Risk and the Financial sector Flashcards
What is risk?
When changes are expected
what is uncertainty?
When changes are not expected
give 3 examples of economic shocks
Financial crisis, Oil Price shock 1973, coronavirus
What is a forward market?
can be in commodities/ currencies: buying at a fixed price for a future order and so you pay a higher current market price but could be benefitting for any future unpredictable events that could see a higher price.
What are pension funds/ insurance companies sometimes called?
Institutional shareholders
what are the roles of the financial sector?
Moblise savings, lend to businesses (for working capital) and individuals, to exchange goods/ services, to assess creditor risk, provide a forward market and a market for equities
When was the Monetary policy committee created
1997 by Gordon Brown
what do the MPC set?
The interest rate and inflationary target
what is a bond yield?
A return on investment that always stays the same (no interest)
What do banks now need to have under new regulation?
more equity, larger cash reserves, less reliance on short term loans and limits on bonuses
what does the Financial Policy Committee (FPC) deal with and what can they do?
The whole banking system: affordability tests, bank capital changes, mortgage limits (LTV or LTI)
what do the Prudential Regulation Authority (PRA) deal with?
Oversee individual banks
what do the Financial Conduct Authority (FCA) deal with?
Consumer’s best interests
what is a subprime mortgage?
lots of bad debt labelled with good debt as ‘Good debt’ so that is collectively sold until little money is payed bank and so liquidity worsens
what market failure was there in the financial sector?
Asymmetric information, market bubbles/ speculation, market rigging, moral hazard and externalities
