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Financial Markets - Coggle Diagram
Financial Markets
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the wider economy
facilitate saving by businesses and households , rewarding savings, protecting deposits
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investment banks
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systemic risk: as banks act as commercial and investment banks, one an take down the other. risk of failure is higher. this could bring down the entire financial sector as banks are interconnected. the more interconnected, the greater risk of failure
money
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narrow money: measure of the value of coins and notes in circulation and money equivalent that are convertible into cash
broad money: total amount of money held by households and companies, mainly commercial bank deposits
Debt vs Equity
debt finance: borrowing money from an outside source with the promise of paying back the borrowed amount, plus the agreed upon interest rate
Bank loans: provided over a fixed period. The rate of interest is either fixed or variable, set by the lender. Some security is required for the loan unsecured loans pay higher interest rates because of risk. Non-performing loans are when the borrower is unable to repay
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Market Failure
moral hazard: where someone takes more risks than they should knowing they are covered by insurance or that the government will protect them form damages
speculative bubbles: the price of something is driven above what it should be due to behaviour in the economy - animal spirits
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shadow banking: outside the regulated market - hedge funds, private equity firms, crowdfunding. shadow banking failures can bring down the 'safe' banks as they are often interconnected
Exchange markets
money markets: market for short term loan finance - borrowed and lent for up to 12 months.
includes inter-bank lending and short term borrowing
capital markets: medium to longer term loan finance. securities like shares and bonds are issued
includes raising finance by the government and the issue and sale of government bonds
foreign exchange markets: currencies are traded - there is no single currency market. the spot exchange rate is the price of the currency to be delivered now. the forward exchange rate is a fixed price given for buying currency today to be delivered in the future
Bonds
government bonds (treasuries) are fixed interest rate securities.
maturity date: when the bond is due to be repaid
coupon: annual interest rate
yield: effective interest rate
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how banks create credit: extend loans to businesses and households. when a loan/mortgage is taken out, credit is added to their bank account with a bank deposit of the size of the loan or mortgage. New money is created at this point
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Why do banks fail?
liquidity
liquidity ratios measure a company's liquid assets against short term liabilities. the more liquid assets they have to cover short term liabilities the more likely they can pay debts without running out of funds
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if a bank does not hold sufficient cash (or assets), depositors may lose confidence in the bank (fear of insolvency) which can lead to a run on the bank
capital
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if banks lend money which consumers fail to pay back, the value of advances as assets reduces.
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