4.4 The Financial Sector

• Role of Financial Markets:

  • Facilitate Saving
  • Lend to businesses & Individuals
  • Facilitate exchange of goods/services
  • Provide a market for equities
• Financial Market: System that provides buyers and sellers the means to exchange goods/services and trade financial instruments

  e.g., bonds, equities, foreign exchange
• Market Failure in Financial Sector:

  • Asymmetric Info.
  • Externalities
  • Moral Hazard - incentive to take bigger risks as sole person won't face burden of big risk
  • Speculation and Market Bubbles
  • Market Rigging - fixing interest and exchange rates for private gain
• Role of Central Banks:

  • Implement monetary policy - influence interest rates
  • Banker to government
  • Banker to banks
  • Regulate financial system