Financial System in the UK

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

  1. Expert advice
  2. Expertise in channelling funds. E.g. into the accounts with the highest yield
  3. Maturity transformation. Can make loans for long periods of time
  4. 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.