The Financial Sector

Question 1

What are financial markets?

Answer 1

Markets where buyers and sellers can buy and trade a range of services or assets that are fundamentally monetary in nature

Question 2

What are the 4 roles of a financial market?

Answer 2

Facilitate savings, lend to businesses and individuals, facilitate the exchange of goods/services, provide forward markets

Question 3

What is a forward market?

Answer 3

Where firms buy/sell goods at a set price for a certain period of time - can also work for countries imports/exports at a set exchange rate

Question 4

How does asymmetric information create market failure in the financial market?

Answer 4

Financial institutions take advantage of their knowledge on consumers to sell products + regulators lack of knowledge provides provides lack of regulation

Question 5

How do externalities cause market failure in the financial sector?

Answer 5

Costs placed on the market don’t effect the financial institution - links to a moral hazard

Question 6

How can workers moral hazard cause market failure in the financial market?

Answer 6

Workers take excessive risks as they known the company must pay back not them - (I.e excessive mortgages sold in 2008 caused the financial crisis ) - workers do this to sell more for higher salaries/bonuses

Question 7

How can financial institutions cause market failure in the financial sector?

Answer 7

Financial institutions take excessive risks as likely the Central Bank will bail them out as want to protect the economy

Question 8

How does speculation and market bubbles cause market failure in the financial sector?

Answer 8

Leads to a massive price rise then collapse - occurs in the housing market when excessive mortgages handed out boosts demand

Question 9

How can market rigging cause market failure in the financial sector?

Answer 9

Collusion of pricing/information hurts consumers

Question 10

What is insider trading?

Answer 10

Where an individual working in the financial market has knowledge of market behaviour so buys/sells share before changes happen to increase profits - or when institutions effect the price of something to benefit themselves

Question 11

What does the Central Bank control?

Answer 11

Monetary policy

Question 12

How does the Central Bank help the government?

Answer 12

Helps debt

Question 13

How does the Central Bank help other banks?

Answer 13

Helps ensure stability as bails other banks out

Question 14

Who are the Prudential Regulation Authority (PRA)?

Answer 14

Manage individual banks - regulates/maintains stability of banks, monitors management of bank risk-taking /management

Question 15

What do the Financial Policy Committee (FPC) do?

Answer 15

Manages entire financial sector, carries stress tests to measure risk of collapse of sector, advices government/ warns them of macroeconomic shocks, advise PRA and FCA on how to tackle financial stability issues

Question 16

What do the Financial Conduct Authority (FCA) do?

Answer 16

Protects consumers, makes sure there is no collusion/market-rigging, promotes competition, bans misleading adverts and financial products against interest of consumers (I,e PPI scandal)

Question 17

What are the FCA, FPC and PRA?

Answer 17

Financial sector regulators

Question 18

Criticisms of regulators in the financial market?

Answer 18

Liquidity rates too high, regulatory capture (lack of knowledge to regulate), reduces efficiency, harder to get mortgages (hurts first time buyers), banks should regulate themselves as not in their interest to go bust