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The participants in the UK financial system

Introduction

The financial system is the main factor of the economy of a country. It is responsible for the day-to-day transactions like wages, paying bills, shopping. They are aided by financial institutions responsible for the monetary transactions and the financial markets which facilitate trade in cash and cash equivalents. Large Information technology (IT) systems facilitate communications and transactions among the individuals, organizations and the financial situations. The fundamental purposes of the system are to maintain financial stability and therefore a healthy economy

Channel savings into finance as investments at low transaction costs

Responsibility for the management of the Financial Stability area lies with the Executive Director for Financial Stability, who reports to the Deputy Governor.

The Bank of England works with the Treasury and the Financial Service Authority (FSA) to maintain the financial stability of the country. The Financial Stability divisions—

  • Analyze the functioning of financial markets of UK and the world.
  • Encourage proposals to increase the effectiveness of the financial system
  • Contribute to the monetary policy process, and promote understanding , for instance, Memorandum of Understanding between HM Treasury, the Bank of England and the FSA

The Memorandum describes the role of each authority, to achieve the financial stability in UK.

 The principles that guide the division of responsibilities are accountability, transparency, avoidance of duplication in efforts, regular exchange of information.[1]

The Bank is responsible for assessing the risk, oversight the overall infrastructure of payment systems, crisis management and act as the lender of the last resort. The FSA is responsible for the authorization and prudential supervision of all financial institutions: supervise the financial markets, securities listings and respond to problems affecting the financial markets or the institutions.

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The Treasury is responsible for the legislation that governs the financial infrastructure, including the negotiation of EC directives, account to the Parliament for the management of serious problems in the financial system and account for financial sector resilience to operational disruptions within the government.

This identity is normally zero for the economy as a whole but positive if the net financial is a surplus and negative if it is of deficit value. The households and overseas markets in the UK have a surplus financially which they invest in purchase of assets and are called primary lenders. The industrial, commercial and governmental sectors will be in financial deficit and are the ultimate borrowers in the market.

The individuals prefer to invest in purchase of assets but not in industries, this is because direct trading with the industrial or the commercial sectors does not yield sufficiently on the long-term securities. Similarly, the yield on the short-term securities is low and therefore, not attractive. This constitutional weakness led to the development of the general intermediaries.

General financial intermediaries

            In the purchase or sale of securities, the financial intermediaries act as brokers and receive a fee for the transaction. They are broker-dealers when they act on their own account in purchase or sales of securities for profit.

  • Issue long-term assets and short-term liabilities
  • Though they lower the risk of insolvency, it is the economies of scale that actually provides sufficient liquidity for anticipated obligations
  • Asset transformation- they transform long-term liabilities of ultimate borrowers into safe assets for the primary lenders at costs lower than in direct trading.
  • Transformation of risk- They reduce risk by risk pooling and spreading-known as specific risk. (E.g. Default or the creditor’s risk)
  • Reduce problems due to asymmetric information in lending and borrowing.

The domestic intermediaries include banks, securities firms, investment companies, insurance companies, pension funds, and financial conglomerates.

Banks have always accepted deposits from commercial enterprises and after the second world-war from individuals. This deposit is available to business as working capital and consumer loans and mortgage loans to individuals. They are able to spread risk and generate funds for investment and act as intermediaries at costs lower to finance companies and others.

The growth of international trade has provided strong incentives for growth of multinational companies. This has promoted the development of Euro credit markets, offshore financial centres, and international banking facilities that are the international intermediaries.[2]

Market-Makers

The term market defines the demand or supply of a financial claim in question.[3](E.g. Housing loan) A transaction that involves government or company securities is a highly organized market, and is classified as Primary, and Secondary markets. The Primary Market issues new financial claims whereas the secondary market facilitates exchange of existing claims aided by specialist brokers for a profit. Market-Makers hold stocks of particular financial claims and act as principals of their own account. These market specialists are responsible for reducing transaction costs, maturity and risk transformation:

  • Reduce transaction costs in commodities like wheat, tea, copper and retail shops
  • Reduce problems arising out of sparse information
  • Reduce differences arising out of the preferences of the lender and the borrower
  • They reconcile issues arising out of conflicts of interest to a greater degree.

