financial sector Flashcards
what are the tools used by the Bank of England
- exchange rate policy
- interest rates
- quantitative easing
- controlling the money supply
what is meant by maturity
the date which the borrower has to repay the lender
what is meant by the yield
- income return on an investment
- OR
- the longterm rate of interest earned
what is meant by the coupon
the guaranteed amount of interest payed to the bond holder (expressed by the face value of the bond)
how do you workout the yield
coupon/market price * 100
what is the difference between the yield and the coupon
the coupon of the bond is fixed where as the yield on the bond changes according to the market price of the bond
what are tools used to fix fiscal deficits
- fiscal austerity
- automatic stabilisers
how does fiscal austerity work
- cuts in public expenditure
- increases in taxation
what are the roles of the financial sector
- allow savings
- allow lending/borrowing
- allow exchnage of goods and services
- allow equities to be bought and sold
different types of financial institutions
- retail/commercial banks
- investment banks
- saving vehicles
- speculators
when does Lender of last resort occur
occurs when banks face liquidity problems
why do financial regulations take place
- prevent financial institutions engaging in risky practices that could damage customers
- prevent systematic failure(when the whole financial system collapses)
what are the authorities that are in charge of financial regulations
- Prudential Regulation Authority(PRA)
- Financial Conduct Authority (FCA)
what is an example of asymmetric information
Payment Protection Insurance (1990s - 2000s)
why should the government bail out banks
- customer protection
- prevents the collaps of other banks (consumers taking money out)
why shouldn’t the government bail out banks
- LR gov debt(higher tax in future)
- moral hazard ( will encourage reckless behaviour in the future)
what financial regulations did the federal reserve(US) implement in 2011
Basel III - conduct stress test to see how the bank would respond in case of a financial crisis
what are the different types of market failure in the financial sector
- asymmetric information
- speculations and market bubbles
- moral hazards
- negative externalities
what is asymmetric information
when one party know more than another in a transaction
what is an example of asymmetric information
bankers knew more about the adjustable rate subprime mortgages than the people they were selling them to
what is an example of negative externalities
banks didnt have enough money to lend out to business. people became unemployed, so real GDP decreased.
what is an example of a moral hazard
after the financial crisis in 2008 the US spent 700 billion of tax payers money to stop banks from going bankrupt
when does market rigging occurs
when firms try to control prices which distorts the price mechanism
