Intro to financial markets Flashcards
The financial services industry provides 4 main functions in an economy:
- Financial intermediation
- Pooling and managing risk
- Payments and settlement services
- Portfolio management
- Financial intermediation
Allows funds to move from savers to borrowers.
Savers can supply funds directly to debt + equity markets or through intermediaries (pensions/insurance/banks).
Intermediaries provide products and services that reduce information and transaction costs.
- Pooling and managing risk
Pooled investment products, insurance, certain derivatives (such as options and futures)
- Payment and settlement services
Payment Systems - Banks allow money to be managed, transmitted/received
Settlement Services - Clearing Houses ensure transactions of securities are completed
- Portfolio Management
Allows investors access to investment advice and portfolio management services
Role of Central Bank
Set monetary framework (short term interest rates for inflation target, lender of last resort)
Role of Deposit Institution
Commercial banks and building societies.
Accept deposits, which become liabilities which the DI loans or invests
Role of Investment Institution
Investment banks and Institutional Investors.
Invest the funds they raise in tradable securities.
Life insurance hold long term assets. General insurance hold short term assets (need more immediate / liquid cash)
Causes of Global Economy
Companies can raise capital by listing on another countries stock exchange or issuing bonds abroad.
The gradual removal of individual nation capital controls has contributed to the globalisation of world economy
Government performs 4 functions:
- Market Failure - provide services private firms cannot or will not. (e.g. defence and certain infra)
- Regulation - regulate firms and markets through FCA/PRA/FCP to protect consumer
- Redistribution - of income and wealth through tax/subsidies
- Stabilise - stabilising economy through employment and inflation e.g MPC
