Financial markets Flashcards
what financial assets is sold in a money market
a financial asset with a maturity date of less than a year
what financial assets is sold in a capital
a financial asset with a maturity date of greater than a year
Eg Bonds and capital
Debt capital
Financial asset paid back with interest
Bonds
Equity capital
Financial asset given to business in exchange for a share in business and dividends (share of profit)
How to calculate the yield on bonds
(Coupon/market price)X100
how to calculate money multiplier
1/ reserve assest ratio (in decimal form)
What is the reserve asset ratio
the percentage of money that is kept on the bank
Quantitate easing definition
government re-buys their own bonds to make debt cheap.
How does QE work (analysis)
As the government buys back bonds the demand for them increases.
This raises the price of the bonds.
Causing the yield to decrease.
Governments can release new bonds with a coupon at to match the yield and can borrow more money with a cheap interest.
How does QE benefit consumers
when the government buys bonds off banks it increases the banks supply of money to increase lending which may result in an outward shift in AD
2 problems with QE
- a devalued domestic currency
2. risk of inflation
What 3 things are on a bonds
- Coupon (interest)
- maturity date (date at which the bond is repaid)
- face value price
Principal agent problem
when one person takes more risk for personal gain because someone else has the bear the cost of those risks
What happens if banks are over regulated
- it may restrict spending and investment as banks limited their credit
- banks may relocate to countries where there is less regulation
what does the financial policy committee do
the macro prudential regulation
Its role is to identify, monitor and take action to remove or reduce ‘systemic risk’. The FPC can make recommendations and also give directions to the PRA and the FCA on actions that should be taken to remove or reduce risk. However, the FCA has no direct powers over the individual financial institutions.
what is moral hazard
Moral Hazard is the concept that individuals have incentives to alter their behaviour when their risk or bad-decision making is borne by others.
Banks might take more risks if they know the Bank of England or the government can help them if things go wrong.
what does market rigging mean
when interest rates are fixed due to collusive activity.
This should be banned to maintain consumer welfare
maximum interest rates
how do they reduce systemic risk
when the price of borrowing must be legally charged below a set price
as banks seek to maximise profit they may be less willing to lend out risky loans as there is a lower change of getting their money back. by being able to charge higher interest rates they may be more likely to give out these loans
how does deregulation solve market failure in financial markets
currently financial markets set the price too high at P1 and as a result those on variable mortgages may have lower standard of living as a result
by increasing competition banks may be more willing to differentiate themselves by offering low interest
setting capital and liquidity ratios
forces banks to keep more liquidity to improve ability to overcome short term liabilities
what is the problem with forcing banks to increase liquidity measures
- banks may make less profit and be incentivised to set up in the UK.
with less competition banks such as Barclays may be more able to charge higher interest rates and get a higher return on savings
how to calculate capital ratio
loans
problems with regulation of financial markets
- moral hazard
- regulatory capture
- asymmetric information
why is regulatory capture likely in the banking industry
- many regulators are previous bank managers so may already have existing relationships within the industry.
why is asymmetric information damaging in the banking industry
when banks hide information about liquidity or risky investments it may force the government to set liquidity ratios at a level too high or too low
