4.4 The Financial Sector Flashcards
Explain the role of retail banks
Provide a range if financial products for consumers and small businesses
Explain the role of commercial banks
Provide a range of financial products for larger businesses
Explain the role of investment banks
Buy and sell shares on behalf of customers, help facilitate mergers and acquisitions, arrange issuing of shares for customers
Explain the role of savings vehicles
Any account or system that allows a consumer or business to save
Explain the role of insurance companies
Provides different types of insurance
Takes risks in turn for a fee
Explain the role of speculators
People or businesses trying to predict what will happen to the price of an asset - buying and selling accordingly to try and make a profit
Give the 5 functions that the financial sector provides
Facilitates Saving
Lending to businesses and individuals
Facilitating exchange of goods and services
Providing forward markets in currencies
Providing a market for equities - companies shares
GIve the 5 market failures of the financial sector
Market Rigging
Moral Hazard
Speculation and Market Bubbles\
Externalities
Asymmetric Information
Explain the role of central banks to the government
Carry out the banking business of the government
Make payments of behalf of the government
Manage the public debt of the country
GIve the 3 regulators in the financial sector
Financial Policy Committee (FPC) - Assess risks to the system and give direction to PRA
Prudential Regulation Authority (PRA) - Regulates individual financial institutions for safety and soundness
Financial Conduct Authority (FCA) - Protects consumers and promotes confidence. Independent regulator
Explain, Example, Resolve market rigging
Groups of individuals or institutions collude to fix prices or exchange information for personal benefit at the expense of others
Insider Trading - having inside knowledge not available to the public
Provision of Information
Explain, Example, Resolve moral hazard
When someone increases their exposure to risk when insured because someone else bears the cost of those risks
Too big to fail - Banks take short term risks knowing the bank will bail them out
Cap on performance related bonuses, long term commitment from CEO - less risk taking
Explain, Example, Resolve speculation and market bubbles
When the price of an asset is driven up to an excessive high and then collapses
Dot com bubble - Investors poured money into internet startups
Provision of information
Explain, Example, Resolve Externalities
Negative consequences of banks’ actions created an external cost borne by individuals and governments
Bank bailouts cost over £2000 per person in the UK
Regulation, Investment into supply side policies - people made redundant through branches closing need to be reskilled or structural unemployment
Explain, Example, Resolve asymmetric information
Banks may have more information than consumers
Payment Protection Insurance (PPI) misselling - Consumers were unaware of what was sold so purchased unnecessarily
Provision of information by the FCA
