Topic 1 (The Financial Services Industry) Flashcards
What are the 2 important functions of Money?
- it’s a unit of account
- it’s a medium of exchange
What is meant by ‘a unit of account’?
It is a common denominator against where values of goods/services can be measured
What 4 properties must money have when using the term ‘medium of exchange’?
- Sufficient in quantity
- Acceptable to all parties in all transactions
- Portable
- Divisible into small units
Why are notes and coins referred to as legal tender?
They are backed by the Government and the Bank of England
What is the main function of the Financial Services Industry?
To bring together people who wish to lend money for profit with people who pay for the privilege of borrowing money
What do FS organisations offer to make profit?
- Convenience
- Means of achieving difficult objectives
- Protection from risks
Name the 2 identifiable sectors within the economy
- The Surplus Sector ‘Depositors’
2. The Deficit Sector ‘Borrowers’
What is intermediary?
An institution that borrows money from the Surplus Sector at a lower interest rate and lends it to the Deficit Sector at a higher rate of interest
What is the definition of Profit Margin?
The difference between 2 interest rates
What is Disintermediation?
Where borrowers and lenders interact directly
Name and explain the 4 elements of intermediation
- Geographic location (would clients have heard of the society, lenders and borrowers can’t always find one another)
- Risk Transformation (may be wary of lending large funds in case the borrower can’t repay, in this case they have loads of borrowers to cope with the loss)
- Aggregation (aggregate small savers deposits to lend higher amounts, the lender might not have enough to fulfil a borrowers requirements)
- Maturity Transformation (offer a range of products to different depositors, the borrower might need the funds for longer than the lender is willing to lend)
What is Risk Management?
It’s offered through insurance and defined as ‘a means of shifting the burden of risk by pooling to minimise financial loss’
What is meant by insurance?
People who get together to create a pool of money to cover those who suffer financial loss
What is the main function of ‘product sales’ intermediaries?
To bring together product providers and the customers who wish to buy there products
In the olden days there were defined boundaries between financial organisations, what is it like today?
The boundaries are blurred by Mergers and Takeovers who have large institutions in financial services markets and in recent years have been used for growth and diversification
What is the main function and mission or the Bank of England?
It acts as a banker to the government, supervises the economy, regulates money supply and maintain financial stability
What are the 6 roles of the Bank of England?
Issuer of bank notes Banker to the government Banker to the banks Advisor to the government Foreign exchange market Lender of last resort
What 2 functions did the Bank used to do?
- Gilt-edged securities
2. Regulator role
What are Gilt-edged securities?
Loans to the government
What is the role of the Bank of England’s Monetary Policy committee?
To set interest rates
What is a Proprietary Organisation?
A limited company owned by shareholders and have a right to share in a company’s profits
What is a Mutual Organisation?
Owned by members who determine how the organisation is managed (in the case of a building society these are savers/borrowers and with life assurance they are policyholders)
What is Demutualisation?
Where a building society is able to convert to a bank with the members approval
What is a ‘credit union’ and what do they pay interest on?
It’s an example of a mutual organisation and it pays interest on savings
What is retail banking?
Where banks/building societies provide loans to small businesses through networks, call centres or the internet
What is Wholesale Banking?
Raises money through wholesale money markets (interbank market)
What is LIBOR rate of interest?
The London interbank offered rate that is fixed daily
Building societies can raise funds up to ….% of the …………….
50%
Liabilities
