Question 1
Financial intermediaries convert assets by acquiring primary assets or shares and converting them from risk and maturity into separate assets. A financial institution’s forms of asset transition are maturity, denomination transformation and risk transformation. Banks accept individual deposits and provide them for investment to organisations and the government (Beck, Colciago and Pfajfar, 2014). The Bank pools its entire savings deposit and makes small bits that the creditor will collect. Each piece consists of various amounts, terms and time to pay back. Intermediaries purchase and sell instruments with various characteristics of risk, return and/or liquidity.
A simple example is that of a bank which, in the form of loaning, mortgages and/or bonds, sells relatively low-risk securities (that is, secure), low rates of return and highly liquid debt, called demand deposits to investors called depositors and purchases relatively risky and high-risk securities from borrowers. The basic and persistent challenge of contemporary service-oriented culture is conflicts of interest (Beck, Colciago and Pfajfar, 2014). New trends in stock market governance and elsewhere illustrate the need for widely agreed guidelines to combat conflicts of interest. A conflict of interest occurs when someone who is obliged to act in the interests of another party must determine to do so, and another interest, in turn, impairs his ability to decide in accordance with his or her duty.
Conflicts of interest may be resolved through organisation, reporting duties or the obligation to refrain from acting. Wide compliance process and strategy for dispute resolution was integrated within organisations of businesses to promote conflict of interest management. Nearly all capital market deals are facilitated by financial service firms who broker market participants. These intermediaries must align their own interests, their partners and the interests of issuers and investors. Such equilibrium needs strong guidelines, and equity offers supplied by financial intermediaries are well-represented (Kroszner and Strahan, 2011). Clear advice is particularly relevant in the case of financial intermediaries because of the importance of capital markets for the entire economy and for individual well-being. Conflicts between the agent’s own interests and the interests of another person may occur if the agent is engaged in a contract with that other person (Werner, 2016). That may be the case for intermediary shares on their own behalf. Moreover, it is not entitled to accumulate hidden gains by prioritising its own interests vis-à-vis consumers even though it does not trade for itself but actually carries out trade for its customers.
Question 2
It is the existence of financial services that makes it possible for a country to boost its economic situation by growing development in all economic growth sectors. The advantage of economic development is expressed in the way the citizen lives in the form of economic success. It is here where the financial services help a person to buy or receive different consumer goods by buying them (Lusardi and Mitchell, 2014). There are other financial institutions in the chain that still make money. These financial institutions encourage savings, development, saving etc. The presence of financial services generates more demand for goods and for the manufacturer, which requires more spending in order to satisfy market demand.
At this point, financial service providers like merchant bankers will rescue their investors via the new issue market to allow the maker to increase their money (Singh, 2014). The stock exchange allows the investor to mobilise more capital. There is an attraction for foreign investment. The retailer is able to sell not only its goods but also to purchase new machinery/technology for more development through leasing and factoring firms, both domestic and international. Financial resources such as mutual funds offer various forms of savings adequate opportunity. For the convenience of both pensioners and elderly persons, various forms of investment options are made available such that fair returns on investment are guaranteed without substantial risk (Singh, 2014).
Various reinvestment options are given to those involved in growing their investments. The legislation passed by the government restricts the functioning of various financial services in a manner that strongly safeguards the public interests that are saved by these financial institutions. The involvement of insurance providers minimises the danger to both financial institutions and manufacturers (Lusardi and Mitchell, 2014). Various types of hazards are protected, providing protection not only against fluctuating market conditions but also against the risks of natural disasters. In addition to mitigating costs, insurance is not only a means of finance but also a source of investment.
In this respect, it has privatised not only the life insurance but also established the Insurance Regulatory and Development Authority (IRDA, 1999) for the insurance sector (Singh, 2014). Financial services allow customers to purchase multiple types of goods and services that enable them to increase their living standards. Through purchasing employ, leasing and house financing firms, vehicles, households and other important as well as luxury goods are made possible. The customer is thus obligated to invest when retaining the advantages of the assets gained by financial services.
Question 3
There is growing evidence that it would be beneficial for both companies and the environment to discuss sustainability. Within the financial services industry, which has been predominantly market oriented by legislation, certain businesses that take the initiative and are leading the charge are capable of winning over consumers (Carroll and Buchholtz, 2014). It does, however, mean genuine sustainable investment. The word real is relevant in this sense as customers are wise to ‘green washing’—the highly clear trend of making unfounded environmental statements of a business—which could harm the credibility of a company, for example, rather than a one-off violation of legislation. Innovations are also said to be powered by major change.
