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Theory and practice
Authors: Mike Buckle and John Thompson

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.

Mike Buckle and John Thompson

complete explanation for the existence of banks. In the following section we consider a further explanation for why funds are mainly intermediated through banks that is based on the role of banks as providers of liquidity insurance. 2.3.3   Liquidity insurance Consumers do not possess perfect information about the future and in particular the future

in The UK financial system (fifth edition)
Abstract only
Mike Buckle and John Thompson

used by the BofE to provide such support by way of acting as the ‘back stop provider of liquidity insurance to the UK banking system’ (Bank of England 2015 ). These methods are both summarised and distinguished from monetary policy measures by the Bank of England ( 2015 ) in the following terms: liquidity insurance – broad collateral liquidity

in The UK financial system (fifth edition)
Mike Buckle and John Thompson

true of many emerging countries in recent years). The main source of fragility is the role of banks in providing liquidity insurance to households (as discussed in chapter 2 ), coupled with the use banks make of funds deposited with them. Bank deposits can be considered as pools of liquidity for households that can deposit funds as insurance against shocks that affect their consumption

in The UK financial system (fifth edition)