The UK Financial System
The financial system of the United Kingdom is one of the most complicated in the entire world. A financial system refers to institutions mainly concerned with money transactions between the lenders and the borrowers. For this to happen, each financial system is composed of a variety of markets, financial institutions, money transactions and other instruments that are necessary in the lending and borrowing function. The modern economy critically requires a financial system to aid in the allocation of resources .
In every economy, financial systems play crucial roles in the enabling of transactions from the household level to the corporate sector. In the United Kingdom, the financial institutions are concerned with the allocation of investment funds amongst different companies. Further still, the financial institutions allow expenditures and consumptions of firms and even households. Through a stable financial system, firms and households are able to share risks. Despite the fact that all the functions of financial systems are similar, their form in various economies varies.
There has been an argument of whether the size of a financial system affects the smooth running of an economy. Many economists in the United Kingdom have suggested that its financial system has become too large for the smooth running of the economy. This is just an opinion. To some point it is true, but at the same time, there is never too much of a something. UK’s financial system is among the top in the whole world and it competes with that of the United States.
A large financial system implies to a system where the number of the institutions that lend and borrow is too large, the lending function being so high, many banking and financial institutions and even high investment rates. This has always come with its goodness and bad side on the other hand. Since it is the financial system that manages the allocation of resources, the stability of an economy entirely depends on the financial system. It is the financial system to come up with ways of collecting money from people who are wealthy and distribute it to the needy.
This is called equal distribution of wealth and it is done through taxes. The main bone of contention here is the fact that financial systems determine the stability of an economy. An economy is said to run smoothly when all other macroeconomic concepts are well balanced. This includes the rate of unemployment, the rate of inflation, population of the economy, the interest rates, the level of trade and even the development of other infrastructures among other concepts.
To ensure that all these macro economic problems are well taken care of, the financial system of each economy must be well balanced itself . In the United Kingdom, it is evident that the financial system there is very large. But the question has always been, is it too large to handle that it even affects the smooth running of the economy. One of the characteristic of a large financial system is that there are very many banking institutions in the economy. United Kingdom is no exception of this. It has several banks that compete day in day out.
And in the long run the interest rates have been seen declining. One is eligible to argue that no matter the size of the UK’s financial system, the economy has always achieved its goals. The financial system in the UK is made up of services and goods that are mostly provided by the banking and lending institutions, or rather the financial institutions. These includes insurance banks, various companies dealing with transactions of the economy, banks of various kinds, funds from the pension schemes and even exchanges that are well organized.
Each transaction in the economy of the UK is affected by these financial institutions of the financial system. The main idea here is the fact that all financial institutions in the United Kingdom, however many they may seem, they are of great capacity to the economy of the United Kingdom as they create financial mechanisms for instance paying interests on deposits, lending money to borrowers who are credit worthy, provisions of stocks and bonds and lastly and most importantly establishing and maintaining the payment systems of the United Kingdom.
This clearly suggests that, however big or large the financial system can be, it is still an advantage to the economy. However, too much lending can bring havoc to an economy. The United Kingdom’s financial system at times can be a punishment to the running of the economy. Too much lending weakens the economy. With the United Kingdom’s many financial institutions, the number of banks for instance is too large. This makes lending and borrowing too easy since there is competition among the banks. This will bring down the interest rates of the lending and borrowing.
Interest is the only value of money with regards to time. With frequent lending, at lower interest rates, this will imply that the banks are making too little as profit to their lending function. Now that the banks are the most important financial institutions in the financial system of the United Kingdom, the economy is not likely to stabilize at any chance. When financial institutions start recording losses, the financial system will start weakening, something that is very crucial to the survival of an economy .
Therefore, the argument that, the United Kingdom’s financial system is becoming too large for the smooth running of the economy is somewhat true. Another weakness of the United Kingdom’s financial system is the fact that the financial risks involved are too many that the efforts to achieve its goals in the lending and borrowing function. It is evident that most financial institutions in the United Kingdom have a tendency to lend money without any securities. This has made many citizens of the UK’s to borrow money from banks without thinking to pay back.
Most banks have suffered lots of losses when individuals and even corporations borrow money and fail to pay back. The financial risks involved in the borrowing and lending function are a way too much that it end up affecting the running of the economy. Some time back governments of the UK were forced to cash in trillions of money to help financial institutions from collapsing. This was not a good show and for the economy to be stable, the financial system of that economy must itself be stable in the first instance.
Inflation is another problem with the financial system of the United Kingdom. Too many financial institutions imply that the services offered are in plenty. Too much money circulating in the markets means inflation. When the financial institutions which are too many think they are doing their transactions of lending, they are on the other hand letting out too much money into the market. This is very unsafe for the running of the economy. With too much paper money in the market, the financial system is already weakened.
