2.8 Financial Sector Flashcards
(18 cards)
money
Anything that is generally accepted as a means of payment for goods and services.
debit cards vs credit cards
alternative to money
barter - needs “double coincidence of wants” - difficult
medium of exchange
Anything that sets the standard of value of goods and services acceptable to all parties involved in a transaction.
financial sector
The financial sector consists of financial organisations and their products and involves the flow of capital (see Chapter 1.1).
The financial sector helps markets to function and consumers/ households, firms and governments to carry out economic activities, all within a regulatory framework. This normally involves the lending and borrowing of money, both in the short and long run. This is done through financial intermediaries, e.g. banks. These link consumers/households, firms and governments in allowing money to be moved from those who do not need to use it immediately (savers) to those who want to use it now (borrowers).
For example savers deposit money in a bank and receive interest; borrowers receive money from a bank and pay interest. This allows for a good use of all funds, since when the offer will meet the demand, it adds to the efficient organisation of the economy.
A healthy financial sector is important to maintain a stable economy
central bank
commercial bank
base rate vs interest
investment banks
Although some commercial banks also have a division that operates like an investment bank, for example Barclays, there are a number of specialist investment banks. They help firms with more specialist needs, such as aiding mergers and takeovers and foreign trade, underwriting the issuing of shares (guaranteeing that they will all be sold), and providing specialist knowledge of financial conditions in new markets.
building societies
A mutual financial institution that is owned by its members. Its primary objectives are to receive deposits from its members and to lend money for members to purchase property.
Building societies are not companies, but mutual institutions, which means that their members, the people who save money with them, own them. These members have rights to attend and speak at meetings and vote on issues, and each member has one vote, regardless of how much money they have invested or borrowed. Building societies provide savings products and mortgages for their members. Building societies differ from banks, as banks are normally public limited companies, listed on the stock market, and owned by shareholders who have voting power in line with the number of shares they own. Building societies are also limited as to the amount of money they can borrow from the money market.
interest rates vs level of saving
interest rates vs level of borrowing
EXAM Q: how would higher interest rate affect these goys
insurance companies
Insurance companies are fi nancial institutions that guarantee compensation for specifi ed loss, damage, illness or death in return for an agreed payment (called premiums by the insurance companies). Their functions are usually divided into two groups: life insurance and general insurance. Life insurance aims to pay out money to the surviving family if the person insured dies. Policies can either be ‘whole-of-life’, which will pay out whenever the person dies so long as the premiums have been paid, or ‘term life insurance’, which will cover the person for a specific period only. These policies are intended to help replace the loss of income due to the death of the person insured. In addition, life insurance also covers areas such as long-term savings, and pensions and annuities that are aimed at providing income during retirement. General insurance covers all non-life policies and includes: property, contents, motor, health, pets, etc. It helps individuals and firms deal with unexpected events such as a burglary (contents) or a car crash (motor). It also spreads the risk of loss across all insurance holders.
3 roles of financial sector
credit provision, liquidity provision, risk management
financial sector: c.p.
financial sector: l.p.
Importance:
• Liquidity is essential for economic stability.
• It builds confidence: people and businesses are much more willing to invest or spend if they know they can get their money out quickly if needed.
• It prevents panic: If people trust they can access funds, they won’t rush to pull out cash during minor market wobbles.
Risks/Limitations:
• If the financial sector over-promises liquidity (like saying “you can always get your money instantly!”) but can’t deliver during a crisis, it causes bank runs (everyone tries to withdraw at once, and the bank collapses).
• Some assets are inherently illiquid — like real estate — so liquidity isn’t always perfect.
financial sector: r.m.
• Encourages investment and innovation:
People are much more willing to start businesses, buy homes, or invest if they know there’s a backup plan if something goes wrong.
• Spreads risk:
Insurance companies pool risk across thousands or millions of customers, so one person’s disaster doesn’t bankrupt the whole system.
• Stabilizes the economy:
When risks are managed well, the economy can handle shocks (like natural disasters or sudden drops in demand) more smoothly.
