Financial markets and monetary policy Flashcards
purpose of banks and financial institutions
make money available to those who want to spend more of their income through loans, accounts, equity and bonds
difference between debt and equity
debt is borrowed money you must pay back, equity is sold shares claimed
money markets
markets which provide short term finance to banks
capital markets
meduim and long term finance by issuing bonds, issuing shares
foreign exchange markets
where different currencies are brought or sold
Bond yield equation
coupon divided by market price * 100
role of commercial banks
accept savings, lend to individuals or firms, allow payments between people
role of investment banks
buy and sell bonds and shares on behalf of client
offer advice on raising finance
functions of money
medium of exchange, measure of value, store of value, method of deferred payment
Narrow money
refers to the notes and coins in circulation plus balances which is very liquid
broad money
assets that are less liquid as well aswell as things which make up narrow money
commercial bank balance sheet
assets-cash,investment fixed assets
liabilities- share capital, reserves,borrowing
role of central bank
act as a banker to the government, help to support banks as a lender of last resort
central bank implementing monetary policy
central bank can manage the money supply through quantitative easing
, affect the amount of loans through capital requirements,
controlling the issuing of bank notes
monetary policy
involves making decisions about interest rates, money supply and exchange rates
contractionary monetary policy
reducing aggregate demand using high interest rates, restrictions on money supply and strong exchange rate
expansionary monetary policy
increasing aggregate demand, high interests rates, fewer restrictions on money supply, weak exchange rate
aim of UK monetary policy
to ensure price stability, low inflation, promoting economic growth
Monetary price committee
sets interest rates in order to meet inflation target which is 2% if inflation went higher it would increase interest rates to reduce aggregate demand.
factors affecting the setting of the interest rate
economic data like house prices, pound exchange rate, any increases or decreases in earnings
hot money
when interest rates are high people want to buy the pound to get rewards
Big Bang
deregulating financial markets in 2008
capital ratio
the ratio of a banks capital to loans it measures the risks associated with lending and stability
Liquidity ratio
the ratio of highly liquid assets to the expected short term need for cash it gives the bank stability and can help meet short term liabilities
microprudential regulation
to ensure that individual firms act fairly towards their customers and dont break the law
Macroprudential regulation
tackles systemic risks and avoids large scale financial crises
FPC
financial policy committee identifying monitoring and protecting against systemic risk in financial system
PRA
prudential regulation authority, maintaining stability and promoting effective competition
FCA
financial conduct authority, regulator which aims to protect consumers and increase confidence in financial institutions by promoting competition, banning products, supervising conduct of firms so they are fairly
