Paper 3 Flashcards
Who are the Bank of England’s macro-prudential regulator and what do they do?
Financial Policy Committee (FPC):
- Protect against systemic risk
- Instruct PRA & FCA in tackling instability
- Advise the government on financial market shocks
Who are the Bank of England’s micro-prudential regulator and what do they do?
Prudential Regulation Authority (PRA):
- Supervise risk in the form of moral hazard (banks taking excessive risk)
- Set industry standards
- Specify ratios & requirements (liquidity ratio and reserve requirements)
Who are the Government’s macro-prudential regulator and what do they do?
Financial Conduct Authority (FCA):
- Supervise conduct of firms (prevent collusion of interest rates)
- Promote competition to improve consumer surp (deregulation)
- Ban mis-selling of products (PPI scandal form of market failure)
- Ban misleading adverts (Loan sharks must include interest rates)
What are the 4 functions of money?
- Store of value
- Unit of account
- Medium of exchange
- Standard for deferred payment
What does ‘standard for deferred payment’ mean?
Money can be used to pay back any debts arising from credit transactions
What does ‘unit of account’ mean?
Money is the standard measure used to compare the value of a range of goods
What does ‘store of wealth’ mean?
Money is a liquid asset which can be used to store wealth over a long period of time. HOWEVER, inflation can erode this store of wealth
What does ‘medium of exchange’ mean?
Money avoids a barter economy in which consumers must find a producer who is willing to exchange for an offered good. Money eliminates the need for a double coincidence of wants
What are the 6 characteristics of money?
Durable
Divisible
Portable
Acceptable / non-perishable
Scarcity
Stability in value
What is the difference between narrow and broad money?
Both narrow and broad money include cash in circulation as well as central bank reserves. However, broad money also encompasses deposits such as bank deposits and sight deposits
What are sight deposits?
Deposits at a bank which can be withdrawn at very short notice
How is demand for bonds determined?
By the relative attractiveness of the return on bonds compared to return on saving in bank. If interest rates fall, bonds will pay a relatively better return on investment and so demand for bonds increases.
What happens if demand for a bond increases?
Market price of the bond increases
This means the fixed coupon will represent a lower coupon rate of the bond and so the yield has fallen
What is the money market?
Financial markets which provide short-term lending with assets maturing in less than a year (short-term bonds)
What are capital markets?
Markets which provide long-term lending such that assets mature in a year or more (long-term bonds)
What are the two components of the capital market and what do they mean?
Primary capital market - Issuance of new bonds in financial markets
Secondary capital market - Re-selling of bonds or other assets from the primary market
What are FOREX markets?
Foreign exchange markets in which currencies are sold and purchased
(an example of hot money flows)
What is debt capital?
A financial asset that pays a return based off the interest rate
What is equity capital?
A financial asset that pays a return in the form of a dividend
What are spot currency markets?
Buying currency at the current exchange rate to be delivered instantly
What are future markets?
Buying currency at the current exchange rate to be paid in future
Who might partake in future markets and why?
Importers - Buy a currency at a stronger exchange rate to prevent raw materials becoming expensive relatively
Speculators - Those trying to make profit by gambling on changes in the exchange rate
What change in the exchange rate must be foreseen to partake in future markets?
A depreciation in the exchange rate
When does inter-bank lending stop and why is this bad?
In a financial crisis.
This means banks struggle to maintain their liquidity ratios and this lack of liquidity can lead to a surge in withdrawals from the bank in fears of insolvency which can exaggerate the problem
