4.4 the financial sector Flashcards
what are retail banks?
provide a range of financial products for consumers and small businesses (current & savings accounts etc)
what are commercial banks?
provide a range of financial products for larger businesses
what are investment banks?
buy and sell shares on behalf of customers, help facilitate mergers and acquisitions, arrange issuing of shares for customers
what are saving vehicles?
any account or system that allows a consumer or business to save
what are speculators?
people or businesses trying to predict what will happen to the price of an asset, buying and selling accordingly in order to try and make a profit
what are insurance companies?
companies providing different types of insurance
facilitate saving?
saving is a way of deferring spending into the future, provides an accumulation of funds for lending
lending to individuals?
credit cards, overdrafts, payment by installment contracts, personal loans, mortgages, pay-days lending
lending to firms?
borrowing is a key form of funding for investment and growth
lending to governments?
any government with a budget deficit requires additional borrowing
facilitate the exchange of goods and services?
provision of a system of currency by a central bank, creates a exchange through money payments, currency exchange allows buying and selling of foreign currency
provide forward markets in currencies and commoditites?
firms may want to buy or sell forward, firm may want to sell goods or buy materials for production at a guaranteed price
future vs forward markets?
often referred to in similar ways
provide a market for equities?
equities in a financial context means company shares, issuing shares is an important way for companies to finance investment or expansion, stock markets provide a system for shares to be bought and sold by individuals and firms
what is market rigging?
group of individuals or institutions collude to fix prices or exchange information that will lead to gains for themselves at the expense of others, difficult to detect and little penalty if caught
what is insider trading within market rigging?
process of gaining an advantage in market dealings due to having inside knowledge not available to the public, e.g knowledge of a merger before it is announced and buying shares
what is the LIBOR scandal in market rigging?
some banks falsely declared their rates which distorted the LIBOR rate to provide a gain to the business, LIBOR rate is the rate banks lend to eachother
what is a moral hazard?
moral hazards occur when someone increases their exposure to risk when insured, someone else is bearing the costs of these risks
what is speculation and market bubbles?
market bubble is when the price of an asset is driven up to an excessive high and then collapses, price becomes higher than the ‘actual’ value of the asset
whats an externalitity?
cost or benefit incurred b a third party, negative consequences of banks actions created an external cost borne by individuals and governments
what is asymmetric information?
banks may have more information than customers, Payment Protection Insurance - many consumers purchased unnecessary insurance, Pensions mis-selling- brought unnecessary pensions instead of occupational schemes. collateralized debt obligations- major cause of financial crisis
policies for market rigging?
legislation and regulation of markets, facing fines and prison, but can be difficult to detect and prosecute when suspected
policies for market rigging?
preemptive solutions to change risk taking behaviour, separation of retail banking and investment banking, regulation of banking behaviour
policies for moral hazards?
after the event- bailing banks out could be necessary to prevent a larger economic crash, but it creates a precedent that might reinforce the moral hazard in the banking sector
