Please enable JavaScript.
Coggle requires JavaScript to display documents.
UK'S LARGE FINANCIAL SECTOR - Coggle Diagram
UK'S LARGE FINANCIAL SECTOR
Real economy
Concerns the production, purchase and flow of goods and services (oil, bread and labour) within an economy
It is focused on the activities that allow human beings to directly satisfy their needs and wants, apart from any speculative considerations
Advantages
Can lead to better allocation of productive capital than a small one
Large increase in productivity and fast pace innovation
Can reallocate fast from declining sectors to those with good growth potential
Encourages the most able and talented into the industry as there will be good career opportunities and high salaries
The UK benefits from being a global financial sector (more than half of the world's largest financial firms have their European headquarters in the UK)
Accounts for 29% of UK exports
Provides over million jobs
10% GDP
Being at the heart of the global financial system broadens the investment opportunities for the institutions that look after British savings. Also reinforces the ability of UK manufacturing and creative industries to compete globally
More resilient to shocks that a small financial sector
Allows increased specialisation, enhanced competition, as well as greater possibilities for diversification and risk sharing
Well regulated and provides prices and financial stability, which are prerequisites for sustainable prosperity
Disadvantages
Large amounts of borrowing can be risky without the asset to secure it
Large profits can lead to excessive risks being taken, creating asset bubbles
With large financial sectors, information asymmetries and moral hazard problems can occur in the hunt for ever higher yields
Government's debt could increase dramatically due to the need to bail out banks and the associated fall in tax revenue if the financial sector runs into difficulties
Financial markets have a large influence on interest rates, which can lead to unintended distributional consequences
Efficient financial markets enhance growth, but if they are too large it can lead to a misallocation of resources
The financial system can siphon-off talent and resources that could be better employed elsewhere
The UK could be hit harder by a financial crash than many other countries