Functions of European Financial Market - Case Study Example

European financial market INTRODUCTION The banks are the best examples of financial intermediation. Banks(Levine, 1999) offer their services to accept deposits from their current and new client depositors. The banks also offer to grant loans (Shetty, 1995) to possible client lenders. The banks will grant loans only if the feasibility study( Thompson, 1999) given by the company applying for the bank loan can show proof that it can pay on time the monthly or quarterly or annual installments(Meigs, 1995). Pooling of funds is one of the better tools for management to use in order to maximize profits. The paragraphs below will explain what pooling of funds(Reilly, 1997) is all about and also what financial intermediaries like banks (Collins, 1992) do. BODY 1A. DISCUSS THE CONCEPT OF 'POOLING OF FUNDS' AND THREE OTHER FUNCTIONS OF THE FINANCIAL SYSTEMS IN ANY EU COUNTRY OF YOUR CHOICE. (60% ) POOLING OF FUNDS. In business parlance, pooling is the grouping credit transactions like bank loans( Brigham, 1985). An example is when loans and other long term liabilities with the same characteristics are pooled successfully into a new stock. Other examples of pooling applying for cash loans(Weston, 1993) with property, plant and equipment are used as collateral loan received is used to invest in several stocks and bonds. The company can also enter into a bond agreement where the bank intermediaries will give a $200,000 loan where the house and lot and another factory equipment will be pooled together to be used as collateral to put buy stocks in the stock exchange. Funds includes all available money, including cash and checks deposited in banks and cash on hand. Funds also include mutual funds(Gartner,1997) where money is invested in many stocks and bonds and not lumped on one stock or bond alone. Pension fund is one fund pooling where the employees contribute a small amount of money to a fund so that when such employee retires, he or she will be able to receive a pension benefit upon his or her retirement. Pension fund could be availed of upon retirement either by lump sum method or monthly method. The factors that affect the success(Thompson, 1999) or failure of a pension fund is based on the tables below. The Life expectancy table shows , in 2002, that in the United Kingdom women will generally live until the ripe old age of 80 years old as compared to only 73.7 years old in 1960. The men, meanwhile, will live up to the ripe age of 75.2 which is an increase from the 67.0 years old age in the year 1960. The elderly will increase to 47 percent in the year 2040 in the United Kingdom as compared to only 32 percent in the year 2020. The table below also shows that pension assets divided by Gross Domestic Product is 91 which lower than the amount accorded to Switzerland and Sweden. The pension assets of United Kingdom pension assets will reach US $1,403,000.000. The real returns divided by risk for United kingdom pension fund is 5.9 and its 50-50 bond equity is 4.4 while the pension plan's global portfolio 67.5 and lastly, The real average earnings of United Kingdom is 2.8. One popular pooling of fund transaction is to exchange cash on and cash in banks and to invest these funds in the stock market. The company then generates income both ways. The first way is to earn dividends that the invested company declares. The second way to gain income is to sell the stocks at a market price that at a much higher than the price when the company bought the stocks. THREE OTHER FUNCTIONS OF FINANCIAL SYSTEM Financial System (UK) . This is defined as the information system(Obrien,1992) shows us all MONEY transactions using applications such as word, excel, quickbooks, MYOB accounting software and many others for the gathering of business related data such as official receipts received from suppliers for purchases paid or officials receipts issued for items sold. Electricity, water and telephone bills are also documents evidencing data to be inputted in the computer. Then the information is processed or recording in the accounting books in their proper homogenous chart of accounts. This is called journalizing. Then after the recording of transactions is finished, a ledger for each account title will be made. Then the output of this financial system will be the balance sheet and income statement. The accounting systems encompasses the recording of financial data, planning financially for the future, making a budget or setting attainable production and sales goals to be accomplished within the next accounting period which usually a one year period, breakdown of individual costs for each department or order received. The government sees to it that all taxes are being paid and that all laws regarding proper recording of assets, liabilities and capital accounts are legally done. The FIRST FUNCTION of the financial system of UK is presentation of financial statement (Hite, 1996) to users of this much needed data. The financial intermediaries, like UK banks) will produce financial statements and give bank statements to its clients so that affected parties will know whether the financial intermediary made an income for the year and whether a new branch will be opened in uncharted territories and employees or a branch will have to be removed because of a bleak future since competitors have now gained the upper hand. The suppliers and banks need the