Banking & Regulations

Banks play a key role as an intermediary in the financial system. Specifically, banks have the following three core functions:

  -  Banks allow individuals to safely deposit their savings, which banks then pay an interest on. If banks did not exist, individuals would have to store and guard their savings themselves, which would carry higher risks.

-    Banks provide loans to both individuals and organisations. Without banks, it would be difficult for individuals to purchase a home or start a business, or for organisations to make big investments.

  -  Banks are principally responsible for the payments system. For instance, electronic payments such as card payments, transfers, direct debits are becoming increasingly important as individuals use less cash.

In this module, you will gain a comprehensive understanding of the main Financial Institutions including:Commercial Banks, Investment Banks, Insurance Companies, Management Investment Companies and Financial Brokerages. 

Commercial banks typically provide a full range of services via an extensive branch network. The key activities of a commercial bank are taking deposits, making commercial and personal loans, mortgage financing, trade finance, foreign exchange and asset financing. An investment bank is a financial intermediary that performs services for businesses and governments. There are four main activity areas of an investment bank: asset management, broking, investment banking or corporate finance, and trading. The main role of an insurance company is to help individuals and organisations manage risk and preserve wealth. Insurance companies collect risk-insurance premiums from individuals and organisations that want to protect themselves against losses, such as fire, floods, illness, accident or death. Management investment companies manage a portfolio of securities on behalf of their investors to achieve their investment objectives. The role of a brokerage firm is to act as an intermediary between buyers and sellers of financial securities.

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The module discusses the role of the central bank and monetary policy. A central bank is a public institution that manages the currency of a country or group of countries and controls the money supply. The Bank of England is the central bank of the UK.

The module also explores the different risks in the financial markets, including: interest rate risk, liquidity risk, credit risk, operational risk, systematic or market risk, sovereign risk and capital adequacy. Interest rate risk arises from a change in interest rates, which impacts net asset values due to the mismatch between the interest rate profiles of assets and liabilities. Liquidity risk is the incapability of a business to fulfil its payment obligations as they arise. Credit risk is the risk arising from an unexpected decline in the credit quality of the counterparty. Operational risk is the direct or indirect loss resulting from inadequate internal processes and unknowable actions by employees or from external events. Systematic risk is the risk inherent to an entire market segment from a source or sources. Sovereign risk refers to the risk that a host government will default on its payment obligations by rejecting its foreign obligations or preventing local firms from honouring their foreign obligations.

Since banks play a major role in the economy, a failure of a large bank can disrupt an economy. As such, the foundation for regulation of the banking system is to address worries about the safety and stability of financial institutions, the financial sector as well as the payments system. Finally, you will also learn about the Banking regulation and the Basel requirements (i, ii and iii).


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