The environmental issue definitely imposes positive action. Many organisations today step toward the incorporation of scientific goals which embody broader global goals, such as global sustainable development goals (SDGs) (Fifka and Drabble, 2012). For example, Colgate and Palmolive have introduced a Global Energy Conservation Team to consider reducing water use in its entirety (Crane et al., 2019). Younger customers are well known to choose to put their money where their principles reside. And sustainability is just one aspect of this dilemma. The ethical reputation of a business can be even greater than the environment, which demands that businesses have a larger philosophy to do the right thing. Particularly in the financial sector, the bank-bashing and negative feelings of actions in certain financial institutions are easy to concentrate upon. That’s what many customers see, rightly or wrongly.
However, external innovations, such as questions about the condensed strength of FAANGs and privacy legislation and irresponsible tax conduct, make consumers more vulnerable to competition if they assume that they have their interests at heart (Crane et al., 2019). Companies which make business with non-exclusive and open services simpler for people are becoming more appealing to consumers. In order to make competition simpler for potential competitors, regulators have operated since the financial crisis. The recent entrants in the wealth management market must be seen as an example because they have lowered costs and minimum contributions, and many have made a balanced fund an important principle of their offering (Crane et al., 2019). Sustainable market strategy problems give industry an immense opportunity to restore trust by taking the lead. However, since adjustments are not constitutionally necessary, it places considerable focus on individual companies.
Question 4
The way the finance market works is being revolutionised by technology. Growing technological advances easily produce new market proposals such as crowd-funding, peer-to-peer loans, digital currency, social banking, online financial transactions and new payment systems (He et al., 2017). Technology has contributed to a major rise in the production and usage of information and social media, affecting consumers’ preferences and financial institutions’ willingness to use consumer data for their goods and services to value, target and compete. Technology has generated a significant change in the usability and usage of data and social media, influencing customer preferences and financial institutions’ willingness to use consumer data for their pricing, targeting and promotions.
FS firms are implementing new rival innovations. Online customer inquiry leads to more direct and instant contact with financial goods and services. Technological advances allow customers gradually to handle their own assets and finances, and companies have to show how they add value. FinTech disruptors found a way into it (PwC, 2020). Disruptors are fast-moving businesses, mostly start-ups, that work on new disruptive products or procedures, from electronic banking to insurance. And they targeted some of the financial services value chains’ most profitable features. Latest PwC Global FinTech Survey, industry survey respondents’ demonstrated that within five years, one-quarter or more of their firms will be losing to independent FinTech companies (PwC, 2020).
Two decades ago, a surge of e-commerce interests was being set up by several major financial institutions (He et al., 2017). Finally, the first “e,” which became a new standard, faded away. Increased productivity led to exponential growth in Internet development and major infrastructure investments. The “digital” movement today has the following markers: different departments, budgets and digital agenda tools. This plan varies from consumer service and operative performance to broad numbers and analytics. This approach was extended in financial services to payments, retail banking, insurance and ownership of property, and migration into institutional sectors, such as capital and commercial banking. These patterns are associated closely with creativity focused on technology. Initially, rural workers started to move to cities in search of better jobs as advances in agricultural innovations increased their labour productivity (PwC, 2020). They sought employment in capital-intensive sectors such as local production and then increased efficiency for the global market as technology pushed them.
Question 5
Economists, governments and sociologists have long been concerned with debt. There is a well-known correlation between the sum owed and its effect on society and financial health in one country (Roberts and Soederberg, 2014). But in another critical aspect of the wider economy, the shockwaves of unsustainable borrowing are being felt: Personal loans are on the rise all over the world. In the United States, it hit 13.86 billion dollars in the second quarter of 2019 – over 1 trillion dollars more than the financial crisis of 2008. That is 109 per cent of the household’s net disposable income (The One Brief, 2020). According to Aon’s 2018 DC and Financial Health Global Employee Report, almost half the employees in the U.S. are holding credit card loans they cannot balance out every month (The One Brief, 2020).
Although there are strong links between finances and wellbeing, there is one disconnect; the personal condition and realities. However, in fact, an enormous amount of people are financially getting around. Greater picture: many employers today will have to wait longer than past generations to get retired for the longer term. The most significant aspect of consumer debt generally is mortgage loans. In the United States, household mortgage debt in the second quarter of 2019 peaked at $9.8 trillion. Household debt in 2018 in Canada amounted to C$1.44 trillion (The One Brief, 2020). The United Kingdom’s residential mortgage default in the first quarter of 2019 was over 1.45 trillion (The One Brief, 2020). Some analysts claimed after the financial crisis that Americans entered a new age of frugality in which loans could not really depend too much on interest income.
