Business Finance Flashcards
(36 cards)
What are the purposes of financial intermediaries?
- Bring together investors and lenders with borrowers and users of funds
- They mirror the real world by providing a relatively risk-free lending environment and easily accessible funds for borrowing
What are the roles of the financial intermediary
- Making a market by putting lenders and borrowers in touch
- Risk diversification
- Aggregation
- Maturity transformation
- Advice
What are the four contractual arrangements between the bank and the customer?
- Bailor/bailee
- Receivable/payable
- Principal/agent
- Mortgagor/mortgagee
What is the relationship between the bailor and bailee?
Safeguard property
What is the relationship between the receivable and payable?
Contractually owe each other dependant on whether overdrawn or in credit
What is the relationship between principal and agent?
The bank acts as an agent for the customer
What is the relationship between the mortgagor and mortgagee?
Bank has the right to assets of the customer if customer defaults on the loan
Define fiduciary relationship
That the bank is expected to act in good faith in its relationship with the customer
What are the three main components of the UK banking system?
- Primary banks
- Secondary banks
- Bank of England
Define primary banks
Banks that deal with day-to-day money transmission
Define secondary banks
Banks that offer tailored advice to large commercial clients usually in raising considerable sums
Define Bank of England
Acts as a banker to the banks by lending money to the banking sector through its financial market operations
What are examples of cash transmission mechanisms?
- General clearing
- Electric Fund Transfers (EFT)
- Bank Automated Clearing System (BACS)
- Clearing House Automated Payments System (CHAPS)
- Society for Worldwide Interbank Financial Telecommunication (SWIFT)
What are the features of general clearing cash transmission?
- Mainly cheques
- costly
- Takes up to four days
What are the features of EFT?
- Electronic Fund Transfers
- A computer-based system used to transfer money electronically
- The most common form is Electronic Point of Sale (EPOS) in shops
What are the features of BACS?
- Bank Automated Clearing System
- Deals with salaries, standing orders, and direct debits
- The account of the payer is debited the same day as the account of the recipient is credited
What are the features of CHAPS?
- Clearing House Automated Payments System
- Covers items larger than £10,000
- Provides same-day clearing
What are the features of SWIFT?
- Society for Worldwide Interbank Financial Telecommunication
- For international transfers
- Covers items larger than £10,000
- Provides same-day clearing
What are the two main roles of the Bank of England?
- Carrying out monetary policy
2. Ensuring financial stability
How does the Bank of England carry out monetary policy?
- The Bank of England lends money to the banking sector at the base rate, which is set by the Monetary Policy Committee
- Banks then lend and borrow money among themselves at rates such as the London Intern Bank Offered Rate (LIBOR), which then, in turn, affects the rates offered to customers when combined with determining factors
How does the Bank of England ensure financial stability?
- The Bank of England’s Financial Policy Committee (FPC) is responsible for taking action to remove systemic risks in the UK financial system as a while
- The Prudential Regulation Authority is also part of the Bank of England and is responsible for prudential regulation and supervision of banks, building societies, credit unions, insurers, and major investment firms
What is the FCA responsible for?
- Promoting effective competition
2. Ensuring that relevant markets function well
What are the two main types of financial markets?
- Money markets
2. Capital market
Define money market
Covers a vast array of markets buying and selling different forms of money or marketable securities
