4.4. The financial sector summary 4.4.1 Role of financial markets (see 1.1.5) 4.4.2 Market failure in the financial sector (see 1.3) 4.4.3 Role of central banks

4.4.1 Role of financial markets unit content Students should be able to: Explain the role of financial markets: to facilitate saving to lend to businesses and individuals to facilitate the exchange of goods and services to provide forward markets in currencies and commodities to provide a market for equities

1.1.5 What are the functions of money? Microeconomics Topic 1: The Economic Problem 1.1.5 What are the functions of money? A m______ of e________ used in payment for goods and services (rather than barter) A m__________ of v_______: used to compare goods and to draw up accounts A s________ of v______: money holds its value (unless we have very high inflation) and so is acceptable to buyers and sellers A m________ of d_________ p________: e.g. when using credit to purchase goods June 2011

Money and the Bank of England Topic 9: aggregate demand and aggregate supply Money and the Bank of England How many years (approx.) has the Bank of England been issuing bank notes? What gives paper notes their value? How do the Bank of England make it hard for people to produce counterfeit money?

Who can lend money to individuals and businesses? RESEARCH – Tuesday 14th Who can lend money to individuals and businesses? What are retail banks? Commercial banks? Investment banks? What are “forward markets” in currencies and commodities? What are equities? Corporate bonds? Gilts? What are money markets? Capital markets? Foreign exchange markets? Commodity markets? Derivatives markets? Insurance markets?

Summary Thursday 16th Using the syllabus and your notes, create a mind map or summary of 4.4.1 Hand this in next lesson

4.4.2 Market failure in the financial sector: content Students should be able to: Define market failure Explain asymmetric information; externalities; moral hazard; speculation and market bubbles; market rigging AS Theme 1 slides on Market Failure 1.3.

The result is a loss of e_________ and s______ welfare. 4.4.2 Market failure What is market failure? The result is a loss of e_________ and s______ welfare. What is economic welfare?

4.4.2 Asymmetric information and externalities What is asymmetric information? What are externalities?

4.4.2 Moral hazard What is moral hazard?

4.4.2 Speculation and market bubbles What is speculation and market bubbles? Speculation is Market bubbles occur when the

4.4.2 Market rigging What is market rigging?.

4.4.2 Examples of market failure Find examples of the different types of market failure discussed E.g. the South Sea Bubble; PPI; securitisation of mortgages in the USA; Wall Street Crash etc.

Research the causes of financial market failure Asymmetric information Externalities Moral hazard (include the government’s implicit guarantee) Speculation and market bubbles (include CDOs) Market rigging (use www.fca.org.uk for more information, what happened in November 2014)

Research LIBOR BBC News Business, 18 December 2012 – what is LIBOR? Why does it matter? What was the LIBOR rate- fixing scandal? What happened?

Research the causes of the financial crisis What were the causes of the financial crisis? Group the causes into failures in the financial sector and failures in regulation

Students should be able to: 4.4.3 Role of central banks Students should be able to: Explain the key functions of central banks: implementation of monetary policy banker to the government banker to the banks – lender of last resort role in regulation of the banking industry

_________________________________ is the central bank for the UK 4.4.3 Names of central banks _________________________________ is the central bank for the UK The _____________________________ is the central bank for the USA The ________________________ is the central bank for the Eurozone countries The _______________________: Japan The ________________________: China

4.4.3 What do central banks do? Act as b__________ to the banks: lender of last r__________ Act as banker to the g_______________ Implement m_________ policy (see 2.6.2) Issue notes and c___________ Manage e___________ rates and the g______ and foreign currency reserves of the country (see 4.1.8) Regulate the f_______________ industry

4.4.3 What is the link between Iender of last resort and moral hazard?

4.4.3 Why is financial regulation needed?

4.4.3 Shadow banking and regulatory capture What is shadow banking? What is regulatory capture?

4.4.3 Type of regulation Financial institutions must follow various rules and may be fined if they break them. E.g. Financial institutions may be compelled to have enough reserves to cover any ___________ they make.

4.4.3 Research banking regulation http://prosperityuk.com/2009/07/a-history-of-banking-regulation-in-the-uk/ Write a brief summary of banking regulation in the UK from the 1970s. What were the three bodies responsible for financial regulation which were created by the 2012 Financial Services Act?