3 - LIQUIDITY (fin.) Flashcards
Benefits/risks
of cash deposits
BENE
- security - FSCS protection up to 85k
- accessibility - usually immediate unless term deposit
- liquidity - instant access to deposits 2nd only in liquidity to cash
RISKS
- interest rates may not keep up with inflation
-inflation eroding value
- portfolio cash accounts - not protected by FSCS
types of cash acc - instant access, notice account, term deposit and money market acc
FSCS
set up under FSMA2000 to compensate customers of auth fin. services firms in case of insolvency
established by FSA and now governed by PRA and FCA
funded by levy on financial services sector depending on class of activity - can also borrow from sector
what does FSCS cover
compensate customers of fin. services firms in case of insolvency
covers deposits, credit unions, insurance pols, pensions, insurance brokering, endowments, investments, mortgages, debt management
key provision is to protect cash deposits up to 85k per person per authorized instit
- originally under EU directive 100k eur rebal every 5 years
doesnt cover deposits outside of EEA
temp large balances protected for 6 months up to 1mn (e.g. proceeds from house sale, insurance payout, inheritance etc)
FSCS global alts
FDIC - deposits in US insit up to $250k (SVB more)
PBOC - 500k yuan per depositor
SARB - 100k rand per depositor per bank
spreading risk through different deposit takers
85k FSCS ceiling can lead depositors to spread risk among instit to reduce default risk
- cannot be same parent instit as cover only provided per authorised firm with 1 FRN number
benefit of spreading risk needs to be weighed against possible disadvantage of lower rates of interest because missing out on higher rates for larger deposits
types of deposit takers
commercial banks - plc which trades on major exchange, provides range of services (mortgages, deposits, loans, basic investment prods, saving acc, CDs)
challenger banks - branchless bank challenging UK big four
- smaller and younger, sometimes operate in underserved areas
green banks - much like regular bank but generally loan combo public and private money for clean energy or energy efficiency projects
either gov owned or quasi public bank
building society
mutally owned orgs (owned by members) - therefore similar structure to credit unions
members are holders of savings acc and borrowers
- have voting rights
- some have demutualised and become comm/retail banks
others absorbed in widespread consolidation
NS&I
safest of all deposits in UK as guaranteed in full by UK gov
>2mn
can open if you have a UK bank or building society account
NS&I holds no capital and has no lending or dealing activity - not a bank - not an authorized deposit taker
deposit acc types
instant access - cash immediately accessible (can be limits on withdrawals e.g. x amount/day)
notice accounts - depositor must give notice of intent to withdraw or suffer interest penalty - higher interest than instant access due to less liquidity
term deposit - cash deposited over predefined period for enhances rate. early withdrawal prob not permitted or allowed with big penalty
- often provided as fixed rate bond by bank
money market accounts
- certain banks offer money market deposits for deined periods, rates and currencies - IR reflects the current MM rates
- call account allows invest to access money on working day and by a specific time (close to instant access and offers rat aligned to base rate)
tax treatment of cash deposits
- gross interest (from April 2017)
- first 1k (500 higher) tax free
- no CGT
what is an ISA]
types?
- tax efficient wrapper for residents
- no income tax or CGT
types
-cash
-stocks and shares
-LISA
-flexible ISA
-innovative finance ISA
JISA
H2B ISA
H2B ISA
gov pay 25% bonus on savings up to max of 3k paid on 12k savings
closed to new savers in nov 2019
investors who had one already can continue to make contributions up to Nov2029
ISA age limits and key info
16 cash ISA
18 SS ISA, flex ISA, innovative finance ISA
18<x<40 - LISA
<18 JISA
UK res (can retain ISA if move abroad but cannot keep subbing)
20k limit across all ISAs
savings made by 5 April
flexible ISA
funds can be withdrawn and replaced in same tax year without counting towards limit
LISA
max contribution is 4k/yr - gov adds 25% bonus
must be between 18-40 to open but can contribute up to 50
used to buy 1st home or save for retirement
25% charge to withdraw unless
- buying first home under 450k
- over 60
- terminal illness <12 months to live
bills of exchange
aka a draft
drawn and issued by a supplier/seller of goods to a customer - specifying amount to be paid @ some future date
acceptance bill req by supplier which can then be offered on discounted basis in MM
- Supplier sends goods to customer and draws BOE on customer. Customer sends “bill of exchange” back to supplier
- To provide that security, the supplier insists that the customer gets the bill
“accepted”. Otherwise the supplier would have an IOU but no security or
guarantee that the bill will be paid. - The bill is accepted when a third party e.g. a bank, guarantees to honour
the bill if the customer is unable to fulfill their obligation to pay the £500.
Bank will require the customer to pay a fee for “accepting” the bill and
providing the guarantee. - The supplier having received the accepted bill could wait 91 days to
receive the £500 from the customer (or bank if customer defaults) - Alternatively, the supplier can sell the bill or the paper in the money
market. The supplier would sell the bill at a discount to another
participant in the money market who would then wait for the remaining
period of the 91 days to collect the £500 from the customer or the
accepting bank.
bills of exchange
aka a draft
drawn and issued by a supplier/seller of goods to a customer - specifying amount to be paid @ some future date
acceptance bill req by supplier which can then be offered on discounted basis in MM
- Supplier sends goods to customer and draws BOE on customer. Customer sends “bill of exchange” back to supplier
- To provide that security, the supplier insists that the customer gets the bill
“accepted”. Otherwise the supplier would have an IOU but no security or
guarantee that the bill will be paid. - The bill is accepted when a third party e.g. a bank, guarantees to honour
the bill if the customer is unable to fulfill their obligation to pay the £500. Bank will require the customer to pay a fee for “accepting” the bill and providing the guarantee. - The supplier having received the accepted bill could wait 91 days to receive the £500 from the customer (or bank if customer defaults)
- Alternatively, the supplier can sell the bill or the paper in the money market. The supplier would sell the bill at a discount to another participant in the money market who would then wait for the remaining period of the 91 days to collect the £500 from the customer or the accepting bank.
