B1 - Features of financial institutions

What is a financial institution? 

• Organisations, such as banks, that provide financial services 

• e.g. savings and borrowing to individuals and businesses

What is the Bank of England?

• They are the UK’s central bank, and they have the responsibility of maintaining a healthy level of financial stability in the UK

• The responsibilities that they have is legal tender, setting interest rates and controlling the national debt

• Ensures money flows effectively in the economy

What are the two core functions of the Bank of England?

Maintain financial stability in the monetary system : banker to the banks

• It acts as lender of last resort; if commercial banks suffer a shortfall of cash or become illiquid in the short term, they can always borrow from the BoE

• This is vital in maintaining liquidity and confidence in the financial system and ensuring depositors are protected and systemic risk is minimised

Help the government achieve targets in the state of the economy

• To achieve price stability i.e. low inflation, and meet the Government target of 2%

• Decisions to achieve this objective are taken by the Monetary Policy Committee (MPC) via setting interest rates.

• They help create the right conditions for economic growth and low unemployment

What are advantages and disadvantages of the Bank of England?

Advantages

• Stability - The BoE plays a vital role in maintaining economic stability and financial oversight

• Lender of last resort - also lends to banks, providing liquidity during financial crises

• Offers a wide range of services

• Offer advice

• Reliable bank as they are owned by the government

Disadvantages

• Limited public access - not a bank for the general public, limits its services to individuals

• Can raise interest rates, making borrowing more expensive which can negatively impact customers & businesses

• Criticism of responses to crises - some argue that the bank could have done more to prevent economic downturns such as the 2008 recession

What are banks? 

• A bank is a financial institution that offers both individuals and businesses a wide range of services to help them manage their money

Services such as:

• Cheques

• BACS

• Mortgages

• Overdrafts

• Loans

• Standing orders

• Cash withdrawal

• Secure storage

• Advice

• Direct debits
   

What are the advantages and disadvantages of banks?

Advantages

• Convenient locations - high street and online

• Wide range of services

• Accounts to meet different needs e.g. student, young person

• Confidence (generally feel money is secure)

• Advice for individuals & businesses e.g. small business advisers

• Interest paid on positive balances
  

Disadvantages

• Conflict of interest between customers and shareholders

• Interest charged on loans and overdrafts etc can be high

• High charges if default on repayments or exceed overdrafts including administration charges

• Savings only covered up to £85,000, beyond this if the bank fails savings can be lost

What is a building society?

• Financial institutions that provide financial services to their members.

• They are a type of mutual institution where the business is owned by its customers.

• This entitles customers to a share of profits, normally in the form of a dividend.

• In particular, building societies offer mortgages.

• They receive money from members, who are paid interest, and this is lent out to other members, who pay interest

• They are a competitor to the high street banks

• Offer a wide range of services similar to a bank

• Account holders are members and such part owners of the building society - therefore receive a voting right

• No shareholders

• Cost can be kept down due to less pressure to make a profit

What are the advantages and disadvantages of a building society? 

Advantages 

• Offer a wide range of services

• No shareholders, therefore should be no conflict between profit and service

• Confidence

• Advice for individuals and businesses e.g. small business advisers

• Interest paid on positive balances 

• Lower costs can mean better saving rates and lower borrowing rates

Disadvantages 

• May have fewer branches and ATMs compared to large banks

• Interest charged on loans, overdrafts etc can be high

• High charges if default on repayments or exceed overdrafts, including administration charges

• Savings only covered up to £85,000, beyond this if the building society fails savings can be lost

• Less ability to raise large amounts of capital than banks

• May offer fewer specialist products, services than large banks

What are credit unions?

• Provide loans to members

• They are funded by members who save

• They tend to be small scale organisations, locally based and normally non-profit making

• Teachers have credit unions

What are the advantages and disadvantages of credit unions?

Advantages

• Anyone can join

• Helps people who are unable to get a loan from the bank

• Better terms than payday loans

Disadvantages

• Loans are usually small

• Saving rates are often less than banks

• Only a few have an online presence

What is the National savings and investments (NS&I)?

• Owned by the government

• State owned savings banks

• Attracts individual savers helping to reduce the governments need to borrow

• Does this by selling premium bonds

What are the Advantages and disadvantages of National savings and investments?

Advantages

• 100% safe guarantee from the treasury

• Some products have tax free elements - ISA

• May win big with premium bonds

Disadvantages

• Rates often low

• Bank savings are now tax free

• May win nothing with premium bonds

What are insurance companies?

• Protect your precious things for a small monthly premium

• e.g. houses, cars, loved ones

What are the advantages and disadvantages of insurance companies?

Advantages

• A small monthly premium may result in a big pay-out

• Peace of mind

Disadvantages

• Could pay for something that you never use

• Policy excesses may reduce the benefit

What are pension companies?

• Provide long term saving plans to fund retirement

• Includes schemes for individuals and schemes ran by employers

What are the advantages and disadvantages of pension companies?

Advantages

• Pension savings are tax free

• Employers often contribute to their in-house scheme

• Peace of mind

Disadvantages

• May die before retirement

• Pension benefits are subject to tax

What are pawnbrokers?

• Provide short term loans subject to interest secured by an asset

What are the advantages and disadvantages of pawnbrokers?

Advantages

• Easier to be accepted than a bank loan

• Terms flexible

• If you default it doesn’t affect your credit rating

• Quick easy money

Disadvantages

• If loan not repaid asset will be sold

• Rates higher than from banks

What are payday loans companies?

• Provide short term loans secured by a post-dated cheque

• If you don’t have money before your payday you can get the loan quickly, but will have to pay it back on your payday - you will always pay back way more

What are the advantages and disadvantages of payday loans?

Advantages

• Available quickly, often for unexpected costs

• Can be for just a few days

Disadvantages

• Very high interest rates

• Usually for less than £1,000

• The full cost of the loan isn’t always obvious to the borrower