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OCR economics > Financial Markets/crash > Flashcards

Financial Markets/crash Flashcards

1
Q

Main purpose of banks (and other financial institutions)

A

make money liable to those who want to spend more than their income using savings if those who currently don’t want to spend

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2
Q

what do banks do to make money available for people to spend:

A
  1. help people and firms save - through bank accounts, pension funds, bonds and other financial products
  2. provide loans to businesses and individuals
  3. allow equities and bonds to be issued and traded on capital markets
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3
Q

Everyday forms of borrowing for individuals

A
  • personal loans
  • mortgages
  • credits cards
  • pay day loans
  • overdrafts
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4
Q

Personal loans (Everyday forms of borrowing for individuals)

A

loans to individuals to be paid back over a small number of years. These can be secured for unsecured

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5
Q

secured loans

A

loans backed by collateral that the bank can claim if the borrowers do not repay them

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6
Q

Unsecured loans

A

loans backed only by the borrowers’ good reputation and previous credit rating higher rate of interest than secured loans because ether riskier

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7
Q

Mortgages (Everyday forms of borrowing for individuals)

A

loans to buy property. The bank owns the property until the loan is repaid.

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8
Q

Pay day loans (Everyday forms of borrowing for individuals)

A

short term, small, unsecured loans, usually high rate of interest

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9
Q

Equity finance

A

Equity finance is generally the issue of new shares in exchange for a cash investment. Your business receives the money it needs and the investor will own a share in your company. This means the investor will benefit from the success of your business.

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10
Q

debit finance

A

borrowing money that has to be paid back with interest. This can involve borrowing from financial institutions or using corporate bonds.

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11
Q

Other functions of financial institutions and markets

A
  • make trade easier by allowing buyers to make payees easily and quickly
  • provide insurance cover to firms and individuals
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12
Q

How does the financial sector help economic growth

A
  • economic growth driven by spending of individual and firms which relies on credit
  • businesses are unlikely to grow without credit - if don’t grow fewer jobs and less exports
  • firms in developing countries financial sector is weak, underdeveloped
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13
Q

Financial institutions are regulated to:

A
  • reduce impact of financial market failure
  • protect consumers by policing individuals and firms to ensure act fairly and legally
  • ensure integrity and stability of financial institution and services
  • maintain confidence and avoid sudden panics
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14
Q

Banks are ______ sector organisations

A

Private - aim to make profit for shareholders

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15
Q

Problems in a bank or banking industry

A

can potentially destabilise country’s whole economy

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16
Q

What two factors of a bank make banking a regulated industry

A
  1. huge economic importance of banks
  2. incentives to take risks for banks
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17
Q

Regulated banking industry

A

there are rules to control the behaviour of banks and penalties for any bank that break the rules

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18
Q

3 types of financial markets

A
  1. Money markets
  2. capital markets
  3. Currency Market
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19
Q

Money markets

A
  • provide short term finance to banks, companies, give, individuals
  • short term debt has maturity of up to a year as little as 24hrs
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20
Q

maturity

A

repayment period

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21
Q

capital market

A

provide governments and firms with medium - long term finance.
- give and firms raise finance by issuing bonds
- also raise finance by issuing shares or borrowing from banks

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22
Q

A capital market has a ______ market and a ________ market

A
  1. primary
  2. secondary
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23
Q

Primary market (capital markets)

A

For new share and bond issues

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24
Q

Secondary market (capital markets)

A

where existing securities are traded. This increases their liquidity

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25
Q

Foreign Exchange market

A

where different currencies are bought and sold. Does to allow international trade and investment or as speculation.

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26
Q

A foreign exchange market is split into:

A
  1. Spot market
  2. Forward market
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27
Q

Spot market (Currency Market )

A

for transactions that happen now

28
Q

Bonds

A

A certificate issued by a government or private company which promises to pay back with interest the money borrowed from the buyer of the certificate: The city issued bonds to raise money for putting in new sewers.

29
Q

investors buy new bonds

A

at their face value (nominal) and become bondholders

30
Q

bondholders

A

those who own bonds and receive the interest payments

31
Q

Commercial banks main roles

A
  • to accept savings
  • to lend to individual banks and firms
  • ti be financial intermediaries
  • t allow payments form one person to another
32
Q

commercial banking is split into 2 area

A
  • retail banking
  • wholesale banking
33
Q

Retail banking (commercial banks)

A

providing services for individuals and smaller firms

34
Q

Wholesale banking (commercial banks)

A
  • dealing with larger firms banking needs
35
Q

Investment banks roles

A
  • Arrange share and bond issues
  • offer advice on raising finance and on mergers/ acquisitions
  • buy and sell securities on behalf of clients
  • act as market makers to make trading in securities easier
36
Q

Large banks can be both commercial and investment

A
  • creates a systematic risk because banks may wish to use deposits form commercial banking side of business to fund investment banking activity
37
Q

