Theme 1 section 4 Flashcards
What is a bank
A bank is a financial institution that offers both individuals and businesses a wide range of services to help them manage their money. They provide financial security through the provision of financial services.
What is the banks most important feature
They provide a safe space for economic agents to keep their money in return for interest payments. This allows firms and people to save. They then use the savings to provide investment funds for businesses e.g for machinery
What is the difference between investment banking and commercial banking
Investment banking provides services to large corporations. Commercial banking works with many clients in the general public.
Investment banks have a more competitive and higher paying salary as a career but often have long working hours but commercial banking offers a better work-life balance but not as high of a salary as investment banking
What are commercial banks
The public are the firms main customer- sometimes known as high street banks e.g barclays and HSBC.
What are commercial banks three core functions
-accepting deposits
-Lending money
-Transferring bank deposits (transferring funds between economic agents
What are commercial banks other functions
foreign exchange , insurance and brokerage (stocks)
How are commercial banks good for the economy
They provide liquidity to the economy, they distribute funds from savers to borrowers
They provide firms with funds to invest in capital
What are investment banks
They don’t directly serve to the public. Their focus is companies, the government and other financial institutions like insurance and pension funds.
They raise finance by offering advice and arranging shares/ corporate bonds e.g USB and Merill lynch
What is credit
credit is the creation of money by banks.
Is the ability to borrow money under the agreement you will repay it later
What must a bank do with a deposit
A bank must hold !0% of the deposits to ensure liquidity
An example of banks holding deposit to create money
1- customer x deposits £1000 into bank A
2-Bank A loans out £900 to customer Y (still holding the 10% the customer then deposits the money into bank B
3-Bank B uses the deposit an lends out £810 (holding 10% of the £900 to customer Z
4- customer Z then spends £810 which moves to bank C
5- Bank C then uses the £810 which they then hold 10% and lend out £729
Overall total deposits are £2710 (1000,900,810) from £1000
Cash reserves
How can banking systems create credit
the more cash they receive from deposits the more credit they can create.
Lending creates deposits because the electronic systems credit the account with money which did not previously exist
What are interest rates
Interest rates are the price of money
the cost of borrowing
the reward for saving A
What happens as interest rates increase
As interest rates increase borrowing become less attractive
As the return on savings they are more likely to save than spend
Consumers who already have loans will have less disposable income
what is collateral
collateral is what banks use as a security for a loan
normally properties but sometime in the form of vehicles which they will seize if they fail to repay loans
often means lower interest rates
What is the impact on business if there are higher interest rates
Expansion becomes more expensive,so less likely
Businesses with existing loans have to pay more in repayments- which reduces their competitiveness
Less jobs are created because costs are so high
More likely to try save
What happens is the effect of businesses when their are lower interest rates
Expansion is cheaper so it makes it more likely
Businesses with existing loans have to pay less in repayments so competitiveness increases
Costs are lower so more employment
Less likely to save more likely to spend
What is the effect of interest rates on the supply of goods and services
The cost of borrowing increases so it becomes more expensive to invest in capital e.g machinery
B2B transactions become less likely as some businesses go out of business and less capital is purchased
Suppliers may increase prices to compensate
what is risk
Risk is the probability of damage, loss or injury occurring
like an entrepreneur
what are features of risk
it is possible to quantify the degree of risk
It is measurable
Can be anticipated by entrepreneurs- through market research and business planning
What are features of uncertainty
It is not possible to quantify
It is not measurable s it is very unpredictable it is harder to anticipate and controll
What is limited liability
Limited liability means if the business was to fail and they were to have debts the investor loses the amount they invested but personal belongings are protected.
- don’t have to sell personal assets to repay debts
What is unlimited liability
The owners of the business is responsible for the total amount of debt of their business. The owner may lose their personal belongings e.g home and cars
Therefore a risk
The owner and the business are one entity
What is a sole trader
A sole trader is a business that is owned by one person but they may have people working for them
e.g hairdressers, cafes
What is the advantage of being a sole trader
Any profit belongs to the owner
Can make all decisions, quickly
flexible working hours
often small size so less capital needed
Easy to set up
Business can be kept private
What are the disadvantages of being sole trader
Lack of people to share decision making with
Long working hours
Borrowing money , can be seen as high risk
May lose money through sickness and holidays
If owner dies the business can seize to exist
