The Financial Sector II Flashcards
Give 4 roles of the financial market
- To facilitate savings , which allows people to transfer their spending power from the present to future
- Lend to businesses and individuals > Consumption and investment.
- Facilitate the exchange of goods and services by creating a payment system.
- Provide forward markets. Where firms are able to buy and sell in the future at a set price.
What is a financial market?
where buyers and sellers can buy and trade a range of services
or assets that are fundamentally monetary in nature.
Why do Financial markets exist?
1.To meet the demand for services, such as saving and
borrowing, from individuals, businesses and the government
2.To to allow speculation and financial gains.
What are 3 types of Financial Markets?
1.The Money Market
2.Capital Market
3.Foreign exchange Market
Define the Money Market
The Money Market provides short-term finance (Saving & Lending)
up to a year
Define the Foreign Exchange Market
The Foreign exhchange markets are where different currencies are bought and sold.
To allow internationa ltrade and investment
Define the Capital Market
The Capital Market provides governemnts and frims with medium- and long-term finance.
Governments and firms can raisefinance by issuing bonds or by issuing shares or by borrowing from banks.
Define a Forward Market
Contracts (called futures) are made at a price agreed today but for delivery later.
e.g Firms wh oexport and import goods can ‘lock in’ an agreed exchange rate betweeen buyer’s and sellers’ currencies.
What are the main roles of a commercial bank?
1.To accept savings
2.To be financial intermediaries (i.e move funds fro mlenders to borrowers)
3.To lend to individuals and firms
4.To allow payments from one person or firm to another
What are the main roles of a investment bank?
1.Arrange share and bond issues
2.Offer advice on rasiing finance, and on mergers and aqcuistions
3.Buy and sell securities (e.g shares and bonds) on behalf of their clients
4.Act as market makers to make trading in securuites easier
What is Liquidity?
Refers to how easily something can be spent (e.g notes and coins are very liquid)
Abillity to turn assets into cash
Banks have to Balance Profitability and Liquidity
- Banks main aim is to make profit, the rate of return on iliquid assets (corporate bonds) is gernerally higher than that on more liquid assets. Howver banks need a certain amount of liquid assets available at all times as depositers who give their money to banks expect to be able to withdraw from their savings immediately.
Banks need enough liquidty to pay back their depositers but not too much to become unprofitable.
What is Inter-bank lending?
Why does this occur?
Inter-bank lending is when very short-term lending is done between banks
Some banks will have excess liquidity and others will have a shortage, Inter-bank lending means that banks with a temporary shortage of liquidity can borrow to meet their customers needs.
Name 5 types of market failure in the financial sector
1.Asymmetric information
2.Moral Hazard
3.Market Rigging
4.Market Bubbles
5.Externalities
How is Asymmetric Information a type of market failure in the financial sector?
One problem with the financial sector is that financial institutions often have more
knowledge compared to their customers, both consumers and other institutions. This
means they can sell them products that they do not need, are cheaper elsewhere or are
riskier than the buyer realises.
Additionally, there can be asymmetric information between financial institutions and regulators. The institutions
have little incentive to help regulators understand their business and this causes difficulties
for the regulators so may allow institutions to undertake harmful activities
