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
