Financial markets Flashcards
Characteristics of money
Medium of exchange
Store of value
Means of deferred payment
Unit of account
Broad money
Measure of the total amount of money held by households and businesses in the economy
Narrow money
The measure of the value of notes and coins in circulation. Also includes other forms of liquid money e.g short term deposits
Stock market
Enables the buying and selling of shares. Firms can use stock markets to issue more shares and raise finance.
Capital Market
A financial market for buying or selling long-term debt, e.g. bonds and equity-backed securities. It includes both government debt and corporate debt.
Money Market
A wide range of financial markets which enable banks and companies to borrow and lend for the short term.
Functions of commercial banks
Take deposits
Offer interest payments on savings
Give out loans
What are a banks assets
Anything that can be sold. e.g. cash reserves, loans and securities
What are the bank’s cash reserves?
What is left after selling assets and repaying liabilities. The amount of spare cash, could reduce risk of collapse.
What are a banks liabilities
Anything the bank has to repay e.g consumer deposits which the bank must pay back should the consumer withdraw their money.
Objectives of commercial banks
Profitability - By lending and attracting savings at different interest rates.
Liquidity - Needs to ensure it has sufficient liquidity to meet consumer cash demands.
Security - Needs to make sure its loans are reliable to reduce risk.
What are the conflicts between commercial bank objectives?
Profitability Vs Liquidity - If banks kept all deposits as cash they would be 100% liquid but would make no profit.
Profitability Vs Security - some loans are more risky, banks can charge higher interest to compensate for the risk. This makes them more profitable but also more risky.
Explain the process of quantitative easing
1) The central bank creates money electronically
2) They buy government bonds of commercial banks raising their liquidity
3) Due to higher cash reserves, banks are in theory more likely to lend increasing investment and consumption
How is there asymmetric information in the financial sector?
Financial bodies may not be aware of a firm/consumers real likelihood to default of their debt.
How did asymmetric information lead to the financial crash of 2009?
A problem in the credit crunch was that many banks bought bundles of US mortgage debt, not realising that many US mortgages were highly likely to default.
How can banks fail?
Loss in consumer confidence causing a run on the bank.
Long term loans meaning banks cannot supply consumers with their deposits short term.
Many commercial banks have investment divisions. Investment banks engage in more risky lending, putting customer deposits at more risk.
Borrowing short term to lend long term.
What does the FCA do?
Protects consumers from misleading information and unsuitable financial products/services.
What does the PRA do?
Promotes the safety and stability of banks.
What does the FPC do?
Aims to remove or reduce systemic risk in the financial system.
