4.4 Financial Sector Flashcards
What are financial markets?
Financial markets are where buyers and sellers can buy and trade a range of services or assets that are fundamentally monetary in nature.
What are the two main reasons for the existence of financial markets?
- To meet the demand for services such as saving and borrowing from individuals, businesses, and the government
- To allow speculation and financial gains
What is one role of the financial market related to savings?
To facilitate savings, allowing people to transfer spending power from the present to the future.
What is a financial intermediary?
A financial intermediary is the step between taking money from one person and giving it to another, as money from savings is used for investment.
How do financial markets facilitate the exchange of goods and services?
By creating a payment system, such as processing cheque transactions and offering credit card services.
What is a forward market?
A forward market allows firms to buy and sell in the future at a set price, providing stability.
What is the market for equities?
The market for equities is where companies issue shares to finance expansion, providing the ability for shares to be sold in the future.
What is asymmetric information in the financial sector?
Asymmetric information occurs when financial institutions have more knowledge than their customers, leading to potential exploitation.
What was a major cause of the Global Financial Crisis?
Banks selling packages of prime and subprime mortgages advertised as all prime mortgages, leading to asymmetric information.
What are externalities in the context of financial markets?
Costs placed on firms, individuals, and the government that the financial market does not pay, like the taxpayer cost of bank bailouts.
Define moral hazard.
Moral hazard is when individuals make decisions in their own best interests knowing there are potential risks that others will bear.
How can speculation lead to market bubbles?
Speculation can create market bubbles when investors buy assets under the belief that prices will continue to rise, leading to excessive prices.
What is herding behavior in financial markets?
Herding behavior occurs when investors sell their assets en masse due to panic, often after a price drop.
What is market rigging?
Market rigging is when individuals or institutions collude to fix prices or exchange information for their own gain at others’ expense.
What is insider trading?
Insider trading is when an individual or institution trades based on non-public information that could affect the price of shares.
What is the role of a central bank?
- Controls monetary policy through interest rates
- Acts as a banker to the government
- Acts as a bank to other banks
- Regulates the financial system
What is the significance of a central bank being a lender of last resort?
It provides liquidity to banks experiencing financial difficulties to prevent systemic collapse.
What are some forms of financial regulation?
- Banning market rigging
- Preventing the sale of unsuitable products
- Maximum interest rates
- Deposit insurance
- Liquidity ratios
What does the FPC do?
The FPC identifies and reduces systemic risk and supports government economic policy.
What is the role of the PRA?
The PRA ensures competition, consumer access to services, minimizes risk of bank failure, and encourages responsible actions from banks.
What is the purpose of the FCA?
The FCA protects consumers, promotes competition, and enhances system integrity by preventing market rigging.
