Financial Sector Flashcards
What do financial markets refer to
Markets such as:
Retail banking (everyday banking)
Investment banking
Insurance firms
Pension funds
Hedge funds
Wealth management firms
Forex traders
What issues are there in financial markets
Asset price bubbles,
moral hazard (excessive risk taking because individuals have incentives to alter their behaviour when their risk is done by others)
Negative externalities (banks may invest in oil companies, pump and dump)
Regulatory capture (regulators act in a way that helps incumbent firms rather than consumers)
What is pump and dump
When a company pushes its share price up by claiming that it’s more valuable than it is. Then, once the shares were sold on public exchanges (company no longer private) shareholders found it shares weren’t that valuable. Share prices fell when the company failed to meet expectations and the shareholders were the third parties that felt the harm of the negative ext
What is an asset price bubble
A sustained rise in the prices of financial assets such as housing and equities which takes their values well above long run sustainable levels. This can happen because of buyers coming into the market expecting future price increases.
To what extent is the UKs large financial market beneficial - pros
It’s huge - processes £75 trillion worth of payments
Financial services account for nearly 12% of GDP
Contributes £72 billion to Uk balance of payments every year
Brings in FDI due to it being world-renowned for services for savers borrowers, insurance etc
In 2022, there were 1.08 million financial services jobs. 3% of all UK jobs
To what extent is the UKs large financial market beneficial - cons
Increases inequality (rich people benefit from accessing this sort of thing and can make a lot of money)
skills imbalance (well educated people work there rather than other important jobs) it’s hard for those from low-income backgrounds to work in this sector
Poor productivity
Low level of loans for new, entrepreneurial businesses
Why do we need to regulate financial markets
Helps prevent exploitation of the financial system eg via pump and dump
Ensure consumers interest are protected, particularly if there are monopoly firms
Financial stability
Stress tests make sure banks are prepared for crisis scenarios
What are the consequences of asset bubbles
Eventually the bubble bursts, leading to a sharp and significant decrease in prices. This results in losses for investors, disruptions in the economy and can cause financial crisis if it makes the financial system undtable
