The Financial Sector Flashcards
Money Market
Short term loan finance
Up to 12 months
Inter bank lending
Short term government borrowing
Capital Market
Medium to long term finance
Government bonds i.e. 10 to 20 year bonds
Foreign Exchange Market
Currencies are traded
Spot exchange rate is price now
Forward exchange rate is fixed price for the future
Roles of Financial Markets
Facilitate savings
Lending
Allocate funds to productive users
Facilitate final exchange of goods and services
Provide forward markets
Provide markets for equities
Characteristics of money
Durable
Portable
Divisible
Valuable
Accepted
Functions of money
Medium of exchange
Store of value
Unit of account
Standard of deferred payment
Types of bank loans
Unsecured loans - creditworthiness
Secured loans - against an asset
Functions of a commercial bank
Provide retail banking
Licensed deposit takers
Licensed to lend money
Profit seeking businesses
Charge higher interest rates on loans than the rate paid on deposits
Asymmetric information
Type of market failure in the financial sector
Finance is a market in information
Externalities in the financial sector
Positive and negative
Contagion effect - loss of trust and confidence
Systemic risk - when on institution experiences issues, can lead to much wider damage
Examples of 3rd parties who bear external costs
Taxpayers
Creditors
Depositors
Shareholders
Employees
Government
Businesses
Moral Hazard
Individual takes more risks because they know they are covered by insurance
Speculative bubbles
Rise in asset prices fueled by high levels of speculative demand
Caused by behavioral factors, expectations, irrational exuberance
Market rigging
Collusion or abuse of power resulting from operating in a concentrated system
Monopoly power in financial markets
Market failure can occur when there isn’t sufficient competition
UK banking system is oligopolistic
Barriers to entry in commercial banking
Regulatory barriers
Intrinsic barriers to entry
Strategic advantage of larger banks
Functions of Central Banks
Monetary policy
Financial stability and regulation
Policy operation
Debt management
Expansionary monetary policy
Increase aggregate demand, including lower interest rates and increasing credit supply
Contractionary monetary policy
Lower aggregate demand, rise in interest rates and tighter controls on bank lending
