Section 1 Flashcards
What 4 main functions does the FS industry provide to an economy?
- Financial Intermediation
- Pooling and managing risk
- Payments and settlement services
- portfolio management
What is financial intermediation?
providing channels for funds to move from savers to borrowers
What do intermediaries do and how?
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
Talk around pooling and managing risk
- 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
Talk around payments and settlement services
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.
Talk around portfolio management
Investors can manage their wealth by offering access to the markets, specialist advice and investment management services.
What two areas are the main services provided by the investment industry?
Investment advice and investment management
What is a central bank?
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.
what does financial intermediation involve?
Financial institutions facilitating the transfer of funds between surplus and deficit agents.
What typically are surplus agents?
Typically households
What are deficit agents
those who need to borrow
What are deficit agents primarily?
Firms and governmnets
Who acts as intermediaries?
A wide variety of financial institutions including deposit institutions and investment institutions.
What’s a deposit institution and what do deposits become?
Something that accepts deposits from economic agents. The deposits become liabilities of these institutions, which lend funds as direct loans or investments.
What institutions are included in deposit institutions?
Commercial banks and building societies.
What do universal banks offer?
Offer financial services as well as traditional deposit and lending facilities
what do investment banks act as
Brokers, underwriters and advisers
What do savings institutions accept and make like banks but what is the difference?
Accept deposits and make loans, although normally operate under different rules to banks.
What do investment institutions do with funds?
Invest the funds they raise into tradable securities such as bonds and equities.
What type of company is included under investment institutions?
Insurance companies that offer protection against unwanted events
what does life insurance concern
death, illness and retirement policies
what does general insurance concern?
loss or damage to property, homes, vehicles etc
how to life and general insurance differ in nature? and explain this
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
why are pension funds increasingly significant institutional investors in many countries?
because of falling state pension payments and ageing populations