And it seemed for some time that Americans changed their money habits. These patterns are associated closely with creativity focused on technology. Initially, rural workers started to move to cities in search of better jobs as advances in agricultural innovations increased their labour productivity (The One Brief, 2020). First, they sought employment in capital-intensive sectors such as local production and then increased efficiency for the global market as technology pushed them. In comparison, developments in computer and telecommunications have allowed Western firms to offshore such support roles, generating comparatively well-paying employment in places such as the Philippines and India. Over time, the cycle has reinforced itself: more workers have been in cities and has drawn employers that can now support foreign markets to develop the technical infrastructure in the regions. The outcome: greater urbanisation in developing markets and a rising middle class.
Question 6
Access to key bank accounting and consumer finance has become increasingly relevant in the contemporary economy, with a greater proportion of the global population using financial services in an online trade-fuelled process, for critical purchases and savings. Those technologies, and in particular more available consumer credit, reinforce individual buying power, boost consumer health and, when used safely, will alleviate poverty (Campbell et al., 2011). However, a rise in risky lending practices and customer overdue accompanied the rapid growth of credit and the sharp increase in the use of financial services, especially in emerging market economies.
Efficient protection of the customer is important to encourage financial stability, according to the financial crash of 2008, triggered by a housing bubble created by unsustainable lending. In addition, new national and international changes have already been adopted in which a series of high-level standards and good practices to strengthen financial customer security have been developed. Although international standards include a clear consumer protection basis, they remain in practice abstract and general and are non-binding. This raises the issue of how national policy, particularly in emerging and developing economies, can affect financial consumer protection (Cole, Sampson and Zia, 2011). On the other hand, regulators also seek to keep pace with emerging financial market trends and are hesitant to interfere as credit provision is viewed as economically advantageous.
Access and suitability are the core subjects in financial advancement and customer security. Access is a situation in which all parts of the population have access within their incomes and demographic characteristics to accessible, popular financial services (Campbell et al., 2011). The adequacy of the goods for various customer markets is discussed. Generally, creative goods are either beneficial for financial access or neutral. However, items that ultimately contribute to improved access to financing will also pose questions of appropriateness. Innovative goods can be difficult to comprehend for retail customers, and increased financial understanding is required to help fight financial illiteracy. Service providers should also have adequate internal monitoring in order to minimise the risk of unnecessary exposure for customers. Even the best disclosures cannot be adequate on their own such that institutions are not “encouraged” to develop sufficient safeguards to protect consumers within their product creation operations to prevent circumstances in which institutional buyers are concerned about inappropriate product items. Where required to tackle misselling, bribery or business wrongdoing, harsher sanctions should be enforced
Question 7
Long-term financing can be characterised as any maturity financial tool beyond 1 year (for example, bank loans, shares, rental and other types of debt finance) and government and private money (Lim, 2012). Maturity refers to the period between the day from which the remaining principal and interest is accrued (loans, bonds or other financial instruments) and the actual date of payment. Equity that has a principal’s final repayment date cannot be treated as a non-finitely mature instrument. The one-year cut-off maturity is the concept of a national account fixed investment. Extending financial maturity is also seen as a cornerstone of sustainable financial growth (Wright and Watkins, 2010).
Long-term financing leads in two ways to higher growth, improved welfare, mutual wealth and sustainable stability: reducing creditors’ rollback costs, thus broadening investment horizons and performance, and increasing the supply of long-term financial instruments, empowering households and businesses to meet the uncertainties of their life cycles (Gomber et al., 2018). There is no clear evidence that long-term borrowing is ideal for the entire economy. Borrowers and lenders enter into short or long-term transactions in well-functioning economies according to their financial requirements and how they agree to share the risk associated at varying maturities.
Short-term loans are borrowed funds and are used within days to a year to satisfy obligations. The lender’s cash receives the creditor quicker than medium and long-term lending and needs to be reimbursed within a shorter period (Wright and Watkins, 2010). A credit card is a card given to customers for payment purposes. The cardholder will pay for the items and services on the basis of the obligation of the holder to pay for them. The card issuer provides a revolving account which gives the customer (or the buyer) a line of credit from which the user can lease the money for a retailer’s purchase or as a cash advance for the user Funding by credit card is a convenient and feasible alternative for smaller companies (Wright and Watkins, 2010). A credit card allows short-term payments to be made easily to a borrower in comparison to debit and checks. A balance outstanding before each purchase will be determined by the borrower because the cumulative payments do not surpass the card’s maximum credit line. Comfort is the biggest advantage for a customer. A credit card provides short-term customer transactions that do not have to measure balance before each purchase to be made easily to a customer if the cumulative payment does not reach the maximum credit card lane.
Question 8
In recent years, the global banking industry has experienced a significant transition, which intensified in the aftermath of the global financial crisis Banks from the Eurozone and other developed economies retrenched from many international markets due to lower returns on foreign business in countries where they lacked size and skills (Soerjomataram et al., 2012). Following a significant regulatory reform following the recession, global advanced country banks were still disincentives for broad and difficult international activities. Emerging and developing banks have started to expand internationally in recent years – following their country’s rising control of the global economy – and are gradually interconnected regionally.
