Financial Institutions Flashcards
What is a central bank?
A central bank is an organisation that acts as the bank to the government, supervises the economy and regulates the supply of money. In the UK this is the Bank of England.
What are the Bank of England’s main roles?
Issuer if banknotes - charges with the duty of making sure there is enough in circulation.
Banker to the government - if there is a deficit the bank will automatically issue a loan to the government to cover this. If there is a surplus the bank may lend this out as part of its general debt management policy.
Banker to the banks - all banks have deposit accounts with the Bank of England. The Bank of England can have a great influence on interest rates by how it charges banks that borrow or deposits.
Adviser to the government - the bank is able to advice and help formulate its monetary policy.
Foreign exchange market - manages the official reserves of gold on behalf of the treasury.
Lender of last resort - the Bank of England can issue funds in circumstances the banking system becomes short of liquidity.
What is the Monetary Policy Committee (MPC)?
Setting the official banks interest rate, the ‘base rate’ and ensures the inflation targets are met.
What are gilt-edged securities?
Who manages new issued gilt-edged securities?
Why are they called gilt-edged?
Loans to the government.
The Debt Management Office (DMO) is responsible for new issues of gilt-edged securities.
They are called gilt-edged as the government guarantees their income and redemption amounts.
What is a proprietary organisation?
They account for a large majority of financial institutions, they are public limited companies and are owned by their shareholders.
What is a mutual organisation?
These institutions are not considered to be companies and do not have shareholders. The most common mutual organisations are building societies.
What is a credit union?
Is run for the benefit of its members who a somehow linked… eg being part of the same association or living in the same area. They come together to meet common economic, cultural and social needs.
How does a credit union work?
Savers invest cash in units of £1.00.
Each unit buys 1 share in the credit union.
Each share pays a dividend, typically 2-3%.
This creates a pool of money that can be lent to other members.
Loans charge interest typically around 1%.
What is retail banking?
More common services such as deposit accounts, loans and payment systems. This is mainly high street banks and building societies that deliver their products.
What is wholesale banking?
Process of raising money where financial institutions buy and sell assets. This enables them to more lending facilities to customers.
What is the interbank?
If a financial institution has the chance to make substantial profit but does not have the cash to lend, it can raise money quickly through the interbank. This encompasses over 400 financial institutions and serves to recycle surplus cash held by banks.
What is LIBOR?
London Interbank Offered Rate. It is the interest charged using the interbank. Interest is fixed daily and can vary in maturity from overnight to one year.
What is the Wheatley Report?
It looked at the way LIBOR was governed. It recommended to make LIBOR a regulated activity and to make the manipulation of LIBOR a criminal offence. This was backed by the government in 2012.
How much funds are building societies permitted to raise on the wholesale market?
Up to 50% if their liabilities (customers deposits)
IBA?
ICE Benchmark Administration
