Financial Intermediaries Flashcards
Types of Intermediaries
Deposit taking - banks, building socs, credit unions
Non-deposit - Insurance co’s, pension funds, unit trusts, investment trusts
Banks
Investment - involved in large and complex transactions.
Commercial: retail or wholesale
Retail Banks
High street banks which take deposits from customers and lend small amounts. Offer:
- Current and savings accounts
- Mortgages
- Personal loans
- Participation in loan guarantee schemes
- Overdrafts
- Certificates of deposit
- Accepting bills of exchange
- Providing financial advice and info
Wholesale Banks
Deal only with financial institutions and large businesses. Offer:
- Currency conversion
- Working capital financing
- Underwriting a new share issue
- Supervising a takeover through the stock market
- Large trade transactions
- Negotiating bills of exchange
- Borrowing and lending between banks
- Money management help
Other Types of Financial Intermediaries
Discount houses/bill brokers (exclusive to the UK)
Building societies
Investment/unit trusts/mutual funds
Pension funds
Insurance companies
Leasing companies
Factoring companies
Credit Creation: Cash Ratio
The ratio of cash or liquid assets to the deposits held by the bank. May be set down as part of the regulatory system for banks in a country.
Cash Ratio Formula
Cash ratio amount to be retained by banks =
Amount deposited x 10%
Cash able to be lent out by banks=
Amount deposited - retained cash ratio amount
Maximum Amount Created from Initial Loan
Change in total deposits =
1 ---------------- x initial cash deposit Cash ration
Credit Multiplier Effect
The increase in credit, and therefore money supply, occurring from an original deposit as a result of the cash ratio.
Factors which determine the multiplier effect are the value of deposits in the bank and the cash ration required to be held.
Gov Funds and the Central Bank
Gov needs funds to operate.
Receipts (money in) comes from tax, payments for public services, profits from nationalised industries.
Payments (money out) goes on day to day like wages and welfare, subsidies and grants, maintenance and investments
Money in and out are not in synch
Central Bank: The Bank’s Bank
Usually all banks must keep an account with the central bank for:
Clearing - to allow for the transfers that have to be made from one bank to another
Cash reserve - banks use the central bank reserve in an emergency, “lender of the last resort”
Central Bank: The Government’s Bank
Central bank acts as gov’s bank:
- account holder
- debt management
- foreign currency reserves
- supervisor for the banking system
- notes and coins
- lender of the last resort
- monetary policy
Central Bank and Monetary Policy
Monetary policy concerns affecting the size of the money supply. Done through:
- buying and selling treasury bills
- changing the market interest rates
- changing the capital adequacy ratio
- quantitative easing
