Financial System

Question 1

Name the components of the financial sector

Answer 1

• Banking sector
• Semi-Banking sector
• Non-Banking sector
• Central counterparties and Bank of England.

Question 2

discuss the banking sector

Answer 2

Functions include holding deposits, providing payment services, and lending.
UK owned banks are split categorised into International, Domestic, and Other Banks.

Question 3

discuss the semi banking sector

Answer 3

These include SPV’s (Special Purpose Vehicles) and financial companies.

Question 4

discuss the non banking sector

Answer 4

Functions include offering investment products and services for savers, on whose behalf they lend money, in the form of debt or equity to borrowers. Examples include Pension Funds and Insurance Companies.

Question 5

discuss the central counterparties and bank of England

Answer 5

Play an important role in the plumbing of the financial system.

Question 6

discuss retail banking

Answer 6

Institutions that provide financial services to consumers, which include accepting savers’ deposits, making loans, and providing payment services.

Question 7

discuss investment banking

Answer 7

Institutions that help companies to raise finance by selling shares or bonds to investors and to hedge against risks. Additionally, they trade in shares, bonds, and other assets with other financial market participants.

Question 8

discuss the glass seagull act

Answer 8

In the US, the Glass-Steagall Act prohibited commercial banks from doing investment banking business. However, in 1999 this legislation was abandoned and, as a result, various US commercial banks acquired investment banks.

Question 9

what does a bank’s balance sheet consist of?

Answer 9

Assets (“Use of Funds”) and Liabilities & Capital (“Source of Funds”).

Question 10

Discuss assets within the banking balance sheet

Answer 10

Loans such as mortgages and consumer or corporate loans, as well as currency, central bank reserves, and government bonds.

Question 11

Discuss liabilities within the banking balance sheet

Answer 11

Retail funding, wholesale funding from international investors, and Capital, which includes primarily common shares and retained profits.

Question 12

discuss credit risk

Answer 12

The risk of a borrower being unable to repay what he or she owes to a bank, which causes the bank to make a loss.

Question 13

discuss liquidity risk

Answer 13

large number of depositors and investors may withdraw their savings at once, leaving the bank short of funds. Can cause a bank run.