A weak financial system means an economy that is not stable at all costs. The price of commodities will rise significantly where too much money will be buying too little of a commodity . It is evident that the financial system in the United Kingdom has a complex structure which keeps increasing day in day out and this is relative to the size of the economy. There has been a tremendous increase of debts to GDP ratios both in the corporate sectors and in the households. This has even extended to the financial sector. An economy with high GDP debts is never expected to be stable at any time.
The argument that the UK financial system giving problems to the running of the economy can be not be justified here because the financial system of the United Kingdom has catered for the GDP debts and the banks, have got enough money to pay the debts the country owes. The United Kingdom’s financial system has greatly improved the value of all the trading activities that take place in the country. A strong financial system helps merchants and business people with enough capital to trade in inside the country or even outside the country. High levels of trade help to strengthen the economy the best ways possible.
They say charity begins at home, and when each individual will benefit from the lucrative trading businesses, the economy will improve with the increase in the GDP both nominal and real. The UK economy can run smoothly with the growing financial system, despite some variances in the financial sector. The financial system in the UK has managed to increase the financial markets in the economy of the United Kingdom. This has been due to the materialization of the rates of interest and the credit derivatives products that are credit structured.
Some of these services did not exist some years back in the United Kingdom. This is one advantage the financial system of the UK has brought to the economy of the UK. The thought that the financial system of the United Kingdom will slow down the running of the economy is not justified now that the advantages of a financial system in the United Kingdom are well known to us. This argument is somewhat not justified and the occurrence of the large financial system in the United Kingdom has really helped the smooth running of the UK economy .
On the other side of the coin, the financial system of the United Kingdom is becoming too large for the smooth running of the UK economy. This is seen by the fact that the financial system of the United Kingdom has really been so complex of late in a way that the financial markets are very vulnerable to diverge from the values of equilibrium. This has been created as an impact of the increased financial trading activities that have increased risks despite the fact that it is beneficial to the economy. An economy whose financial markets are threatened by the forces or rather risks of falling is not a stable economy.
The number of risks increases with regards to the increase in the number financial activities taking place in the economy. This has been problematic to the smooth running of the economy as the economy tries to lay down measures and ways to maintain the financial markets at equilibrium. The financial system in the United Kingdom has some types of contracts called the credit contracts. Credit contracts are not healthy for the smooth running of the economy. They introduce a lot of weaknesses to the financial system and most importantly to the economy of the United Kingdom.
With the circulation of many credit contracts in the economy, the leverage level in the real economy increases and that of the financial system also increases. This has made the financial system of the United Kingdom to weaken by each day with regards to the increase of the credit contracts in circulation. With a weak financial system, however big it may seem, the economy will never run smoothly as expected. Therefore the argument that, the financial system in the United Kingdom is affecting the smooth running of the economy is true to some extent.
The United Kingdom’s financial system has bestowed powers to many banking institutions to create money and even establish credit. Most of these institutions have a maturity transformation function that does not meet the required expectations. This is to say that, most banking institutions can make money and establish credit on their own so that they can meet the needs of their clients. These has made these reserved banks to introduce a lot of vulnerabilities to the financial system of the United Kingdom and in the long run it is always the United Kingdom to suffer the loss as it will have difficulties in its functions .
This further will mean that there will me a lot of paper money in circulation, and the price of commodities will increase significantly. This is called inflation. With inflation in the economy, the economy is in the course of a collapse. This will affect the smooth running of the economy. In conclusion, a financial system of every economy determines its success or its failure, its smooth running or complicated running. The United Kingdom’s financial system has been on the lookout as many economists have argued that it is currently becoming too large to handle and for the good functioning of the economy.
The financial system of the UK is very necessary for the running of the economy as it helps to provide means and ways for the solving of the main macroeconomic concepts. In the economy of the United Kingdom, the financial system existing there is very crucial in the running of the economy. Despite its advantages, it is also capable of creating and destroying the smooth running of the economy. It has weakened the economy by creating a lot of vulnerabilities within the financial system.
The complexity of the financial system of the United Kingdom has weakened the running of the UK economy and the economy can no longer run as expected. The argument that the United Kingdom’s financial system has become too large for the smooth running of the UK’s economy is to some extent justified given the negative vulnerabilities the financial system has introduced into the operations of the economy.
Turner, Adair. The Future of Finance Conference in London, Financial Services Authority, 2010, retrieved 19th August 2010, http://www. fsa. gov. uk/pages/Library/Communication/Speeches/2010/0714_at. shtml