finance

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Benefits of Central Bank Independence

Monetary policy (mainly interest rates) used to be managed by the government. However, in recent years, there has been a trend to give monetary policy to independent Central Banks. The Central Bank officials are appointed by government and are given broad guidelines (e.g. target low inflation). But, the decisions are left to Central Bankers and not government.   Political business cycle The feeling was that when the government was responsible for setting interest rates, there was a political business cycle. This means that the incumbent government sought to influence the economic…

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Global funds manager

Readers Question: Who really is a global funds manager? A global funds manager is person who looks after different investment trusts / pension funds. He will decide where and how to invest the fund of money in different markets. Individuals with savings may wish to seek better returns than just saving in a bank with a low interest rate. However, individuals may lack the confidence, knowledge, and ability to invest in bond markets / stock markets around the world. Therefore, they can put money into investment trusts. These individual funds are…

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Why Fed Tapering caused a rise in bond yields

Readers Question Why did bond yields in the USA rise at news of the Fed Tapering back in August? The Federal Reserve has been engaged in a policy of quantitative easing. This involves: Creating money electronically Using this created money to buy assets, such as government bonds. The aim of quantitative easing is to stimulate economic activity – increase economic growth and avoid inflationary pressure. QE aims to stimulate economic growth through increasing the money supply and reducing interest rates in the economy. When the Fed buys bonds, the greater demand pushes up the…

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Securitisation

Securitisation involves changing loans into tradeable bonds. Securitisation can increase the liquidity of banks and enable banks to engage in more lending than previously. Securitisation was a factor in the credit crunch because it enabled banks to lend more than usual. When there was a shortage of credit in the banking system, banks became over-exposed and faced a shortage of cash (liquidity) The difference between loans and bonds. Loans are viewed as assets on a banks balance sheet. Loans cannot generally be sold on or traded. Bonds can be traded and sold to…

Credit Policy

Credit Policy

Credit policy / financial policy is the use of the financial system to influence aggregate demand (AD). Monetary policy affects AD through the Central bank controlling interest rates and the money supply. Fiscal policy affects AD through the use of government spending and taxation. Credit policy looks at factors such as: Bank lending rates to firms and households in the economy. The supply of credit and availability of loans from banks to firms and households. In normal economic circumstances, it was felt the Central Bank could adequately control the economy through…

Different types of economic and financial bubbles

Different types of economic and financial bubbles

Readers Question: In finance and economics, there are such things as “bubbles” in the economy. And when bubbles start forming, it normally isn’t a good thing. My question is, how many different kinds of “bubbles” are there? Such as the property bubble or stock market bubble. And how do they form and what are their economic impacts? Bubbles typically refer to a situation where assets or financial instruments see a rapid increase in price – an increase in price which is driven by speculative demand and unsustainable in the long…

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Top 10 British Banks

In recent years, the British Banking system has become highly concentrated due to the wave of mergers following the credit crunch. Top 5 British Owned banks Bank Market value (£bn) As of 24 February 2011 Assets (£bn) As of 31 December 2008 HSBC 122.4 1,736 Royal Bank of Scotland Group 49.9 2,508 Lloyds Banking Group 44.3 1,195 Barclays 38.3 2,320 Standard Chartered 37.1 299 Smaller Banks Co-operative Bank owned by The Co-operative Group. Sainsbury’s Bank: 50% owned by British supermarket company Sainsbury’s and 50% owned by Lloyds Banking Group. Tesco Bank: owned by British supermarket company Tesco. Government Ownership of UK Banks Royal Bank…

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Return on Government Bailout for Banks

Readers Question: Just a quick one. Are UK banks paying interest on the government bailout they received? Not as far as I am aware. When the UK bailed out the bank we actually bought stocks in the bank. We gave money in return for buying shares. Companies usually pay dividends to shareholders, though the two banks effectively nationalised are not currently paying dividends, The taxpayer now owns 84pc of Royal Bank of Scotland  and 41pc of Lloyds. According to Office of National Statistics these are now classed as public…