importance of London as a global financial centre is apparent, as it occupies the second rank in both indices. In the previous paragraphs we have discussed the centres in terms of importance and we now turn to examining the relative size of the global financial centres. One measure of the relative size of the centres is the level of employment created. The Centre for Economics and
The early part of the twenty-first century has witnessed a sea-change in regulation of the financial system following the financial crisis of 2007-2008. Prior to that financial crisis, the official policy was directed to deregulating the financial system, whereas after 2008 the move is towards increased regulation. This book begins the study of the UK financial system with an introduction to the role of a financial system in an economy, and a very simple model of an economy. In this model the economy is divided into two distinct groups or sectors. The first is the household sector and the second is the firms sector. The book describes the process of financial intermediation, and in doing so, it examines the arguments as to why we need financial institutions. It highlights the nature of financial intermediation, and examines the various roles of financial intermediaries: banks as transformers, undertaking of transformation process, and providers of liquidity insurance. The nature of banking, the operations carried out by banks, and the categories of banking operations are discussed next. The book also examines the investment institutions and other investment vehicles. It examines the role of central banks in the financial system in principle, particularly, the role of the Bank of England. Primary market for equity issues, secondary market, the global stock market crash of October 1987 and efficient markets hypothesis are also covered. The book also looks at the trading of financial derivatives, risk management, bank regulation, and the regulation of life insurance companies, pension funds.
How can governments persuade their citizens to act in socially beneficial ways? This ground-breaking book builds on the idea of 'light touch interventions' or 'nudges' proposed in Richard Thaler and Cass Sunstein's highly influential Nudge (2008). While recognizing the power of this approach, the book argues that an alternative also needs to be considered: a 'think' strategy, which calls on citizens to decide their own priorities as part of a process of civic and democratic renewal. As well as setting out these divergent approaches in theory, the book provides evidence from a number of experiments to show how using 'nudge' or 'think' techniques works in practice. This second edition includes a substantial prologue by Cass Sunstein and an epilogue by Peter John, reflecting on recent developments in nudge theory and practice and introducing his radical new version of nudge, 'nudge plus'.
This chapter provides an introduction to the role of a financial system in an economy. It presents a very simple model of an economy and establishes some of the basic financial concepts which will be drawn upon throughout this book. In this model the economy is divided into two distinct groups or sectors. The first is the household sector and the second is the firms sector. The chapter examines the nature of the financial claims which underlie the transfer of funds from those with surplus funds to those who wish to borrow. It also provides a sectoral analysis of the financial system, focusing on households, non-financial corporations, financial corporations, general government and rest of the world. The chapter discusses three sets of national accounts that are relevant to the analysis of the financial sector: national wealth, financial wealth and flow-offunds accounts.
This chapter mainly focuses on the bond market and the term structure of interest rates. The two are linked because the discussion of the term structure of interest rates is mainly conducted in the context of government securities. The chapter briefly discusses the reasons why different securities have different interest rates (i.e. the general structure of interest rates) and surveys the differing theories of the level of interest rates. It examines the general nature and valuation of bonds by highlighting the standard bonds and the Sukuk Islamic bonds. The chapter looks at the market for UK government securities (the gilt-edged market) in terms of new issues, secondary market trading and the innovation of gilt strips. It also examines the nature of corporate bonds and credit ratings.
Banks are the most important category of financial institution, which provide intermediation services to the economy. This chapter focuses on the nature of banking and the operations carried out by banks. It examines the different categories of banking operations. For expository purposes, the chapter divides discussion of banking into six categories: retail banking, wholesale/investment banking, international banking, universal banking, Islamic banking and narrow banking. The process of financial intermediation can be deconstructed into four constituent parts: loan origination, loan funding, loan servicing, and loan warehousing. The process of securitisation separates loan origination to loan servicing from function loan warehousing so that after the loan is arranged, it is transferred to a third party. The chapter examines the risks faced by banks and how they are managed. The risks include: liquidity risk, market risk, payments risk/settlement risk, operational risk, credit risk, sovereign risk and legal risk.
This chapter examines the investment institutions and other investment vehicles (i.e. funds which finance investment). It discusses the types of investment institutions: pension funds, long-term insurance companies, investment trusts, unit trusts, open-ended investment companies, property trusts, and exchange-traded funds. The portfolio investment of both long-term insurance companies and pension funds is determined by the nature of their liabilities and the return on and availability of the various types of financial asset. The chapter also examines the role played by the new funds: hedge funds, private equity, sovereign wealth funds (including central bank reserves) and money market funds. The importance of these new funds can be gauged by the fact that McKinsey & Company designated the first three the 'new power brokers'. The main types of alternative finance funding includes peer-to-peer lending, invoice funding, and crowd-funding.
The market for equities is part of the capital market, which refers to the market for long-term finance. This chapter deals with equity markets and examines some general issues relating to the raising of long-term finance by private firms. It focuses on the primary market for equity issues, which is followed by a discussion of the secondary market, where equity securities are traded. The chapter also examines the nature of and causes of the global stock market crash of October 1987 and the 'technology bubble' in the late 1990s that led to global stock market falls from 2000. It considers the degree to which stock markets conform to the efficient markets hypothesis. Two markets exist in London. The main market is the London Stock Exchange (LSE), which deals in the securities of established companies. The second market is the Alternative Investments Market, which is owned and operated by the LSE.
Central banks have achieved greater prominence since 2008 as a result of their role in bailing out banks following the financial crisis. This chapter examines the role of central banks in the financial system in principle and discusses whether, in fact, this role is necessary for the smooth running of such systems. It addresses the question of why it should be necessary for the financial system to have a 'super-bank' responsible for the operation of the financial system. This includes consideration of the objectives of central banks, their role in the operation of monetary policy and their function as a lender of last resort. The chapter also examines the part they may play in the regulation of the financial system and whether they should be independent of the government. Against this background it looks in more detail at the role of the Bank of England.
This chapter describes the process of financial intermediation, and in doing so, it examines the arguments as to why we need financial institutions. It discusses the reasons why we need financial intermediaries and hence the benefits of the financial sector. The chapter highlights the nature of financial intermediation, examining the various roles of financial intermediaries: banks as transformers, undertaking of transformation process, and providers of liquidity insurance. Banks reduce the problems arising out of asymmetric information. The chapter also examines the implications of the existence of financial intermediaries for individual lenders and borrowers using the Hirshleifer model and provides an overview of the tremendous changes that have taken place in the UK financial system over the last 20 years.