Introducing The Financial Services Industry

Front 1

What is Money used for?

Back 1

1) A medium of exchange; can be exchanged for goods and services.

2) A unit of account; a common denominator against which the value of goods and services can be measured.

3) A store of value; money received today can be stored until required.

Front 2

What is a financial intermediary?

Back 2

A financial intermediary is an institution that borrows from the surplus sector and lends it to the deficit sector. It pays interest to the surplus side but a higher rate to the deficit sector. The intermediary's margin is the difference between the two.

Front 3

What are the elements of intermediation?

Back 3

1) Geographic location; intermediary's can operate over a large area matching surplus to deficit sectors that otherwise couldn't.

2) Aggregation; intermediaries can overcome the size difference by aggregation of small deposits. e.g. many deposits pooled to lend out on a mortgage.

3) Maturity transformation; borrowers may need funds for a longer than the lender is prepared to commit to. e.g. a mortgage vs. 2 yr bond.

4) Risk transformation; an intermediary allows lenders to spread the risks over a wide variety of borrowers and so spread the risk.

Front 4

What are product sales intermediaries?

Back 4

A financial intermediary brings together product providers and potential customers who wish to purchase the providers' products and services.

Front 5

What are the different types of financial institutions?

Back 5

1) Retail Bank - providers of payment services, savings and loans to personal customers or small businesses.

2) Wholesale Banks - provide funding for other financial institutions or large corporate clients.

3) Life Assurance - Insurance that provides payment - usually a lump sum bit can also be an income - on the death of the person covered by the policy.

4) General Insurance - Insurance designed to protect the policy holders from the financial consequences of adverse life events. e.g. house insurance, motor insurance, travel insurance etc.

Front 6

What are the potential range of services offered by financial services group?

Back 6

1) Retail banking.

2) Mortgage services.

3) Credit card services.

4) Wealth management services.

5) Financial asset management.

6) Investment banking.

7) Insurance services.

Front 7

What is the Bank of England and what does it do?

Back 7

The Bank of England is an organisation that is a banker to the government, supervises the economy and regulates the supply of money.

It's main functions are:

1) Issuer of bank notes.

2) Banker to the government.

3) Banker to the banks.

4) Advisor to the government.

5) Working for the treasury by managing the UK's official reserves of gold and foreign currencies.

6) Lender of last resort.

7) Maintaining economic stability.

Front 8

What is a proprietary organisation?

Back 8

Most big financial institutions are proprietary organisations which means they are limited companies. They are owned by shareholders and the shareholders have the right to share in the profits of the business in the form of dividends.

Front 9

What is a mutual organisation?

Back 9

A mutual organisation is not considered a company and therefore doesn't have shareholders. The most common mutual organisations are building societies, friendly societies and credit unions. A few life insurance companies are mutual organisations to.

A mutual is owned by it's members. They determine how the organisation is managed through general meetings. For a building society, members comprise it's depositors and borrowers and for life insurance they are the policyholders.

Front 10

What is demutualisaton?

Back 10

This is where a building society converts to a bank if it's members agree to it.

Front 11

What is a credit union?

Back 11

A credit union is a mutual organisation, run for the benefit of the members. They offer simple savings and loans. They used to have to share a common bond but that is no longer the case. In order to join a member must pay an entrance fee and buy at least £1 share in the union. All members of the union are equal regardless of the size of their shareholding.

Traditionally they operated in poorer areas and sections of the economy.

Front 12

What's the difference between retail and wholesale banking?

Back 12

The main distinction between retail and wholesale banking is one of scale. Retail banking is normally for individuals and small businesses but wholesale banking services are provided to large companies, the government and other financial institutions.

Front 13

What is Libor?

Back 13

Libor stands for London inter bank offer rate. It is a rate that acts as a reference for the majority of corporate lending. The rate is usually quilted as Libor plus a specified margin. Libor rates are fixed daily and run from overnight to a year to maturity.