As bank risk is a key issue of financial stability, the effect of foreign diversification on risk is a specific stream of literature. The theory of diversification says that multinational banks may have lower risks as they are more able to diversify the threat to countries. In line with the hypothesis of market risks dominance over the hypothesis of diversification, a study has stated that internationalisation has a positive relationship to the risk of US commercial banks, whereas the cross-country sample of commercial banks has similar facts (Soerjomataram et al., 2012). According to the reports, the presence of agency problems can help to drive their outcomes.
In comparison, the degree of diversification rather than the size of foreign reserves is of risk to the multinational banks headquartered in Germany rather than to their domestic banks. Credit risk diversification effects are recorded from the 49 largest multinational banking groups, particularly when OECD banking groups in the non-OECD countries are diversified (Qian et al, 2010). If a country is in financial trouble, many foreign investors will step out, inflation will increase, joblessness will occur, and other consequences can accrue (Soerjomataram et al., 2012). An example is the banking system of Argentina. The government of Argentina agreed to process USD bank deposits and payments in pesos during the financial crisis. The exchange rate of dollar and peso is high since the peso currency has depreciated (more peso for one dollar) (Büyükkarabacak and Valev, 2010). The consequence of the interest rate is that when the exchange rate is high, it declines. More capital and more cash flows will be in circulation with every investment, keeping the country’s interest rate on a low basis.
Question 9
The Central Bank has been deemed the “lender of last resort,” meaning that it is liable to provide the national economy with funds if a supply deficit cannot be filled by commercial banks (Goodhart, 2010). The central bank avoids a collapse in the country’s financial system. Yet central banks’ primary purpose is to provide price stability for their countries’ currencies by managing inflation. As a regulatory body of the monetary policy of a government, a central bank also serves as a sole producer and importer of circulating notes and coins. The period has shown that the central bank can work better in this capacity by staying independent of government monetary policy and hence untouched by any regime’s political concerns.
Any commercial banking interests should therefore be totally disconnected from a central bank. There are two major categories of functions for a central bank, (1) the macroeconomic role of controlling inflation and price stability and (2) the microeconomic working of last resort lenders (Goodhart, 2010). The central bank shall monitor inflation levels by regulating the money supply by monetary policy and is responsible for market stabilisation. The central bank conducts open market transactions (OMOs) which either liquidise the market or absorb additional funds, which influence inflation (Clift, 2014). The central bank will purchase government bonds, bills, or other bills issued by the government to increase the amount of money in circulation and decrease the interest rate (cost) of borrowing.
However, this purchase will also lead to increased inflation. When the central bank is forced to absorb liquidity in the hopes of reducing inflation, it would be able to sell government bonds on the free market (Stiglitz, 2013). Core forms for the central bank to monitor inflation, money supply and prices are free market operations. The establishment of central banks as last resort lenders has made free trade banking necessary. A commercial bank delivers first-come, first-service money to consumers. If the commercial bank has inadequate cash to meet the demands of its customers (in general, commercial banks do not have reserves that meet the requirements of the whole market), the commercial bank will use the central bank for borrowing extra funds.
Question 10
Throughout the module, I got to learn about the importance of the financial sector in different sectors of our life and the way in which it can affect an individual to a country’s economy. In the workings of the economy, the financial sector plays an important role via mediation. Simply put, the finance sector is between borrower and saver. It accepts money from savers (e.g., through deposits) and loans it to those who choose to invest, whether they be families, corporations or states. I learnt that the financial sector operates at the cellular level through the funding acquired from individuals, and it is then invested further along the chain to higher investors and government, in turn providing the individual with the returns on their investment.
The key learning of this module for me is also to learn the importance of effectively regulating the financial sector so the services that are provided are streamlined for the ease of the customers and the institutions. Adequate regulation can, in turn, help contribute to stabilising the economy of countries, as seen during the 2008 financial crisis that shook a number of countries. Furthermore, with the advent of technology, the finance sector also has the opportunity to use innovation in its services and provide better facilities to customers. It is also an opportunity for the financial institutions to make their internal services effective and more efficient.
Another key point that stood out to me was regarding the manner in which different countries operate and the differences between the banking systems throughout the world. This reflects on the stability of the economy of the countries and demonstrates how they chose different strategies within their operations in the finance sector to mitigate harm or financial crisis. Lastly, another important takeaway is the matter of sustainable practices within organisations to promote better methods of carrying out their operations. It is evident through recent data how much sustainable practices can contribute to a more stable economic output.
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