The Financial Sector and Financial Markets Flashcards
What is the most basic purpose of banks and financial institutions
is to make money available to those who want to spend more than their income
using the savings of those who don’t currently want to spend.
how do banks fulfil their most basic purpose
by helping people and firms to save. (bank accounts pension funds bonds)
provide loans to businesses and individuals.
allow equities and bonds to be issued and traded on capital markets.
everyday forms of borrowing for individuals
personal loans
mortgages
credit cards
pay-day loans
overdrafts
personal loans
loans to individuals paid back over small number of years.
can be secured or unsecured
secured where bank can force sale of asset to recover the loans cost.
unsecured loans have higher rate of interest as they are riskier.
mortgage
loan to buy a property
bank owns property until loan repaid.
credit cards
allow you to borrow money from a bank when purchasing goods or services.
pay-day loans
short term, small, unsecured loans, usually with high interest rates.
overdraft
loans made to firms individuals that occur when funds in their account falls bellow 0. fee might need to be paid and interest may need to be paid on money borrowed.
firms use equity and debt finance to
fund their activities.
equity finance
is raised by selling shares in a company. person buying shares providing the finance becomes shareholder and claims some ownership. shareholder entitled to dividends.
debt finance
is borrowing money that has to be paid back usually with interest. can involve borrowing from financial institutions or issuing corporate bonds.
other functions of financial institutions and markets
facilitate trade by allowing buyers to make payments quickly and easily.
they provide insurance cover to firms and individuals.
the financial sector helps economic growth
effective and efficient financial institutions and financial markets enable economic growth.
because economic growth is driven by the spending of individuals and firms, much of which relies on credit.
the banking industry is regulated meaning
there are rules to control the behaviour of banks, and penalties for any banks that break the rules.
why do banks need regulation?
the banking industry can have an impact beyond those with bank savings. it can potentially destabilise a country’s whole economy.
greater profitability in banking is also often associated with taking greater risks. therefore there is an incentive for banks to take financial risks in the hope of making a profit.
huge economic importance + incentive to take risks = regulation.
financial institutions are regulated to
reduce impacts financial market failure
protect consumers by policing individuals and firms to ensure act fairly and legally.
ensure integrity and stability of financial institutions and services they provide.
maintain confidence in financial sector and avoid sudden panics.
what are the three types of financial markets
money markets
capital markets
foreign exchange markets
money markets
provide short term finance to banks, companies, gov, individuals.
short term debt maturity of up to about a year.
can be as little as 24 hours.
capital markets
provide medium and long term finance.
gov firms can raise finance by issuing bonds. firms can raise finance by issuing shares or by borrowing from banks.
the capital market has a
primary and secondary market.
primary capital market
is for new share and bond issues
secondary capital market
where existing securities are traded (stock exchange).
this increases their liquidity. you can sell and get cash.
a security is
a certificate with some kind of financial value which can be bought and sold.
foreign stock exchange
this is where different currencies are bought and sold. done to allow international trade and investment, or as speculation.
