financial markets Flashcards
what is included in M1
Currency (coins and paper money)
Demand deposits (checking accounts)
Other checkable deposits (like negotiable order of withdrawal accounts)
Traveler’s checks
What is included in M2
M1
Savings accounts
Time deposits (under $100,000)
Money market deposit accounts
Non-institutional money market mutual funds
what is included in M3
M2
Large time deposits (over $100,000)
Institutional money market mutual funds
Repurchase agreements and other large liquid assets
what is M0
physical money in circulation and held by commercial banks at the central bank
what is the liquidity spectrum
the range of financial assets categorised by how quickly and easily they can be converted into cash
Moral Hazard
happens when people engage in riskier behaviour with insurance than they would without insurance.
PPI scandal
PPI (Payment Protection Insurance) was designed to cover loan or credit repayments if the borrower:
✅ Lost their job
✅ Became ill or disabled
✅ Passed away
Banks and lenders mis-sold PPI in several unethical ways, including:
1️⃣ Adding PPI Without Consent – Many customers were unaware they had been charged for PPI as it was added to their loans without clear explanation.
2️⃣ Pressuring Customers to Buy PPI – Some lenders made PPI seem like a requirement for getting a loan or mortgage, even though it was supposed to be optional.
3️⃣ Selling PPI to Ineligible Customers – PPI policies often had strict terms, meaning that self-employed, unemployed, or retired customers couldn’t even claim the insurance, but they were sold the policy anyway.
Fincancial Policy Comittee
monitors and addresses systemic risks in the UK financial system to ensure stability, prevent financial crises, and advise the government on macroprudential regulation by stress tests and emergency liquidity provision
prudential regulation authority
oversees banks, insurers, and large investment firms to ensure financial stability by enforcing capital, liquidity, and risk management requirements to prevent systemic failures.
financial conduct authority
regulates financial markets and firms to protect consumers, promote competition, and ensure integrity by enforcing fair practices and preventing misconduct.
which 2 regulators work for the BOE
FPC and PRA
capital ratio
reserves/riskier assets
liquidity ratio
liquid assets/total liabilities
LIBOR scandal
The LIBOR scandal involved major banks manipulating the London Interbank Offered Rate (LIBOR) to profit from trades and appear more creditworthy, leading to billions in fines, regulatory reforms, and loss of trust in financial markets.
liquidity crisis
a bank run occurs but the bank doesn’t have enough liquid assets to meet demand
insolvency crisis
liabilities exceed assets so there isn’t enough capital to offset losses in asset values
types of financial market regulation
ban market rigging eg collusion
prevent sale of unsuitable products
maximum interest rates
deregulation - encourage more competition
limit bank lending
deposit insurance