Other financial institutions operate in global financial markets

A
  • pension funds
  • insurance firms
  • hedge funds
  • Private equity firms
38
Q

the 2008 credit crunch

A
  • financial crisis caused by speculative bubble in US housing market
  • growth in sub prime mortgage market caused house prices to rise as demand increase
    rising house prices lead to more and more people investing in property, pushing prices up
  • bubble burst when people who taken portages couldn’t afford begin to default and house prices fall
  • meant banks levels capital fell so banks reduced lending - credit crunch
  • triggered loss confidence in wider economy, fall AD and recession deep
39
Q

Two key roles of central banks

A
  • act as banker to government
  • help support banks by acting as a lender of last resort
40
Q

central banks as lender of last resort advantages

A
  • prevent panic and runs on banks
  • helps reduce impact of financial instability
41
Q

central banks as lender of last resort disadvantages

A
  • can lead to moral hazard and encourage banks to take excessive risks
  • can lead to banks not holding sufficient liquidity
  • can seem unfair that central bank will try to save financial institutions but not non financial firms
42
Q

Central banks OTHER functions

A
  • banker to government
  • implement monetary policy
  • help regulate financial sector
43
Q

act as banker to government (Central banks OTHER functions)

A
  • central banks can help government manage national debt - eg issuing government bonds
  • can also offer advice to government one economic matters and help in negation with the international financial organisation
44
Q

They can implement monetary policy (Central banks OTHER functions)

A
  • central bank can manage moneys supply by affecting availability credit - controlling interest rates
  • affect amount loans banks make by setting capital requirement - reserves of capital a bank must keep
  • can influence exchange rate through buying and selling currencies and changing interest rates
  • usually responsible for controlling issuing of banknotes and ensure confidence in current in maintained
45
Q

Can help regulate financial sector (Central banks OTHER functions)

A
  • central bank can impose rules to prevent financial market failure and instability
46
Q

Financial markets have been less regulated in past

A
  • from mid 1980 till 2008 financial crisis - regulation in many financial markets across world wasn’t veery strict
  • less regulation helped be more profitable
  • lack of regualtion in financial sector also lead to market failure and the problems - contributed to instability
47
Q

lack of regulation in financial sector lead to market failure and other problems contributed to instability:

A
  • excessive risk taking by financial institution
  • commercial banks acting as investment banks - massive losses during investment activity
  • fraud and other illegal activity
  • growth of market bubbles
48
Q

regulation of financial market relies on

A
  • competition - making financial markets competitive to benefit consumers
  • structure of firms and risk management - ensure firms stable
  • strengthening rules and principles that financial institutions must abide by
  • systemic risks - identifying SR in financial markets and find ways to manage or remove them`
49
Q

two types of financial regulation

A
  • micro prudential regulation
  • macro prudential regulation
50
Q

international agreements to regulate financial markets

A

help to increase financial stability fo banks by making sure have buffer in case of fall in asset values or bank run

51
Q

drawbacks of regulation of financial markets

A
  • regulators can be vulnerable to regulatory capture
  • if regulation too strict can lead to restrictions on credit which can harm economic growth
  • can lead to growth of shadow banking system - isn’t regulated
52
Q

Who are responsible for regulating financial markets in the UK?

A
  1. Bank of England
  2. Financial Conduct Authority
53
Q

Which two bodies under Bank of England control

A
  1. Financial Policy Community
  2. Prudential Regulatory Authority
54
Q

Financial Policy Committee (FPC)

A
  • identify, monitor and protect against systemic risks in financial system
  • issuing instruction to PRA and FCA to tackle problems that threaten financial system
  • advise government on managing financial markets
55
Q

micro prudential regulation

A
  • to ensure individual firms act fairly towards customers and don’t take excessive risks or break law
56
Q

macro prudential regulation

A
  • to tackle systemic risks in financial markets and avoid large scale financial crises that can hurt country economy
57
Q

capital and liquidity ratios

A
  • gives better understanding of banks overall stability
58
Q

moral hazard

A
  • occurs when someone is more willing to take risks because know someone will pay consequences if anything goes wrong
  • eg may provide risky loans if know that it would be bailed out by taxpayers if things go wrong
59
Q

adverse selection

A
  • most likely buyers of product are those seller would prefer not to sell to
  • adverse selections lead to firm unknowingly taking greater risk than intended
60
Q

asymmetric information

A

occurs when one party to a contract has less information than the other party

61
Q

externalities in financial markets

A
  • negative externalities - some come about because of importance of banks and financial sector to wider economy
  • mismanagement risk
  • large drops GDP
  • falling salary levels
  • significant rise unemployment
62
Q

Big banks too big to fail

A
  • need for bailout of banks because some considered too big to fail - systemic risk created
  • if one of two large banks collapse - lead to [anis and run on other banks causing financial sector collapse
  • UK Govt had to rescue banks
63
Q

when do financial crises usually happen

A

after a period od prosperity eg. because of low interest rates, easy credit, excessive speculation nd overconfidence - leads to recession

64
Q

Various kinds of financial crises

A

eg sudden sharp fall prices of assets or government defaulting on loans

65
Q

Difference between Hedge funds and mutual Funds

A

Hedge funds partake in much riskier deals which involve lots more money. This is why it is so heavily regulated

66
Q

Financial Markets

A

Role of the financial markets is for buyers + sellers can trade financial assets

OCR economics (25 decks)

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