The principle users of any financial system are consumers, businesses, governments and residents of other countries. With progress in world trade, it necessitated the need for common accounting principles and financial reporting of the same. The International Accounting standards board (IASB) formed in 2001 helped to set up the international financial reporting standards. These standards promote high quality, transparent, comparable financial statements. The objectives of these financial statements is to provide information about the financial scenario, performance and changes in financial positions of an entity. This is useful in making of economic decisions by the analysts and investors in situations of when to buy, sell or hold and in case of recruitment of top management.

The valuation of shares can be complicated because future earnings of and dividend payments on shares have to be forecasted no maturity date and therefore no maturity value riskiest investment as it is difficult to calculate the net income based on the assets of the firm. The process of valuing shares is investment analysis and the most common valuation method is by fundamental analysis. This approach examines the fundamental behaviour of the firm and analyses the financial structure of the firm. Examine the income, retained earnings statement and the balance sheet of the firm. This framework conveys the financial effects of the past events. They show the results of the strategic decisions made and adhered to by the management of the organization.

Performance is useful to predict the capacity of the entity to generate cash flow from existing resources and the income statement provides this information in detail. Position indicates the ability to generate cash in the future. The financial resources and structure, liquidities and solvency are items of the information that helps the analysis. The balance sheet provides the data regarding the above. The earnings statement that will assess the investing, operating and financing activities of any organization can examine changes in the financial position and advise accordingly.

The Income Statement

Statement of the total income and expenses of the organization is drawn periodically like every quarter or half yearly indicative of the corporation’s results in the business. Sales, cost of sales, gross margin, operating expenses can be analyzed in detail describes the trading nature of the company and provides information on profit and loss informs the way in which the revenue has been invested.

The balance sheet is drawn using any of the following: the historic cost values, current cost book values and market values. The market values indicated is the most appropriate as it lists the current assets and liabilities of the firm and can be drawn from the Financial Times. The firm’s net worth is the difference between the market value of the ordinary shares and their book value. But, most of the firms in the UK are not listed in the stock exchange and therefore cannot be valued.

Most firms present their balance sheet in historic costs-both assets and liabilities and the share capital and reserves represent the book value of the net worth of the company. The financial statement of the firm is therefore the only available source and is fraught with problems, therefore making it difficult for comparison of firms. It is the main limitation in UK.

The Earnings Statement

Is a financial statement that indicates the revenues and expenditures of a company resulting in either profit or loss over a specific period of time helps investors understand the financial history and activities of the firm. The earnings per common share attributes the profit after tax of a company for a particular share. The FSA has been established with an aim to overcome the limitations in sharing of information and promote efficient orderly and fair markets help retail consumers achieve a fair deal improve their business capability and effectiveness identify and respond to risks arising in the markets encourage a coherent approach to market issues across the FSA.

Develop staff knowledge and skills on capital market structures, products and practices for better gains by publishing The Financial Risk Outlook, the FSA Business Plan, and The International Regulatory Outlook. Liaison with the industry and trade associations on market developments regarding the risks and training to minimize the same. Legal Accountability by regulators is established mainly to ensure that those responsible act in good faith and in accordance to their duties by a code of conduct and exposure to liability in tort of negligence, the equitable principle of confidentiality[i]

Conclusions

The UK has a consolidate system of regularizing the deregulated markets. The Financial statements are a strong basis for investors and traders
Uniformity in accounting methods for actual comparisons The FSA is responsible for market confidence, public awareness and consumer protection.

References

  1. David Blake , 2000, Financial Market Analysis. Contributors,  Chichester, England, 5-80
  2. Edwin H Neave, 1998 Financial Systems :Principles and organization, Financial Intermediaries, Routledge, Part iv pg;259-296
  3. John Gilbody,1988, The UK Monetary and Financial System: An overview of the monetary and financial system , 1-89.
  4. Article by Gabriel Rozenberg & Christine Seib, http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2733787.ece, cited on  July 19, 2008.
  5. Website of the FSA, http://www.fsa.gov.uk/Pages/doing/index.shtml ,cited on July 22 2008
  6. Website of the Treasury, ht http://www.financialservices.co.uk/tp://www.hm-treasury.gov.uk/documents/Financial_Services/fin_index.cfm, cited on July 22 2008.
  7. Dalvinder Singh,2007,Banking regulation of UK and US Financial Markets, Ashgate Publishing Ltd,160-185

 

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The participants in the UK financial system. (2020, Jun 02). Retrieved from http://studymoose.com/the-participants-in-the-uk-financial-system-new-essay

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