Chapter 6: Economic influences Flashcards
c. the influences over the commercial and economic environment from central banks.
List seven areas in which a central government may be interested.
(T-he P-rinting of M-oney F-or G-overnment I-n C-ountry)
- Taxation
- Printing of money and Minting of coins
- performance and integrity of Financial markets
- Government borrowing implementation
- In banking regulation
- Currency market intervention
- monetary, interest rate and inflation policy
c. the influences over the commercial and economic environment from central banks.
Describe the role of the central bank in monetary policy and control.
Primarily concerned with monetary policy and control, including the following aspects:
- adjustment of banking sector liquidity
- control of money supply growth and short-term interest rates.
c. the influences over the commercial and economic environment from central banks.
Outline reasons why the central bank may be concerned with the adjustment of banking sector liquidity
- Smooth Functioning of Financial System: A healthy banking system relies on sufficient liquidity. This ensures banks have enough cash reserves to meet their daily obligations, like withdrawals and loan repayments.
- Lending and Economic Growth: Adequate liquidity allows banks to lend money to businesses and individuals. This fuels economic activity and growth.
- Financial Stability: Insufficient liquidity can lead to financial instability. Banks might become reluctant to lend, credit might dry up, and the economy could suffer.
c. the influences over the commercial and economic environment from central banks.
Outline reasons why the central may be concerned with the control of money supply growth and short-term interest rates.
By controlling money supply growth and short-term interest rates, the central bank aims to achieve its primary objectives, which often include:
- Price Stability: Maintaining low and stable inflation.
- Economic Growth: Promoting sustainable economic growth and employment.
- Financial Stability: Mitigating financial risks and maintaining a stable financial system.
c. the influences over the commercial and economic environment from central banks.
Outline how the central bank may fulfil its roles in relation to the adjustment of banking sector liquidity and the control of money supply growth and interest rates.
It can fulfil its roles:
- Directly through open money market operations
- buying and selling of bills to influence level of liquidity within banking sector and ST interest rates - Indirectly through:
- setting minimum liquid reserve ratios
- setting discount rates and interest rate ceilings for bank deposits
- issuing directives on types of lending
c. the influences over the commercial and economic environment from central banks.
Describe how the central influences money supply growth and interest rates indirectly through:
1. setting minimum liquid reserve ratios
2. setting discount rates and interest rate ceilings for bank deposits
3. issuing directives on types of lending
- set minimum reserve ratios
- This requires banks to hold a specific portion of customer deposits as reserves, limiting the amount available for lending.
- While lending expands the money supply, these reserve requirements restrict a bank’s ability to lend, ultimately impacting overall money growth. - interest rate ceilings for bank deposits
- restricts the ability of banks to compete for investor’s money
- therefore, restricts amount coming into the system
- thus, restricts extent bank lending is able to expand money supply - directives on types of lending
- restricts expansion of money supply by directly restricting lending, e.g., restrict extent to which consumer credit is available
c. the influences over the commercial and economic environment from central banks.
Describe Quantitative Easing.
it is a tool used to stimulate economic activity.
it involves the increases in money supply and the increase from the fractional reserve system.
Usually, the Central bank will credit its account with money and use it to buy financial assets.
Usually, the assets bought are gov bonds, quasi gov debt, MBS, and corporate bonds in OMO.
Central banks using QE may provide forward guidance to market regarding the anticipated levels of QE that they intend to conduct in the short to medium term.
c. the influences over the commercial and economic environment from central banks.
Describe Forward Guidance.
it is a tool used by central banks to indicate (in the absence of unforeseen events) how it believes monetary policy will change in the future - usually of over the following 18 to 24 months.
It is designed to help people see how the central bank sets interest rates and to reduce the uncertainty about the future path of monetary policy.
it allows the CB to influence:
- long-term interest rates
- inflation expectations
- and economic activity
it is not a guarantee. The CB can depart from its guidance either as a consequence of unforeseen economic event or if the economic outlook changes.
c. the influences over the commercial and economic environment from main investor classes.
List the four main classes of investor.
- Private individuals (Households)
- corporates (Businesses)
- managers of ST and LT savings products (Financial intermediaries)
- Foreign investors
c. the influences over the commercial and economic environment from main investor classes.
List the four features that vary between different categories of investor and also the investors within each category.
- time horizon, e.g., whether they want investment returns over ST or LT
- appetite for risk, i.e. extent to which averse or tolerant to risk
- taxation position - reflects both tax rules that apply to particular type of investor and individual investor’s circumstances, e.g., how wealthy or otherwise
- liability profile and other features and circumstances
c. the influences over the commercial and economic environment from main investor classes.
List other features that might further differentiate categories of investors.
- Investment Knowledge and Experience
- Sophisticated vs. Retail Investors
- Investment Focus (specific asset classes or investment styles) - Investment Objectives
- Income vs. Growth
- Liquidity Needs - Investment Restrictions
- Investment Mandates
- Regulatory Requirements - Demographic Factors
- Age
- Risk Tolerance
c. the influences over the commercial and economic environment from main investor classes (Households).
List considerations for households when making investments.
LET WORDS Improve Life
- Liabilities
- Expertise
- Tax
- Wealth
- Outgo and income uncertainty
- Risk appetite
- Diversification
- Stability of Asset value
- Investment and risk characteristics
- Liquidity
c. the influences over the commercial and economic environment from main investor classes (Financial intermediaries).
State four possible advantages offered by financial intermediaries compared to direct investment.
- Pool resources and thereby enable small investors to gain access to investments which they could otherwise not do so by themselves
- diversification (through lending to many borrowers)
- Expertise (built through volumes of business they conduct)
- lower dealing, administration and management costs (through economies of scale)
c. the influences over the commercial and economic environment from main investor classes (Financial intermediaries).
List the examples of FI.
Examples include:
- banks
- insurers
- pension funds
- CIS
They sell their own liabilities to raise funds that are used to purchase the liabilities of other corporations.
c. the influences over the commercial and economic environment from main investor classes (Financial intermediaries).
State four possible disadvantages offered by financial intermediaries compared to direct investment.
- Additional layer of costs to investors
- products offered might not meet the exact requirements of investor (e.g., LT bonds not available)
- products offered may be inflexible (e.g., fixed term or penalty for early redemptions)
- Investor loses element of control over investment choice