4.4 - The financial sector Flashcards
Bank
4.4.1 - Role of financial markets
A business that makes it profit by paying interest to those who keep money there and charging a higher rate of interest to people/businesses who borrow money from the bank
Bank assets
4.4.1 - Role of financial markets
Assets are “owned” by the bank e.g. cash, their balances with the Bank of England, loans (advances), securites (e.g. bonds) and also fixed assets such as property
Bank capital
4.4.1 - Role of financial markets
Bank capital is the value of the bank’s assets minus its liabilities (or debts)
Bank liabilities
4.4.1 - Role of financial markets
Liabilities are “owed” by the bank e.g. customers can walk into a bank or use an ATM machine to withdraw some/all of their deposits
Bank overdraft
4.4.1 - Role of financial markets
An overdraft is short-term finance, widely used by businesses of all sizes. With an overdraft the bank lets the business “owe it money” when the balance goes below zero
Bank reserves
4.4.1 - Role of financial markets
Money and liquid assets (such as securities that can be sold quickly) held by banks in order to meet cash withdrawals by customers
Banking credit
4.4.1 - Role of financial markets
An arrangement with a bank for loan, or bank lending in gerneral
Banking system
4.4.1 - Role of financial markets
The way banks work together to handle payments, make money available
Barter
4.4.1 - Role of financial markets
The practice of exchanging one good or service for another, without using money as a medium of exchange
Base money
4.4.1 - Role of financial markets
Currency (banknotes and coins) in circulation plus minimum reserves credit institutions are required/choose to hold with a country’s central bank
Base interest rate
4.4.1 - Role of financial markets
The rate of interest set by the Monetary Policy Committee of the Bank of England, being in effect the lowest rate that commercial lenders will charge interest at
Bitcoin
4.4.1 - Role of financial markets
Bitcoin is a digital currency that was launched by a secretive entrepreneur in October 2008, with the aim of being “a new electronic cash system that is fully peer-to-peer with no trusted third party”. Bitcoins are created by users (a.k.a. “miners”) who allow the Bitcoin system to use their computing power to process Bitcoin transactions. These miners are rewarded with some of the transaction fees paid by those who use Bitcoin. A few retailers, especially online, accept Bitcoin, partly because the transaction fees are lower than those of credit cards. However, Bitcoin’s value has been volatile
Bond market
4.4.1 - Role of financial markets
The market for interest-bearing securities (with either a fixed or floating rate) and with a maturity of at least one year) that companies and goverments issue to raise capital
Bond yield
4.4.1 - Role of financial markets
The yield is effectively the interest rate on a bond. The yield will vary inversely with the market price of a bond. When bond prices are rising, the yield will fall. When bond prices are falling, the yield will rise#
Broad Money
4.4.1 - Role of financial markets
A measure of the money supply. Broad money is a measure of the total amount of money held by households and companies in the economy. Broad money is made up mainly of commercial bank deposits - which are essentially IOUs from commercial banks to households and companies - and currency - mostly IOUs from the central bank
Building societies
4.4.1 - Role of financial markets
Building societies are owned by their members (i.e. customers) and not shareholders. Historically, they tended to focus on offering mortgages and savings products. Since 1986 many now offer a broad range of retail banking products. There are over 40 building societies in the UK, many of them with a regional customer bases. The 3 largest are Nationwide Building Society, Yorkshire Building Society and Coventry Building Society
Capital market
4.4.1 - Role of financial markets
Market for medium-longer term loan finance. Capital markets are the markets where securites such as shares, and bonds are issued to raise medium to long-term financing. Includes raising of finance by the government through the issue/sale of medium-term and long-term government bonds for example 10 year and 20 year bonds (loans)
Capital ratio
4.4.1 - Role of financial markets
A commercial bank’s capital ratio measures the funds it has in reserve against the riskier assets it holds that could be vulnerable in the event of a crisis. The European Union runs regular “stress tests” to check whether banks have enough of a capital buffer to weather difficult economic/financial conditions (known as disaster scenarios). Banks must maintain sifficient capital which includes money raised from selling new shares to investors and also their retained earnings (profits)
Commercial banks
4.4.1 - Role of financial markets
Commmercial banks have a licence to take the deposits of savers and make loans. They provide services to corporate and individual customers. Commercial banks make their profits by taking small, short-term, relatively liquid deposits from retail savers and transforming these into larger, longer maturity loans e.g. in the form of business loans and mortgages. Other services of commercial banks including providing debit and credit cards, private banking, money custody and guarantees, cash management and settlement e.g. through cheque accounts, as well as trade finance
Credit card
4.4.1 - Role of financial markets
A card indicating that the holder has been granted a line of credit. It enables the holder to make purchases and/or withdraw cash up to a prearranged ceiling
Credit risk
4.4.1 - Role of financial markets
This is the risk to the commerical bank of lending to borrowers who turn out to be unable to repay thier loans. Credit risk can be controlled by proper safeguards/research into the credit worthiness of borrowers. Credit risk also controlled through prudential regulation i.e. the size of reserves banks must hold back in case of bad debts
Credit unions
4.4.1 - Role of financial markets
Credit unions are small and local non-profit lending institutions. They are owned by their members and typically serving those customers who are unable to access standard retail banks products through banks or building societies. Examples of credit include London Mutual and Bristol Credit Union
Crowdfunding
4.4.1 - Role of financial markets
Crowdfunding is a form of equity finance that has grown rapidly in the USA and the UK. Crowdfunding involves the collective effort of a large number of individuals who network and pool small amounts of their capital to finance a new or existing business venture. Social causes remain the most active source of crowdfunding activity