lesson 8: the banking system Flashcards
what is a commercial bank?
financial institutions which aim to make profit by selling banking services to customers
what do commercial banks accept and create?
deposits
accept deposits from the general public to transfer to other account holders
create deposits to be lent to customers who wish to borrow money from their bank
what is the main function of investment banks?
help companies to raise finance by selling shares or bonds to investors and to hedge against risk
what is systemic risk in banking?
rather than the individual banks failing the entire financial system breaks down
what is the main form of money?
bank deposits
these are liabilities to the bank since the bank must honour any cash withdrawals or payments from the deposit
what is liquidity?
Liquidity is a measure of how easily an asset or investment can be converted to cash without affecting its price. It can also refer to the amount of cash that is readily available.
why are banks required to hold reserve assets?
to maintain liquidity and confidence and to meet any likely demand by customers for cash
what are the two main functions of the central bank?
maintain macroeconomic (growth jobs prices trade) stability
bring about financial stability in the monetary system
how is financial stability achieved through the central bank?
its acts as a lender of last resort
offers loans to banks with short term liquidity problems. (increases money supply for the high street banks)
when the central bank acts we have to consider they are thinking about…
the wider economy always and how it would be effected
why was the financial policy committee created?
FPC was created to identify monitor and take action to remove or reduce systemic risk to the system
what is the prudential regulation authority responsible for?
PRA is responsible for regulation of individual deposit takers insurers and major investment banks
what does the financial conduct authority regulate?
FCA regulates the financial services industry to protect consumers and financial markets and promote effective competition in the interest of consumers
what are the two ways that banks can fail?
insufficient capital
insufficient cash
what is a banks capital?
the value of all its assets minus the value of its liabilities
what is moral hazard in banking?
when banks take too many risks because they know the government and the bank of england are there to support them if things go wrong
what have the bank of england created due to the existence of moral hazard?
firewalls between retail and investment banking activities so the riskier parts of the bank can fail without affecting high street activities
highlights how the bank of england regulates the financial system
what is fractional reserve banking?
create more credit than the deposits received
what is QE?
increasing money supply to
increase loans
stimulate the economy
put liquidity into banks
buying financial assets
