4.4. The 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
- To allow speculation and financial gains
How do financial markets facilitate savings?
They allow people to transfer their spending power from the present to the future through assets such as savings accounts and stocks.
What role do financial markets play in lending?
They lend to businesses and individuals, allowing for consumption and investment.
What is a financial intermediary?
A financial intermediary is the step between taking money from one person to give to another, using money from savings for investment.
How do financial markets create a payment system?
They facilitate the exchange of goods and services through central banks printing money, processing 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 for commodities and foreign exchange.
What is the importance of issuing shares in financial markets?
Issuing shares is a crucial way for companies to finance expansion, as it allows 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 the sale of unsuitable or risky products.
What was a contributing factor to the Global Financial Crisis?
Banks selling packages of prime and subprime mortgages while advertising them as all prime mortgages.
What are externalities in the context of the financial market?
Costs placed on firms, individuals, and the government that the financial market does not cover, such as taxpayer bailouts.
Define moral hazard.
Moral hazard is when individuals make decisions in their own best interests, knowing the risks will be borne by others.
How can moral hazard manifest in financial markets?
When employees take risks to increase their salaries without facing the consequences, or when institutions take excessive risks knowing they will be bailed out.
What are market bubbles?
Market bubbles occur when asset prices rise excessively and then fall, often due to speculative trading.
What triggers herding behavior in financial markets?
Investors purchasing assets as prices rise, believing they will continue to profit, leading to panic selling when prices begin to fall.
What is market rigging?
Market rigging involves collusion to fix prices or exchange information for personal gain at the expense of other market participants.
What is insider trading?
Insider trading is when individuals or institutions trade based on non-public knowledge to make a profit.
What is the role of a central bank?
To control monetary policy, act as a banker to the government, and serve as a bank to other banks.
How does a central bank maintain financial stability?
By acting as a lender of last resort during liquidity problems for banks.
What is financial regulation?
Regulation includes measures like banning market rigging, preventing the sale of unsuitable products, and enforcing liquidity ratios.
List the three key bodies for financial regulation.
- Financial Policy Committee (FPC)
- Prudential Regulation Authority (PRA)
- Financial Conduct Authority (FCA)
What does the Financial Policy Committee (FPC) do?
Identifies and reduces systemic risk and supports government economic policy.
What is the focus of the Prudential Regulation Authority (PRA)?
Ensures competition, access to services, minimizes risk, and promotes responsible banking actions.
What are the primary goals of the Financial Conduct Authority (FCA)?
Protects consumers, promotes competition, and enhances market integrity.
