest Rate up:
- More saving
- Less borrowing
Define risk
A measure of the likelihood that a particular event may or may not happen, not knowing the outcome but knowing the possibility of its occurrence
Give 5 ways in which banks evaluate risk
- Give a wide range of loans to spread risk
- Study outcomes and identify problems
- Banks gain experience over time
- Some banks are specialised
- Banks lend to each other
How do banks spread risk?
Give a wide range of different loans
Define limited liability
Where a business owner is only liable for their original investment should they fall into debt
Define unlimited liability
If the business falls into debt, the business owner is responsible, even if it requires selling their personal assets
Define sole trader
Someone who runs a business on their own
Why would someone want to have unlimited liability?
4
- They get all the profits
- They are their own boss
- Less paperwork
- Easier to shut down if it fails
Why would someone want to have limited liability?
- Not personally liable for debt
- Shareholders protected
- Raising finance is easy with shareholders
Give a disadvantage of unlimited liability (not having to personally pay debt)
Harder to raise finances with no shareholders
Give 3 disadvantages of having limited liability
- Have to pay an accountant to look at their finances
- Must make their accounts public
- Can grow large and become messy to run
What does LTD mean a firm is?
Private
What does PLC mean a firm is?
Public
Define LTD
A firm with a select group of shareholders
Define PLC
A firm where anyone can buy shares on the stockmarket
Give 4 reasons for raising finance
- Pay debt
- Business expansion
- Starting up
- Buying stock
Give the 2 types of finance sources
Internal - coming from inside the business
External - coming from outside the business
What is a loan?
Where a bank lends money to a business
What is the disadvantages of a loan? (2)
- Affected by interest rates
- Requires collateral
