Section 1

Question 1

What 4 main functions does the FS industry provide to an economy?

Answer 1

1. Financial Intermediation
2. Pooling and managing risk
3. Payments and settlement services
4. portfolio management

Question 2

What is financial intermediation?

Answer 2

providing channels for funds to move from savers to borrowers

Question 3

What do intermediaries do and how?

Answer 3

significantly reduce information and transaction costs by:

• providing services and products to allow savers to become investors
• ensuring the adequate provision of information
• allowing borrowers to access a range of savers that can meet a variety of needs

Question 4

Talk around pooling and managing risk

Answer 4

• FS industry provides mechanisms to efficiently manage risk
• pooled investment products allow savers to invest in a wider variety of investments than they would be able to individually –> reduce in risk exposure
• insurance allows individuals and companies to transfer a risk exposure in return for a premium
• Derivatives (options and futures) allow investors to manage their risk exposure

Question 5

Talk around payments and settlement services

Answer 5

Financial systems means money and assets can be managed, transmitted and received.

Banks = main providers of payment systems that allow money to be exchanged and debts to be settled.

Settlement services also provided by clearing houses to ensure that buyers and sellers of securities complete a transaction.

Question 6

Talk around portfolio management

Answer 6

Investors can manage their wealth by offering access to the markets, specialist advice and investment management services.

Question 7

What two areas are the main services provided by the investment industry?

Answer 7

Investment advice and investment management

Question 8

What is a central bank?

Answer 8

A financial institution involved in settling the monetary framework within which financial organisations operate. This typically requires the central bank to set short-term interest rates to meet an inflation target. In addition, the central bank will act as lender of last resort to the banking sector supplying liquidity during times of crisis.

Question 9

what does financial intermediation involve?

Answer 9

Financial institutions facilitating the transfer of funds between surplus and deficit agents.

Question 10

What typically are surplus agents?

Answer 10

Typically households

Question 11

What are deficit agents

Answer 11

those who need to borrow

Question 12

What are deficit agents primarily?

Answer 12

Firms and governmnets

Question 13

Who acts as intermediaries?

Answer 13

A wide variety of financial institutions including deposit institutions and investment institutions.

Question 14

What’s a deposit institution and what do deposits become?

Answer 14

Something that accepts deposits from economic agents. The deposits become liabilities of these institutions, which lend funds as direct loans or investments.

Question 15

What institutions are included in deposit institutions?

Answer 15

Commercial banks and building societies.

Question 16

What do universal banks offer?

Answer 16

Offer financial services as well as traditional deposit and lending facilities

Question 17

what do investment banks act as

Answer 17

Brokers, underwriters and advisers

Question 18

What do savings institutions accept and make like banks but what is the difference?

Answer 18

Accept deposits and make loans, although normally operate under different rules to banks.

Question 19

What do investment institutions do with funds?

Answer 19

Invest the funds they raise into tradable securities such as bonds and equities.

Question 20

What type of company is included under investment institutions?

Answer 20

Insurance companies that offer protection against unwanted events

Question 21

what does life insurance concern

Answer 21

death, illness and retirement policies

Question 22

what does general insurance concern?

Answer 22

loss or damage to property, homes, vehicles etc

Question 23

how to life and general insurance differ in nature? and explain this

Answer 23

in their investment strategies

Life insurance - tends to cover long periods so insurers tend to hold long term assets

general insurance companies - shorter term periods so tend to hold shorter-term assets reflecting their greater need for immediate cash

Question 24

why are pension funds increasingly significant institutional investors in many countries?

Answer 24

because of falling state pension payments and ageing populations

Question 25

what is the global impact of institutions such as investment / insurance companies globally and why?

Answer 25

many of these institutions operate in the global financial system. e.g. company in one country may choose to list on the stock market in another country to rase capital in a market with different characteristics/ may issue bonds in another country to raise capital.

Thus investment by savers and capital-raising firms has a global dimension. The gradual removal of capital controls by individual nation states and the globalisation of the world economy have contributed to the phenomenon of GLOBAL CAPITAL FLOWS.

Question 26

Broadly what four functions to governments perform?

Answer 26

1) Providing services that private firms are either unwilling or not allowed to provide.
2) Regulating firms and markets, principally to protect the consumer.
3) Intervening in the distribution of income generated by private market transactions.
4) Stabilising the economy

Question 27

What is a government providing services that private firms are unwilling/ not allowed to provide also referred to as often? And give e.g.’s of this

Answer 27

market failure = is the economic situation defined by an inefficient distribution of goods and services in the free market.

examples include defence, law and order and maintenance of certain infrastructure.

Question 28

What may government policy also include in terms of investment approach?

Answer 28

Grants and subsidies to promote certain issues for which the market may not be satisfactorily addressing (e.g. ‘green issues’) or for which the market does not punish externalities (e.g. carbon taxes)

Question 29

What does regulation do?

Answer 29

Promotes competition and prevent fraud

governments can restrict entry to markets and enforce rules to govern people’s behaviour

Question 30

In the UK what are the main regulatory bodies for financial services?

Answer 30

FCA, Prudential Regulation Authority (PRA) and the Financial Policy Committee (FPC)

Question 31

What is an examples of how a government may conform to some criterion of equity / redistribution of wealth

Answer 31

• a minimum wage guarantee
• state benefit payments
• Taxation

Question 32

How does the government aim to stabilise the economy

Answer 32

Attempt to reduce fluctuations in income and employment and to control movements in the general price level

Question 33

how is inflation controlled in many economies today and who runs this in the UK

Answer 33

Interest rates - Bank of England’s Monetary Policy Committee (MPC)