revision

🔵 (a) ROLE OF BANKS IN THE ECONOMY

A) Simple Notes (like you know nothing)

Banks have four main roles:

1. Accept deposits

  • People put money into banks.

  • Banks keep it safe.

2. Lend money (credit creation)

  • Banks lend money to households and firms.

  • This increases spending and investment.

3. Payment system

  • Banks allow card payments, transfers, direct debits.

  • Without banks, buying and selling would be slow.

4. Financial intermediaries

  • Banks connect savers with borrowers.

  • Savers earn interest; borrowers pay interest.

5. Support economic growth

  • Loans allow firms to invest in machinery, buildings, workers.

  • This increases GDP.

B) AO2 Example

  • UK banks during COVID: banks offered Bounce Back Loans to small businesses → kept firms alive → prevented mass closures.

C) Chain of Analysis (linked to AO2)

  • Banks provided Bounce Back Loans.

  • → Firms received money to pay wages and bills.

  • → Firms stayed open instead of closing.

  • → Workers kept their jobs.

  • → Consumer incomes stayed stable.

  • → Spending stayed stable.

  • → GDP fell less sharply.

D) Evaluation (1‑sentence “why?”)

  1. Banks may lend too much
    → Excessive lending increases risk of financial crises.

  2. Banks may lend too little
    → Firms cannot invest, slowing growth.

  3. Banks may prioritise profit over safety
    → Risky loans can cause instability.

  4. Banks may fail
    → Depositors lose confidence and withdraw money.

E) Explained Evaluation

If banks lend too aggressively (e.g., 2008), bad loans build up and the banking system becomes unstable, showing that banks must balance profit with prudence.

🔵 (b) RISK AND LIABILITY

A) Simple Notes

1. Risk

  • Banks face risk when lending.

  • Borrowers may default (fail to repay).

  • Higher risk → higher interest rates.

2. Liability

  • Liability = legal responsibility for debts.

  • Two types:

Limited liability

  • Owners only lose what they invested.

  • Common for companies.

Unlimited liability

  • Owners are personally responsible for all debts.

  • Common for sole traders.

3. Why risk matters

  • Banks must judge who is safe to lend to.

  • High‑risk borrowers pay higher interest.

  • Low‑risk borrowers pay lower interest.

B) AO2 Example

  • Credit cards charge high interest (20–30%) because borrowers are riskier.

  • Mortgages charge low interest (3–6%) because houses act as collateral.

C) Chain of Analysis (linked to AO2)

Using the credit card example:

  • Credit card borrowers are riskier.

  • → Higher chance of default.

  • → Banks charge higher interest rates.

  • → This compensates banks for the risk.

  • → Banks remain profitable even if some borrowers fail to repay.

Using the mortgage example:

  • Mortgages are low risk.

  • → Borrowers provide collateral (the house).

  • → Banks face lower default risk.

  • → Banks charge lower interest rates.

  • → More people can afford mortgages.

D) Evaluation (1‑sentence “why?”)

  1. High interest rates can trap people in debt
    → Borrowers may only afford minimum payments.

  2. Banks may misjudge risk
    → Leading to bad loans and financial crises.

  3. Collateral does not guarantee safety
    → House prices can fall.

  4. Unlimited liability discourages entrepreneurship
    → People fear losing personal assets.

E) Explained Evaluation

If banks misjudge risk (like in 2008), they lend to people who cannot repay, causing defaults and threatening the entire financial system.

🔵 (c) TYPES & SOURCES OF CREDIT + IMPACT OF CREDIT

A) Simple Notes

1. Types of credit

  • Loans (personal, business, student)

  • Mortgages

  • Credit cards

  • Overdrafts

  • Hire purchase (buy now, pay later)

  • Trade credit (firms pay suppliers later)

2. Sources of credit

  • Banks

  • Building societies

  • Credit unions

  • Online lenders

  • Government loans

  • Peer‑to‑peer lending

  • Suppliers (trade credit)

3. Impact of credit on the economy

Positive impacts

  • Increases spending

  • Increases investment

  • Supports business growth

  • Increases GDP

  • Helps households smooth spending (e.g., mortgages)

Negative impacts

  • Too much credit → debt crisis

  • Defaults → bank losses

  • High household debt → lower future spending

  • Risk of financial instability

B) AO2 Examples

Positive AO2

  • UK mortgages allow households to buy homes → increases construction → boosts GDP.

Negative AO2

  • 2008 credit crisis: too much risky lending → defaults → recession.

Business AO2

  • Trade credit helps small firms buy stock before paying suppliers.

C) Chain of Analysis (linked to AO2)

Using the mortgage AO2 example:

  • Banks offer mortgages.

  • → Households buy homes.

  • → Construction firms build more houses.

  • → Jobs increase.

  • → Incomes rise.

  • → Spending increases.

  • → GDP grows.

Using the 2008 credit crisis AO2 example:

  • Banks lent too much to risky borrowers.

  • → Borrowers defaulted.

  • → Banks suffered huge losses.

  • → Lending collapsed.

  • → Firms couldn’t borrow to invest.

  • → Spending fell.

  • → Recession occurred.

D) Evaluation (1‑sentence “why?”)

  1. Credit can cause bubbles
    → People borrow too much and push prices too high.

  2. High debt reduces future spending
    → Households must repay loans instead of buying goods.

  3. Credit can increase inequality
    → Wealthier people get cheaper loans.

  4. Not all firms can access credit
    → Small firms face higher interest rates.

E) Explained Evaluation

Credit boosts growth in the short run, but if households or firms borrow too much, repayments reduce future spending, slowing long‑term growth and increasing financial risk.