Financial Sector Flashcards
What is the role of financial markets?
- facilitate savings
- to lend to businesses and individuals
- facilitate the exchange of goods and services
- to provide forward markets in currencies
- to provide markets for equities
What are the market failure in the financial market?
Asymmetric information: e.g risky bank loans
Externalities - leading to misallocation of resources
Moral hazards: taking on risk knowing you are not liable due to insurance
Speculation and market bubbles: when demand exceeds supply due to predictions that crash
Market rigging: firms colluding the interfere in the market
What is the central bank
They manage an economies currency, money supply, interest rates
What do central banks do?
Implement monetary policies
Act as bankers to the government
Lender of last resort to banks
Regulates the banking industry
What is liquidity and Liquid assets
Liquidity refers to trading activity
Liquid assets are those which can be bought and sold easily
What is illiquidity
Assets that cannot be sold easily unless there is some loss in value
What is systematic risk
View as a negative externality.
They’re the risk of damage in an economy e.g risk of collapse of a bank
What market failure may make banks engage in if they’re supported by the government
May engage in moral hazard
What does the central bank mainly control?
The base interest rate
How does the central bank support the government?
Collects payments to the government, makes payments on behalf of the government, maintains and operates the governments account.
Who is regulating the UK’s banking industry?
The FCA and PRA
