What is a medium of exchange?
Where money can be exchanged for good and services
What is a unit of account?
Where the value of goods and services can be measured and compared
What is a store of value
Money received that can be stored until required
What is inflation?
An increase in prices of goods and services
What is intermediation?
The middleman between a surplus party and a deficit party
What is a financial intermediary?
An entity that acts as a middle person between 2 parties in a financial transaction. e.g. banks & building societies
Individual/firm who have enough funds to release and lend in order to increase value in future
Individual/firm who don’t have sufficient funds to meet spending needs
Where lender and borrower interact directly without an intermediary e.g. crowdfunding
What are the 4 elements of intermediation? Why they are needed
Geographic location - locating the right lender for the borrower
Aggregation - making sure the amount meets the needs of borrower
Maturity transformation - making sure the length of term meets the needs of borrower
Risk transformation - intermediaries absorb the loss of lender of borrower defaults on lend
Avoiding risk by pooling to minimise financial loss
Product sales intermediaries?
Brokers/advisors who find customers products and services from banks and insurance companies
Banks that cater to customers and small businesses
Banks that provide funding for financial institutions and large corporate clients
Insurance that provides payment as a lump sum or as an income in the event of a death to a policyholder
Protect policy holders e.g. car, travel, household
Bank of England
Is a central bank that maintains the economy and regulates the supply of money.
Main functions of the Bank of England
- Issuer of bank notes
- Banker to government
- Banker to the banks
- Advisor to the government
- Foreign exchange market
- Lender of last resort
- Maintain economic stability
What is liquidity?
Assets that can quickly be made available to meet liabilities
Loans to the government at different rates and periods
Central Bank Digital Currency - digital version of the £
A limited company owned by the shareholders
Company owned by its members e.g. savers and borrowers of a building society and the policy holders of a life assurance
Converting to a bank and limited company e.g. building society into a bank
What is a credit union?
A mutual organisation run for the benefit of its members
Offer savings and loans to members and should have at least £50k or 5% of total assets in reserve to pay interest to members
Large market that recycles surplus cash held by banks directly to other banks or through specialist money brokers
What is LIBOR?
(London Interbank Offered Rate)
The rate of interest charged in the interbank market usually plus a specific margin.
What is SONIA
(Sterling Overnight Index Average)
As a result of LIBOR scandal (2012) Bank of England have shifted towards SONIA (2016)
It is based on actual transactions and the average of interest rates that banks pay to borrow sterling overnight from other financial institutions