topic 6- unit 4

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what is an exogenic shock?
a significant event that happens without warning and can have major/lasting effects on political, economic and social systems
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what is volatility?
refers to the extent to which there are large swings between high and low e.g. exchange rates
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what cannot be measured, risk or uncertainty?
uncertainty meaning it cant be managed
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what allows people to estimate the likelihood of an event happening?
past data- this estimate is called risk
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what is risk?
the probability that something might change
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what is pure risk?
when risk can only have a negative outcome. it can result in injury, damage to possessions or financial loss
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what is speculative risk?
where risk can have a good or bad outcome. for example, buying shares in a PLC could rise or fall
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how can flood be assessed?
by considering geographical position of the property and weather forcasts
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can risk be eliminated?
risk can be reduced, minimised, managed and transfered but not eliminated
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how is the impact of risk measured?
in terms of the amount of financial loss suffered
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what does the amount of loss suffered by an indivdiual provider depend on?
how much exposure they have. teh amount of loss to which a provider is exposed to depends on the money its lent or insured for
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what is expected loss?
the average amount of loss someone could face
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what is unexpected loss?
amount by which the actual loss might exceed the expected loss
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what is catastrophic risk?
a loss in excess of unexpected loss that's unlikely but will have devastating consequences if it does happen
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what are four examples of economic uncertainty?
inflation, economic activity/GDP, stock market and unemployment
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what is real income?
refers to value of people's income in terms of goods and services it will buy- purchasing power
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what must happen in order for an indivdiual to experience a rise in real income?
people's wages must increase more than the rate of inflation
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what is real interest rate?
the difference between nominal interest rate (% figure) and rate of inflation
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what must savers receive in terms of the real interest rate in order to keep ahead of inflation?
they must receive a nominal rate higher than rate of inflation otherwise the purchasing power is falling
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currently most savers are receiving negative real interest rates. explain
the rate they're receiving is lower than rate of inflation
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how can providers make savings products more attractive when interest rates are lower than inflation?
offer a teaser rate for a period of time or offer higher rates for those who are willing to commit a larger sum for longer or those who are existing customers
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what is an index linked savings account?
they guarantee that a saver won't suffer a loss in real return although they never go higher than inflation
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what are 2 products that would benefit from being index linked?
pensions and annuities
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what is a benefit of an index linked annuity?
this product will always compensate for inflation
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what is a drawback of an index linked annuity?
the amount paid will be much smaller than that under a non-index linked one
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what is a benefit of higher inflation?
it might cause demand for mortgage loans to rise and customers benefit from the subsequent rise in value of proeprty
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what is a drawback of higher inflation?
it means interest rates may rise and this will result in a rise in mortgage repayments
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what should fixed rate borrowers do during a period of inflation?
they should save as much as possible during this period, so tehy can meet higher repayments resulting from a higher rate at the end
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what causes volatility in the stock market?
it reflects a sudden sharp change in demand and supply which are in turn caused by high uncertainty by investors
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who is most affceted by a volatile stock market?
small investors as they cant afford big losses in their small portfolio
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what can providers offer customers in order to minimise the impact of uncertainty in stock market?
designing investment products that will help to minimise fluctuations in asset values
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if unemployment is rising, which savings accounts become popular?
instant savings accounts
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why have housing equity withdrawals been negative since 2013?
.
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is the number of people in trouble with their mortgages falling?
yes
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how can providers exercise forbearance?
extending mortgage term, giving borrower a repayment holiday and allowing them to owe more as long as they make at least some payments
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what are 2 advantages of provider not repossessing?
the lender wont have to write it off as a bad debt and it avoids bad publicity of them having to evict
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what is a payment waiver product?
available on most credit unions loans. it provides members with protection against failure to meet repayments due to absence from work through illness
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what is deleveraging?
paying off debts and reducing outstanding credit
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what is the current financial climate?
now generally one in which people borrow, but only if they can afford to
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what is responsible lending?
lenders now must complete a range of affordability checks before granting a loan
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what are 2 examples of responsible lending?
loan to income ratio reduced and customers are advised to pay more than the minimum each month and limit themselves to 1/2 cards
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what are examples of institutional uncertainty?
breaking up bigger banks and retail ring fencing
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why is the govt wary of selling its shares too quickly?
RBS share prices remain low, it must wait until theyre up so the public purse gets back as much
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what is divestment?
disposal of certain parts of a business to make them smaller and to improve competeition in banking sector
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what is retail ring fencing?
process by which retail activities of a UK bank are placed within a subsidary seperate from its investment arm
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what's a main core activity of a bank?
accepting savings deposits
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what is a main excluded activity that ring fenced bank won't be able to carry out?
a bank dealing in investments
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what is menat by electrifying the fence?
PRA have power to force an individual banking group to seperate its retail and wholesale banking completely if the PRA believes that the bank is undermining aims of ring fencing
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what are advantages of ring fencing?
confidence gained in retail banks and investment banks may improve their risk management if they know they wont be bailed out
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what are disadvantages of ring fencing?
doesnt stop the close interconnectivity that caused the crash, the large UK banks may choose to relocate and retail banks also engaged in irresponsible lending not just investment banks
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what are the costs of compliance with regulation?
more administration costs, direct costs of employing compliance staff and costs of ongoing training to ensure all staff are up to date
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what are the knock on costs of compliance with regulation?
providers raising costs and stop granting small loans to customers because theyre not profitable enough to cover compliance costs of granting them
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how does the cooling off period reduce a providers' competitive advantage?
impossibel for a provider to distinguish itself by offering this as all providers offer this facility- need to find other ways
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what are 2 ways of dealing with risk of weather uncertainty?
avoidance and preparation
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insurance companies calculate their premiums on the basis of acturial data. explain
data from the past adjusted for present conditions to calculate a risk probability. higher the probability the higher the premium
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what is a catastrophe bond?
investors purchase these bonds and receive a good rate of interest as long as the disaster doesnt occur. if it does they lose their investment
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what is sharia law?
rules that devout muslims follow which prohibit the payinga nd receiving of interest
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what is islamic home purchase plans?
methods of buying homes that are compliant with sharia law- two main types, ijara and murabaha
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what are the direct costs in relation to terrorist attacks?
to tangable assets e.g. property and also on infrastructure. indirect costs are more widespread- they can affect customers confidence in banks and they may not be willing to invest
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what is money laundering?
process of making dirty money clean, as if it has been acquired through legitimate means
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what is a money laundering officer?
employee of financial provider who must be informed of suspicious activity in the business that might be linked to money laundering or terrorist financing and must report it
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Other cards in this set

Card 2

Front

what is volatility?

Back

refers to the extent to which there are large swings between high and low e.g. exchange rates

Card 3

Front

what cannot be measured, risk or uncertainty?

Back

Preview of the front of card 3

Card 4

Front

what allows people to estimate the likelihood of an event happening?

Back

Preview of the front of card 4

Card 5

Front

what is risk?

Back

Preview of the front of card 5
View more cards

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