What is meant by financial intermediation?

Financial intermediation is the channelling of funds from those with a surplus to save to those who wish to borrow, with the intermediary standing between the two and taking on the resulting risks.

Why does maturity transformation make a bank vulnerable?

If a large number of depositors want their money at the same time the bank cannot call in its long-term loans quickly, so a fundamentally solvent bank can fail through illiquidity.

How does a bank perform risk transformation?

It pools many small deposits and spreads its lending across a large number of unrelated borrowers, so no single default threatens the depositors, who bear far less risk than if they had lent directly.

Why can a bank lend more cheaply than an individual saver could?

It has specialist expertise in assessing borrowers, spreads the fixed cost of screening and monitoring over a large loan book, and diversifies default risk, all of which lower the cost and risk per pound lent.

Define working capital.

Working capital is the finance tied up in day-to-day operations, measured as current assets less current liabilities, and it funds stock, work in progress and the credit given to customers.

Edexcel A-Level Economics B 9EB0

Scarcity, Choice and Potential Conflicts

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Enterprise, Business and the Economy

Topic overview The entrepreneur and creative destruction Adding value Entrepreneurial motives Factors of production Division of labour and specialisation The wider economic environment and the firm

Introducing the Market

Topic overview Consumer objectives and the demand curve Movements along and shifts of the demand curve Producer objectives and the supply curve Movements along and shifts of the supply curve Equilibrium price and quantity Excess demand, excess supply and market forces Shifts in demand and supply in real markets Limitations of the supply and demand model Functions of the price mechanism Mass markets, niche markets and market growth Market research and consumer insight Market segmentation Market mapping and competitive advantage Adding value, pricing decisions and dynamic markets

The Role of Credit in the Economy

Topic overview Banks and the channelling of savings into investment Bank lending, interest rates and collateral Risk in business decision-making Limited and unlimited liability Loans, overdrafts and trade credit Venture capital, share capital and leasing Owner's capital, retained profit and other sources of finance Challenges in obtaining credit and the impact of credit on the economy

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Revenue, Costs, Profits and Cash

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Business Growth and Competitive Advantage

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Introduction to Macroeconomic Policy

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Globalisation

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Impact of Globalisation on Global Companies

Topic overview Globalisation and glocalisation Ethnocentric, polycentric and geocentric approaches to global markets Price and non-price competition in global markets Branding and differentiation in global markets Cultural and language barriers in global markets Adapting marketing strategy for niche and mass markets

Impact of Globalisation on Local and National Economies

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Global Labour Markets

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Inequality and Re-Distribution

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Competition and Market Power

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Market Power and Market Failure

Topic overview Cartels, collusion and restrictive practices Monopsony, natural monopoly and power in the labour market The implications of market failure for firms, consumers and government Promoting competition: anti-competitive practices, mergers and privatisation Regulating natural monopolies and protecting consumers and employees The Competition and Markets Authority and EU competition policy The benefits and costs of regulation

Market Failure Across the Economy

Topic overview Merit and demerit goods Factor immobility and information failure Externalities and social costs and benefits Environmental externalities and environmental change Policies to correct market failure

Macroeconomic Policies and Impact on Firms and Individuals

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Risk and the Financial Sector

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Risk and the Financial Sector

Mobilising savings and lending for business investment

3 things to know
Papers 1 and 3

Overview

Financial intermediation, maturity transformation and the vulnerability it creates, risk transformation, cheaper bank lending, working capital and growing firms, bank finance for working capital and invoice factoring, debt against equity finance, collateral, gearing, bank lending and productive capacity, and credit crunches.

What you need to know

Answer each one before you reveal it.

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Key term

What is invoice factoring?

Key term

What is gearing, and why does a lender examine it?

Key term

What is meant by maturity transformation?

Questions from this subtopic

Each one with the model answer underneath.

1
What is meant by financial intermediation?
Model answer
Financial intermediation is the channelling of funds from those with a surplus to save to those who wish to borrow, with the intermediary standing between the two and taking on the resulting risks.
2
What is meant by maturity transformation?
Model answer
Banks accept deposits that can be withdrawn on demand or at short notice and lend them out for years, so short-term liabilities are transformed into long-term loans.
3
Why does maturity transformation make a bank vulnerable?
Model answer
If a large number of depositors want their money at the same time the bank cannot call in its long-term loans quickly, so a fundamentally solvent bank can fail through illiquidity.
4
How does a bank perform risk transformation?
Model answer
It pools many small deposits and spreads its lending across a large number of unrelated borrowers, so no single default threatens the depositors, who bear far less risk than if they had lent directly.
5
Why can a bank lend more cheaply than an individual saver could?
Model answer
It has specialist expertise in assessing borrowers, spreads the fixed cost of screening and monitoring over a large loan book, and diversifies default risk, all of which lower the cost and risk per pound lent.
6
Define working capital.
Model answer
Working capital is the finance tied up in day-to-day operations, measured as current assets less current liabilities, and it funds stock, work in progress and the credit given to customers.

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Scarcity, Choice and Potential Conflicts

Enterprise, Business and the Economy

Introducing the Market

The Role of Credit in the Economy

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ABorrowing becomes dearer and saving more rewarding.

BMortgage holders have less disposable income left.

CSpending on credit-financed items falls.

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