Please enable JavaScript.
Coggle requires JavaScript to display documents.
ECONOMICS THEME 4 - TOPIC 4.4 - THE FINANCIAL SECTOR - Coggle Diagram
ECONOMICS THEME 4 - TOPIC 4.4 - THE FINANCIAL SECTOR
4.1.1 Role of financial markets
Financial markets are where buyers and sellers can buy and trade a range of services or assets that are fundamentally monetary in nature
They facilitate savings, lend money, facilitate the exchange of goods and services (money), provide forward markets and a market for companies shares
4.4.2 Market failure in the financial sector
Asymmetric information
financial institutions tend to have more knowledge than customers so they exploit them
Externalities
e.g taxpayer bailing out banks during 2007-2008 crisis
Moral hazard
Where individuals make decisions in their own interests knowing there are potential risks
Speculation and market bubbles
Herding behaviour where everyone sells their assets and markets crash
Market rigging
Group of individuals collude to fix prices or exchange information that will lead to gains for themselves
4.4.3 Role of central banks
The central bank controls monetary policy and acts as a banker to the government
They also act as a bank to other banks and are a last resort for banks
In some countries they regulate the financial system
Financial regulation
Can include banning market rigging, preventing sale of unsuitable products, prevents consumer exploitation, etc...
Three key bodies are the FPC,PRA AND FCA