Topic 1: Questions Flashcards
Explain what is meant by financial intermediation
an entity that acts as the middleperson between two parties in a financial transaction. Banks and building societies are the best known examples
Explain intermediations role in the Financial Institution?
borrows money from a surplus party and lends to a deficit party.
What is the function of money? 3
- a medium of exchange, for goods and services
- a unit of account, value of which products can be measured
- a store of value, stored until required. needs to keep it’s value e.g saving accounts
Money can be a store in value, what does this mean?
To fulfil this function what must it retain?
it can be saved and used later. E.g. investments, current accounts
retain its exchange value or purchasing power
What properties must money have? 4
- sufficient in quantity
- acceptable to all/most parties
- divisible into small units
- portable
What products and services do Financial Institutions provide benefits? 3
- convivence. E.g. current accounts
- achieving difficult objectives. E.g. Mortgages to purchase a home, savings to meet long term goals
- protection from risk. E.g. insurance or beneficiaries from consequences
What are the four main reasons why individuals and companies need financial intermediation? 4
- Geographic Location
- Aggregation
- Maturity Transformation
- Risk Transformation
What are the potential services offered by Financial Services Groups? 7
- Retail Banking
- Mortgage Services
- Credit Card Services
- Wealth Management Services
- Financial Asset Management
- Investment Banking
- Insurance Services
What is the Bank of England’s mission?
to promote the good of the people in the UK by maintaining monetary and financial stability
What are the functions of the Bank of England? 7
- Issuer of banknotes
- 2.Banker to the government
- Banker to the banks
- Adviser to the government
- Foreign exchange market. E.g. gold reserves and foreign currency on behalf of the Treasury
- Lender of last resort. E.g. makes fund available when banking system is short of liquidity
- maintaining economic stability. E.g. Financial Policy Committee identify and address economic risk
What is a credit union?
a mutual organisation run for the benefit of it’s members
All members are equal regardless of the shareholding size.
What did members in a Credit Union used to have to meet joining requirements?
a common bond
changes to the Credit Union Act 1979 in 2012 mean that credit unions no longer need to prove members have something in common.
What requirements do you need to meet to join a Credit Union? 3
- membership requirements
- pay entry fee
- buy at least £1 share in the union
Who are credit unions owned by?
Who are credit unions authorised and regulated by?
the members- directors are selected at a AGM
FCA and FSCS
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 building societies, savers, and borrowers. For a life assurance company, they are policy holders.
A proprietary organisation is owned by its shareholders and is a limited company
A financial traction that is carried out directly between an organisation with surplus funds to lend and one that needs to borrow is an example of:
Disintermediation
Credit unions cannot pay interest on savings. True or false?
False- Credit unions can pay interest on savings as long as they have necessary systems and controls in place and have at least £50,000 or 5% of total assets (whichever is greater) in reserve.
Who is responsible for administering Sonia?
The Bank of England
How can a bank involved in wholesale banking raise money quickly in order to finance business activity?
From the interbank market
What is meant by the interbank market?
a very large market which recycles surplus cash held by banks, either directly between banks or ore usually through the services of specialist money brokers
Explain the functions that money performs in society and the economy?
a medium of exchange, a unit of account, a store of value
Outline the differences between a building society, and a credit union?
Explain what is meant by the London interbank offered rate (Libor) and the sterling overnight index average (Sonia)
Sonia (sterling overnight index average)- 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.
Libor- fixed daily and varied in maturity from overnight through to one year. Average calculated using information submitted by banks.
The difference between retail and wholesale banking?
Retail banks provide payment services and saving loans to personal customers or smaller businesses
Wholesale banks provide funding for other financial institutions or very large corporate clients
