Topic 1 Flashcards
Intermediation
Matching those with surplus cash (investors/savers) and those with a shortfall (borrowers) to satisfy their needs – the saver lends to the borrower via an intermediary (middle person). The intermediary borrows from the saver at one rate and lends the money to the borrower at a higher rate, the difference is their margin (profit).
Disintermediation
Those with a surplus and those with a deficit connect directly – cutting out the middle person.
Liquidity
Retail and wholesale banking
Geographic Location
The physical problem that individual lenders and borrowers would have to locate each other and would probably be restricted to their own area or circle of contacts. NOT ENOUGH MONEY
Aggregation
Even if a potential borrower could locate a potential lender, the latter might not have enough money available to satisfy the borrower’s requirements
Maturity Transformation
Even supposing that a borrower could find a lender who had the amount they wanted, there is a further problem. The borrower may need the funds for a longer period of time than the lender is prepared to part with them. NOT ENOUGH TIME
Risk transformation
Individual depositors are generally reluctant to lend all their savings to another individual or company, mainly because of the risk of default or fraud. RISK OF LOSING MONEY TO FRAUD
The benchmark for financial businesses and institutions to calculate the interest paid on swap transactions and sterling floating rate notes is the:
sterling overnight index average.
The Workers Credit Union has reserves of £60,000, which equals 6% of its assets. This means it:
can pay interest on dividends to savers.
Finance houses raise most of their funds through:
wholesale markets.
Which organisation is responsible for managing new issues of UK gilts?
HM Treasury The Debt Management Office.
What is the maximum borrowing a building society can raise on the wholesale market?
50% of their liabilities.
Which of the following is not a function of the Bank of England?
Prudential regulation. (regulates and supervises financial services firms)
n order to be acceptable as a medium of exchange, money must have certain
properties.
sufficient in quantity;
generally acceptable to all parties in all transactions;
divisible into small units, so that transactions of all sizes can be precisely
carried out;
portable
Money is
a medium of exchange – it can be exchanged for goods and
services;
a unit of account – a common denominator against which the
value of goods and services can be measured; and
a store of value – money received as payment today can be
stored until required
Product sales’ intermediaries
the intermediation that brings together the
product providers (such as banks and insurance companies) and the potential
customers who wish to purchase the providers’ products and services. These
product sales intermediaries include financial advisers, insurance brokers and
mortgage advisers.
WHOLESALE BANKS
Banks that provide funding for other financial institutions or very large
corporate clients
GENERAL INSURANCE
Insurance designed to protect policyholders from the financial
consequences of adverse life events. Examples include household
insurance, motor insurance, travel insurance and commercial property
insurance.
KEY TERMS
The Bank of England
A central bank is an organisation that acts as a banker to the government,
supervises the economy and regulates the supply of money.
European Central Bank (ECB
Within the European Union, the
European Central Bank (ECB) acts as central bank for those states that belong
to the eurozone (ie use the euro as their currency).
THE BANK OF ENGLAND’S ROLE AS A REGULATOR
The Bank of England previously held responsibility for the
supervision and regulation of the UK banking sector; in 1998
this responsibility was transferred to the Financial Services
Authority (FSA
The Financial Services Act 2012
effective from 1 April
2013, divided responsibility for financial stability between
the Treasury, the Bank of England and two new regulators:
the Financial Conduct Authority (FCA) and the Prudential
Regulation Authority (PRA)
mutual organisation
is one that is not constituted as a company
and does not, therefore, have shareholdersThe most common types of mutual
organisation are building societies, friendly societies and credit unions; some
life assurance companies are mutual, too.
What is a credit union?
A credit union is a mutual organisation. Credit unions are run for the benefit
of their members.hanges to the Credit Unions Act 1979
that came into force on 8 January 2012 mean that credit unions no longer have
to prove that all members have something in common with each other. In order to join a credit union, the member must meet the membership
requirements, pay any required entrance fee and buy at least one £1 share in
the union. Credit unions can choose whether to offer ordinary shares (which
are paid up and bring all the benefits of credit union membership), or deferred
shares, which are only payable in special circumstances. All members of the
credit union are equal, regardless of the size of their shareholding
Credit Union
Credit unions are owned by the members and controlled through a voluntary
board of directors, all of whom are members of the union. The board members
are elected by the members at the annual general meeting (AGM). Although
the directors control the organisation, the day-to-day management is usually
carried out by employed staff. Credit unions are authorised and regulated by
the Financial Conduct Authority (FCA), and savers are protected through the
Financial Services Compensation Scheme.Credit unions offer simple savings and loan facilities to members. Savers
invest cash in units of £1, with each unit buying a share in the credit union.
