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
interests of its
clients, other market participants and the wider UKfinancialsystem.
Similar failings occurred in other areas of Barclays’ FX voice trading
in London, including various transactions in currencies of countries in
emerging markets and the G10.
What did Barclays do by way of manipulation?
• It made attempts to manipulate the WM Reuters and the ECB fix
rates, in collusion with traders at other firms, for Barclays’ own
benefit and to the potential detriment of its clients and of other
• It attempted to trigger clients’ stop loss orders
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
(PDCF). During the following day, 14 September, the FRBNY expanded its access to its PDCF, but Lehman was told that it was ineligible to access it. The UK FSA was especially concerned that since Barclays was and is one of UK's clearing banks, it was important that it should not take on risks which might have a wider systemic impact on the UKfinancialsystem.
During the afternoon, the FSA discussed the importance of cooperation between the regulators if Lehman was going to go into Chapter 11. Later that evening Barclays advised that the Federal