The Role of the Financial Sector in the UK economy
Financial intermediaries: These have the role of providing a link between those who wish to borrow and those who wish to lend. They provide 4 functions
- Expert advice
- Expertise in channelling funds. E.g. into the accounts with the highest yield
- Maturity transformation. Can make loans for long periods of time
- Risk transformation. Financial institutions lend money to many people, therefore they spread the risk of lending
Financial Institutions in the UK
Retail Banks e.g. Barclays, Lloyds, abbey National
Wholesale banks: these deal primarily in receiving large deposits from and making large loans to industry and other financial institutions
– They help companies raise money on the stock market
– Merchant banks such as Rothschild’s and Hambros
– Increasingly provide mortgages for customers
– Foreign banks deal a lot with foreign exchange
Building societies: not public limited companies like banks. Primarily concerned with saving accounts and mortgages loans. Increasingly acting like Banks
Finance Houses: specialise in providing hire-purchase agreements for buying consumer durables, several finance houses are subsidiaries of banks
Discount Houses: These specialise in lending and borrowing money for very short periods of time. There are eight discount houses in the UK (e.g. King & Shaxson)
N.B. the distinction between these has been blurred in recent years due to changes in the financial system.