Each share pays an annual dividend, typically 2–3 per cent.
Credit Union LIFE ASSURANCE
A unique feature of credit unions is that members’ savings
and loan balances are covered by life assurance.
This means that any loan balance will be paid off on death,
and a lump sum equal to the savings held will also be paid,
subject to overall limits.
Retail and wholesale banking
The main distinction between retail and wholesale transactions is one of size
– wholesale transactions being generally much larger than retail ones.
INTERBANK MARKET
A very large market which recycles
surplus cash held by banks, either
directly between banks or more
usually through the services of
specialist money brokers.
Ring fencing
Wholesale banking operations are riskier than retail banking. Following the
2007–09 financial crisis, regulators sought to ensure that banks involved
in both retail and wholesale banking did not expose their retail customers’
deposits to risk as a result of their wholesale operations. This approach is
referred to as ‘ring fencing’ and was implemented in the UK banking sector on
1 January 2019
Restricted to 50 per cent of their liabilities
Building societies are also permitted to raise funds on the wholesale markets,
but are restricted to 50 per cent of their liabilities; the remainder must come
from deposits. For banks, there is no restriction.
Libor
The rate of interest charged in the interbank market used to primarily be the
London interbank offered rate (Libor). Libor used to act as a reference rate for
the majority of corporate lending, for which the rate is quoted as Libor plus
a specified margin. Libor rates were fixed daily and varied in maturity from
overnight through to one year.
Libor was an average calculated using the information submitted by major
banks in London regarding the interest rates they were paying to borrow from
other banks. It was supposed to be an assessment of the health of the financial
system, and the confidence felt by the banks as to the health of that system
was reflected in the rates they submit.he review recommended that banks submitting
rates to Libor must base them on actual interbank deposit
transactions, and not on what rates should be or are expected
to be.
Sonia
As a result of the Libor scandal, a shift has been made to Sonia (sterling overnight
index average). Sonia was introduced in 1997 and has been administered by the
Bank of England since 2016, with calculation and publication responsibilities
also passing to the Bank following a reform of Sonia in 2018 (Bank of England,
2021). It is based on actual transactions and reflects the average of the
interest rates that banks pay to borrow sterling overnight from other financial
institutions and other institutional investors. Sonia is an important benchmark
used by financial businesses and institutions to calculate the interest paid on
swap transactions and sterling floating rate notes
How can a bank involved in wholesale banking raise money quickly
in order to finance business activities?
From the interbank market
What are the four main reasons why individuals and companies
need financial intermediation?
Geographic Location, Aggregation, Maturity Transformation, Risk Transformation
What is the key difference between a mutual organisation and
a proprietary organisation?
A mutual organisation is owned by its members – in the case of a building
society, these are savers and borrowers; for a life assurance company
they are the policyholders. A proprietary organisation is owned by its
shareholders and is a limited company
A financial transaction that is carried out directly between an
organisation with surplus funds to lend and one that needs to
borrow is an example of
disintermediation
Which one of the following is not a role of the Bank of England?
To act as financial ombudsman in resolving customer
complaints about banks
Which institution issues UK banknotes?
The Bank of England. The Royal Mint issues coins
Credit unions cannot pay interest on savings. True or false?
False. Credit unions can pay interest on savings as long as they have the
necessary systems and controls in place and have at least £50,000 or 5 per
cent of total assets (whichever is greater) in reserve
Freshfood Ltd supplies fruit and vegetables to market traders
and small shops. The banking transactions it carries out are an
example of
retail banking
Who is responsible for administering Sonia?
The Bank of England.
what are 7 Roles of bank of England?
1) Issuer of banknotes2) Banker to the government3) Banker to the banks 4) Adviser to the government5) Foreign exchange market6) Lender of last resort7) Maintaining economic stability
What is DEMUTUALISATION?
The conversion of the building society to a company.
How does a Mutual organisation differ from a Proprietary one?
MUTUAL ORGANISATIONS HAVE NO SHAREHOLDERS BUT ARE OWNED BY THEIR MEMBERS
