3 - Financial Services in the Wider Economy Flashcards
What is Intermediation?
Where those with a Surplus lend to the those with a deficit. The profit made is on the difference between the rate paid on gaining the funds from the surplus sector and the rate charged to those with a deficit.
What is Disintermediation?
This is where there is no middle man and those with a surplus lend directly to those with a deficit: Disintermediation - no intermediate. Where is Intermediation, there is an intermediate who will charge the borrower an addition on the rate gained from the surplus sector.
What are the four main reasons why you would want to use an intermediary?
Geographic Location - unable to borrow in the area in which you are located.
Aggregations - Larger loans covered by smaller deposits.
Maturity Transformation - Some lenders may not want to lend over the entire period requested. By using a wider range of deposit accounts and deposits, allows for a greater degree of flexibility.
Risk Transformation - Spreading the lending over a number of different lenders, limiting the amount of risk covered by just one, by sharing it with other lenders.
What are the key differences between a Proprietary organisation and Mutual Organisation?
Proprietary - are owned by shareholders within the organisation and share in the profits through dividend payouts. They can contribute to decisions on how the company is run. These account for the majority of large Banks.
Mutual organisations - are not a company and do not have any shareholders. Typically Mutuals are building societies and those depositing funds are it’s members. They can attend general meetings. Credit Unions too are mutual organisations, run in the interest of those of its members.
What is Retail banking?
The provision of deposit, withdrawal and credit facilities to the general public and business.
What is Wholesale banking?
This is where banks and large organisations will buy and sell financial assets to raise money. Usually where banks will lend to one another, should the other have a shortfall in liquidity. Building societies are allowed to raise up to 50% of the total liabilities on the wholesale market. This was increased to 75% in 2007 but hasn’t yet been used.
What are the five key points of the Financial Services (banking reform) Act 2013?
UK retail ring-fencing: All UK deposits from customers are placed into non-investment/wholesale arms of the organisation. Completely separate from the investment/wholesale organisation and removing risk to those deposits should the investment/wholesale arm encounter any issues.
Loss-absorbency requirements: Banks and similar organisations are required to hold capital above the regulatory limits. Reducing the need for needing public funds (taxpayer) to be rescued.
Depositor Preference: Retail depositors are the are considered preferential debts up to the limit of the Financial Services Compensation Scheme per account. Meaning unsecured creditors, bondholders, corporate creditors are settled after.
Bail-in is a stabilisation measure: Bondholders are first in line that are liable for any debt due by the bank, before any bailout (paid by outside of the organisation - such as we saw previously.).
Conduct regime: Those in senior management or who have an influence on how the bank invests, are accountable for their actions and can face criminal charges if found negligent.
What is Clearing?
The clearing process is made between clearing banks, usually the main banks, such as those like HSBC, Barclays, Lloyds etc. Whereby the difference between deposits and withdrawals (cheques, etc) with each bank is settled at 23.59 that night.
