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.
need financial institutions such
as banks. Finally, we provide an overview of the tremendous changes
that have taken place in the UKfinancialsystem over the last 20
years. This will provide a framework for the more specific
discussion of events affecting financial institutions and markets
which make up the remainder of this book.
In this section we provide a
brief summary of the nature of the UKfinancialsystem as presented
in this book. In part I we discussed the institutions forming the
financial system, including the role of the central bank in the
financial system. In part II we discussed both the nature of markets
in general and the various
With this chapter we begin our
look at the main financial markets making up the UKfinancialsystem. We saw in chapter 1 that
one of the primary roles of a financial system is to allocate saving
to its most productive uses by bringing together lenders and
borrowers in an efficient way. In chapter 2 we examined how financial
We begin our study of the UKfinancialsystem with an introduction to the role of a financial system
in an economy. The financial system is at the heart of the economy,
supplying finance, enabling transfers of payments and enabling agents to
manage risk. In the UK economy, which has an international financial
system, that system also provides many jobs
with a view to protect UKfinancialsystem. To do this, the FPC can
intervene at a number of levels. The first is by way of
publications, such as minutes of its meetings, policy statements and
the biannual publication of the Financial Stability Report.
The second level is to make recommendations in connection with the
preservation of financial stability. One example of such a
on the UKfinancialsystem but
they are heavy investors in the UK. For example, the Singapore fund
Temasek Holdings invested $1.63 billion in Barclays Bank in
July 2007 at the height of the UK banking crisis. Incidentally, the
entire stake was sold in December 2008 and January 2009 at a loss of
$850 million. This is not an isolated case. For example, the
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.
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.
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.