4.4 The Financial Sector Flashcards
(27 cards)
The Money Market
Short term finance for business and households
Money is borrowed and lent
Includes short term gov borrowing
Capital market
Shares and bonds are issued to raise finance
Includes issuing gov bonds
Foreign exchange market
Where currencies are exchanged
Gains or losses made through exchange rates
Key roles of financial markets
Facilitate saving by businesses and households
Lend to borrowers and individuals
Allocate funds to productive users
Facilitate exchange of goods and services
Provide forward markets in currencies and commodities
Characteristics of Money
Durability
Portable
Divisible
Hard to Counterfeit
Generally accepted by population
Valuable and holds value overtime
Functions of Money
Medium of Exchange
Store of value
Unit of account- can be expressed in and understandable way that allows comparison of items
Standard of deferred payment- expressing the value of a debt
Narrow Money
Measure of value coins and notes in circulation and other money equivalents that are easily convertible into cash such as short-term deposits in the banking system
Broad Money
Measure of total money held by households and companies in the economy
Made up of commercial bank deposits- which are IOUs from commercial banks to households and companies
Long term loans
Share capital
Retained profit
Venture capital
Mortgages
Long-term bank loans
Medium-term loans
Bank loans
Leasing
Hire purchase
Gov grants
Short-term Loans
Bank overdraft
Trade creditors
Short-term bank loans
Factoring
Unsecured loans
Money supported by borrowers credit worthiness, rather than collateral
Secured loans
Money you borrow that is secured against an asset you own
Asymmetric information
Market failure exists when one party has more information than another and then uses that to exploit the other party
Moral hazard
Exists where an individual or organisation takes more risks because they know that they are covered by insurance, or expect that the government will protect them from any damage incurred as a result of those risks
Speculative bubble
A sharp and steep rise in asset prices such as shares, bonds, housing, commodities or crypto-currencies
The bubble is usually fuelled by high levels of speculative demand which takes prices well above fundamental values
What causes speculative bubbles
Behavioural Factors- herd behaviour
Exaggerated expectations of future price rises
Period of low monetary policy
Market Rigging
This market failure is collusion or abuse of the power resulting in a concentrated market
Happens when some companies in a market act together to stop a market working as it should in order to gain a competitive advantage.
Barriers of entry into commercial banking
Regulatory barriers- need to be given a banking licence by the central bank
Costs of entry
Strategic advantages of larger banks
Main function of central bank
Monetary policy function- interest rate, QE, exchange rate
Financial stability
Policy operation functions- lender to bank, manage liquidity of banks
Debt management - handle gov bonds
Monetary Policy
Changes in interest rates, supply of money and credit and exchange rates to influence the economy
Expansionary Monetary Policy
Reducing nominal and real interest rates
Steps to expand the supply of credit from the banking system via QE
Depreciation of the external value of the exchange rate
Deflationary Monetary Policy
Higher Interest rates on both loans and savings
Tightening of credit supply
Appreciation of the external value of the exchange rate
What is QE?
Increasing the supply of money available for banks to lend
Bank creates new money to buy gov bonds which stimulates their spending
