Theme 4 - The financial sector Flashcards
What are 5 main roles of the financial markets?
- Forward market contracts
- Selling of Equities
- Exchange of goods and services
- Financial lending
- Financial savings
How to financial markets allow for parties to save?
Savings can include in a bank, in a pension fund or the buying of shares on the stock exchange
Savings in the banks may mean people could earn more interest on their savings
How to financial markets allow for parties to lend?
Banks make profits by lending money to parties for more I.R that they give to savers. This allows for borrowing of money for consumers to buy houses (mortgages), start businesses etc and gives firms ability to expand
How do financial markets facilitate the exchange of goods and services?
Makes it easier to make payments between two parties which allows for easy transactions.
Also makes it easier for the exchange of currencies
How do financial markets facilitate forward markets?
Forward contracts are contracts made for the future but fixing a price for now.
This means firms can maintain costs and make profits and ensure they don’t make losses in the long run
How do financial markets facilitate the selling of equities?
Equities are a share in a business. A firm can sell shares to a bank which can then sell these share to investors around the world for the business which makes it more manageable for firms
What are the 5 types of market failure in the financial sector?
- Moral Hazard
- Negative externalities
- Asymmetric information
- Market rigging
- Speculation and market bubbles
What is Moral Hazard and how could it lead to market failure?
Example in 2008…
Moral Hazard is when one party takes risks and other parties bear the cost of that risk. E.G. in 2008, the financial crisis caused the government to bailout banks because the financial sector is too important. This lead to bankers taking risk because they know governments bail them out
How could negative externalities lead to failure in financial markets?
If bankers takes risks, this could cause third parties to lose money despite them not constituting to the risk
How can Asymmetric information lead to failure in financial markets?
Bankers may know more about the risks of lending that the lender for example. This leads to risks being taken
What is speculation and market bubbles and how can it lead to failure in the financial markets?
Speculation is when firms predict what is going to happen in the future. Market bubbles are huge influxes in demand of an asset which increases the prices creating a spiral. This may lead to bursts of bubbles because parties will overvalue the asset price which leads to an increase in supply and reduction in prices
What is market rigging and how may it lead to failure in the financial market?
This is when a firm will speculate something and will then use this for private gains. Another example could be when a firm or individual affects the price of a commodity, asset or currency
What are the 4 main roles of the central bank?
- Implementation of monetary policies
- Regulations
- Bank to commercial banks
- Bank to government
What types of monetary policies does the central bank implement?
- Changing the base rate
- Changing the money supply through QE, QT and quantitative financing
How does the central bank as a bank to the government?
Managing the countries national debt, selling of government bonds and lending to the govt
