The financial sector

Question 1

what is the role of the financial sector?

Answer 1

• lending money to businesses or individuals
• facilitate savings (easier for people to save money), houshold save for a deposit, rainy days ect, firms save to then reinvest profits and governments save to pay off debt and Gov spending
• facilitate (make easier) the exchange of goods and services
• to provide forward markets in currencies and commodities (farmers agree to sell crops for an agreed price in the future = guaranteed supply and income
• To provide a market for equities e.g. company shares , a company sells shares to finance expansion

Question 2

example of market failure in the finacial sector

Answer 2

2008 banking crisis - bank run

Question 3

what causes market failure in the financial sector?

Answer 3

• asymetric information
• externalities
• moral hazard
• market rigging

Question 4

what are the roles of central banks?

Answer 4

• issue money
• prices and values your money (interest rates)
• control spending using interest rates and quantitive easing and quantitive tightening
• the financial system (the other flash card)
• keeping confidence by lending to other banks and preventing failure

Question 5

what do the monitary policy commity do ? MPC

Answer 5

the control and set interest rates, set inflation goals and forecast economic activities

Question 6

what are the 4 functions of money (theme 1)

Answer 6

• holds a value
• exchange medium
• measure of a value
• method of deffered payment (accepted way to settle debt)

Question 7

Evaluation of should banks bail out?

Answer 7

Arguments FOR :
- preventing systemic collapse - if one bank fails another may follow leading to a financial crisis. recesion and decreased confidence
- protecting depositors - a bail out ensures customers dont lose their savings = keeps trust and prevents panic / runs
- protects jobs
- some banks are so large that if it crashed it would harm the entire economy
Arguments AGAINST :
- ‘bail outs’ may encourage to take excessive risks because they know they will be rescued = recklessness
- often funded by public meaning taxpayers pay the financial burden
- poorly managed banks can keep surviving, leeds to inefficient allocation of resources and decreases potential rise in AD/growth

Question 8

Financial policy committee

Answer 8

identify/monitor/ take action to reduce systemic risks

Question 9

Prudent regulation authority

Answer 9

sets standards and supervises firms
- promotes safety

Question 9

Financial conduct authority

Answer 9

provides customers with appropriate products.

Question 10

why is regulation of the banking system required ?

Answer 10

to reduce the chance of market failures seen during the financial crisis of 2008

Question 11

list the regulations of the banking system

Answer 11

• new structures (organisations) to monitor and regulate it E.g. FPC (monitor and prevent risks), PRA and FCA
• STRESS TESTING to make sure the financial system is strong enough to withstand severe senarios such as a financial crisis
• greater intervention from the FCA to protect consumers