4.4 Financial Sector Flashcards
What are the five main roles of the financial markets?
- To facilitate saving
- To lend to businesses and individuals
- To facilitate the exchange of goods and services
- To provide forward markets in commodities and contracts
- To provide a market for equities
How does the financial markets help facilitate saving?
the financial markets allow people to
transfer their spending power from the present to the future. It can be done through a range of assets, such as storing money in savings account and holding stocks and
shares.
How do financial markets help led to businesses and individuals?
financial markets helps to encourage consumer consumption and investment, enabling the connection between households and businesses.
How do financial markets facilitate the exchange of goods and services?
they do this by creating a payment
system. Central banks print paper money, institutions process cheque transactions, companies offer credit card services and banks and bureau de changes buy and sell
foreign currencies.
What are retail banks?
Banks that provide high street services to depositers
What are wholesale banks?
Banks that deal with companies and other large banks
What are universal banks?
Banks that operate in both retail and wholesale markets
What is liquidity ratio?
The ratio of liquid assets to total assets
What is interbank lending?
Borrowing and lending between banks to manage their liquidity and other requirements for short term funds
What four things are money?
Medium of exchange
Store of value
Unit of account
Standard of deferred payment
What are the five ways that market failure can occur in the financial sector?
- Asymmetric information
- Externality effects
- Moral Hazard
- Speculation and market bubbles
- Market rigging
How can asymmetric information cause market failure in the financial sector?
Financial institutions can accumulate assets that they have less than full knowledge- this can mean some financial institutions may not act in the most rational way.
How can Externality effects cause market failure in the financial sector?
The financial is closely integrated, interdependent and globalised – if one part of the system fails the whole system can be shaken - institutions involved may become affected
How can Moral hazard cause market failure in the financial sector?
Moral Hazard is the concept that individuals have incentives to alter their behaviour when their risk or bad-decision making is borne by others. as a result institutions may not behave rationally
How can speculation and market bubbles cause market failure in the financial sector?
When markets are buoyant, traders, brokers and fund management are driven to join the party in faith that the value of assets will keep rising in the future. Because players are investing on the basis of others behaviors, rather than the fundamentals of the market known as the ‘animal spirit’ by Keynes.
