finance

Pros and cons of Financialisation

Pros and cons of Financialisation

Financialisation is a term used to describe the increased role of the financial sector in a modern economy. Source: NYT 2013 Financialisation also refers to particular trends in the financial sector of the economy. This includes: Increased use of financial intermediaries Increased use of futures markets. For example future contracts for bonds, shares, currencies and interest rates) An increased importance placed on the financial sector. For the concept of‘shareholder value’ as the primary motivation of companies. This can lead…

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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 idea is that Central Banks will be more independent of political considerations and willing to keep inflation low – even if there are political costs to raising interest rates. The Central Bank officials are appointed by the government and are given broad guidelines (e.g. target low inflation). Political business cycle The feeling was that when the government was responsible for…

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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 October 2013 Assets (£bn) As of 31 March 2017 1. HSBC 126 1,936 2. Lloyds Banking Group (Bank of Scotland/Halifax) 53.5 817 3. Barclays 43.6 1,203 4. Royal Bank of Scotland Group Natwest, Ulster Bank 42.0 783 5. Standard Chartered 36.7 526 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:…

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Credit Default Swaps Explained

Definition of Credit Default Swap – CDS are a financial instrument for swapping the risk of debt default. Credit default swaps may be used for emerging market bonds, mortgage-backed securities, corporate bonds and local government bond The buyer of a credit default swap pays a premium for effectively insuring against a debt default. He receives a lump sum payment if the debt instrument defaults. The seller of a credit default swap receives monthly payments from the buyer. If the debt instrument defaults they have to pay the agreed amount…

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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 are unsustainable in the…

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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…