The Financial Sector

T4 CC5 (keywords)

Asymmetric information

where buyers and sellers have different amounts of information, with one group having more information than the other.

Capital markets

financial markets which provide long-term borrowing and lending, usually defined as over one year.

Central bank

the financial institution in a country or group of countries, typically responsible for the printing and issuing of notes and coins, setting short-term interest rates, controlling monetary policy, managing the country’s gold and foreign currency reserves and issuing government debt.

Commercial banks

banks that provide services to businesses.

Derivatives

financial instruments based on the values of other financial instruments.c

Equity

in a company, is the value of the assets owned by the shareholders.

Financial market

any convenient set of arrangements where buyers and sellers can buy or trade a range of services or assets that are fundamentally monetary in nature.

Investment banks

banks that engage in a variety of activities in different financial markets, such as the foreign exchange market, the money markets, the capital markets and the derivatives markets.

Lender of last resort

usually a function of a central bank, it occurs when financial institutions can obtain money from the central bank to balance their accounts when they are unable to do this from the financial markets in which they operate.

Market bubble

a market bubble occurs when the price of a particular asset is driven to an unsustainably high level and then collapses.

Market rigging

Where a group of individuals or institutions collude to fix prices or exchange information that will lead to gains for themselves at the expense of other participants in the market.

Money market

financial markets that provide short-term borrowing and lending, usually defined as up to one year.

Moral hazard

when an economic agent makes a decision in their own best interest knowing that there are potential adverse risks, and that if problems result, the cost will be partly borne by other economic agents.

Production externalities

when the social costs of production are different from the private costs of production. If social costs exceed private costs, then there are negative production externalities.

Regulatory capture

An example of government failure, it occurs when firms in an industry are able to influence to their advantage a regulatory body which is supposed to be regulating the behaviour of those firms.

Retail banks

banks that provide services to individuals.

Saving

is what is not spent out of disposable income. This could take the form of increasing the stock of cash, money in bank or company shares.

Shadow banking

parts of the financial market that are either much less regulated than the norm or are completely unregulated.

Systemic risk

in the context of financial markets, the danger that the failure of parts of the financial system will lead to the collapse of the whole of the financial system.