Ch 5 - Environmental Influences Flashcards
Central Banks Interests
BIT PIMP
Monetary, interest rate and inflation policy
Banking regulation
Implementation of government borrowing
Performance and integrity of financial markets
Intervention in currency markets
Printing and minting of notes and coins
Taxation
Central banks are now primarily concerned with monetary policy, and control:
Adjustment of Banking Sector Liquidity
Quantitative Easing
Forward Guidance
Adjustment of Banking Sector Liquidity:
Money market intervention is achieved through buying and selling bills to influence the level of liquidity within the banking sector and short-term interest rates (open market operations)
Central bank may also use non-market (direct) controls such as:
Setting minimum liquid reserve ratios
Setting interest rate ceilings for bank deposits
Issuing directives regarding the types of lending to be undertaken
Quantitative Easing:
It usually involves both a direct increase in the money supply (electronically printing) and a knock-on effect from the fractional reserve system, increasing the money supply further.
Although it can involve just making changes to the fractional reserve system.
Forward Guidance:
It enables the central bank to indicate, in the absence of any unforeseen events, how the central bank believes monetary policy will change in the future
Allows the CB to influence the long-term interest rates, inflation and the currency
Main Investor Classes
Households
Financial intermediaries
Businesses
Foreign investors
Factors that will influence the investment needs of the members of these classes
Time horizon
Tax position
Appetite for risk and capacity for risk
Liabilities (nature, term (time horizons), currency and certainty)
Household considerations when making investment decisions:
LACED SLUT
Liabilities
Attitude to risk
Characteristics of available assets (risk return)
Expertise (their level of investment expertise)
Diversification
Stability of asset values
Liquidity
Uncertainty over future income and outgo (cashflows)
Tax
Financial Intermediaries
Financial intermediaries sell their own liabilities to raise funds that are used to purchase the liabilities of other corporations
Channels resources between lenders (investors) and borrowers
Advantages of Financial Intermediaries over direct investment:
Pooling of resources
Diversification
Expertise
Economies of scale (thus lower costs)
Disadvantages of Financial Intermediaries:
Additional layer of costs to the investor
Products offered might not meet the exact requirements of the investor
Products may be inflexible
Lose a degree of control over investment choice
Businesses in issuing securities to the public, have several objectives:
Best possible price
Market the issues at the lowest possible cost
To issue securities that best meet their requirements with regards to the term, pattern and flexibility of funding
Businesses often seek the aid of an investment bank to help them achieve their fund raising objectives. The investment bank does the following:
Advise the issuing firms on the price they can charge
Handle the marketing of the security issue to the public
Checking and certifying the quality of the information offered
Innovate security design and packaging to stimulate demand
Foreign Investors don’t like:
Political risks
Currency risks
Different rules and regulations for them (compared to locals)
Main Forms of Government Policy (5):
Monetary Policy Fiscal Policy National Debt Management Policy Exchange Rate Policy Prices and Income Policy