financial statements(Reilly, 1986) in order to determine if the bank(Ross, 1996) and or suppliers will grant additional loans and credit limits to the company. The UK government and its duly authorized tax collection agencies need the financial statements in order to estimate the tax collections within its territorial jurisdiction. A SECOND FUNCTION of the financial system is handling deposit accounts (Gadhunucgakajusm 1995) and this applies to the banks in the United Kingdom. Based on chart 118 below, The growth in the UK private sector has increased. This is a good sign. Chart 136 below shows that the new entrant's household deposits have gone down further. This is not a good sign for the bank. Chart 126 also states that the banking sector lending to vulnerable companies has drastically gown down the chart. A THIRD FUNCTION of the financial system is giving loans to its clients. (Westerfield,1996) Chart 125 below shows that there is a sharp decline in the loans given to vulnerable UK companies. The bank intermediaries work hard for the interest income on loans that it gives the bank's clients. Chart 134 below shows that United Kingdom commercial banks had before tax income on equity that has increased dramatically. 2B. IDENTIFY AND ASSESS TWO FACTORS THAT MAY HAVE CONTRIBUTED TO THE DECLINING VOLUME OF FINANCIAL INTERMEDIATION IN THE UNITED KINGDOM IN THE PAST TEN YEARS (40%) FIRST FACTOR. The first factor among many factors that aided in the decline in the volume of financial intermediation in the UK for the past ten years is domestic competition. In fact, Chart 138 shows that constraints on banking business in the United Kingdom where level of demand is about seventy percent, availability of professional staff is thirty percent, availability of clerical staff is also thirty percent, adequacy of systems capacity is sixty percent, ability to raise funds twenty five percent, domestic competition one hundred percent, overseas competition is twenty five percent, and statutory legislation is fifty five percent. Competition is the number one factor for the decline in volume of financial intermediation in the United Kingdom for the past ten years. Many banks have sprouted up thereby making the market share of each United Kingdom Bank smaller. Table 11 below shows the profitability and capitalization of the following companies. The commercial banks have the highest return on assets of 1.4 percent. This is followed by the mortgage banks with a return on assets of 1.2 percent. Another sectors is the United Kingdom owned investment banks with a 1.1 percent return on assets ratio. Then the other retail banks garnered 1.6 percent of the total return on assets. As for return on equity, the commercial banks again garnered 26.8 percent of the total. This is followed by the Mortgage banks with a 26.3 percent share of the entire return on equity. Then this is again followed by the Other retail banks with a 19.1 percent return on equity. This is then followed by the United Kingdom owned investment banks with a return on equity of a lower 17.8 percent. Chart A below shows that the United kingdom commercial banks have the biggest share of the pie entitled total assets of United kingdom banking sector by peer group for as of September 2006. The United Kingdom EEA owned bank , has the next to the smaller pie share in of total assets and then followed by the next group which is the mortgage banks follow the UK commercial banks with a smaller pie share. SECOND FACTOR. The second factor, among many factors that aided in the decline of volume of financial intermediation in the UK in the past 10 years is availability of professional and clerical staff. The banking business is basically a service business. Therefore business must be fast. This is the reason why most UK banks now offer online deposit and withdrawal transaction services. Most banks even go to the extend of offering bigger salaries to present employees of other competitors who are usually the key employees. The key employees, when hired, can now teach the new bank he or she works with the secret promotional programs in order to offer the same or even faster and better services to the other bank's clients. It is statistically proven that bank employees who have been pirated from other banks do deliver the services of satisfying customer wants because the newly hired transferees will be able to entice the clients to transfer. Therefore, it boils down to one thing, and that is SERVICE. One service that the bank can offer is give the employees an Automatic Teller Machine card so the bank's client's employees can just withdraw their salaries at any of the numerous Automatic Teller machine outlets. CONCLUSION Based on the above data, financial intermediaries follow a financial system. This system goes from gathering source documents like official receipts and the like . Then the source documents are then recorded in the books of accounts like the journal book and the ledger. Nowadays, the journal book has been replaced by the computer. The computer then generates a financial statement and all other relevant and much needed reports like schedule of accounts receivable and schedule of accounts payable. The banks offer many services in order to earn a living. One of its major services is to accept deposits. Clients are offered interest income and other perks like free Christmas gifts and automatic teller machine card for the bank's clients' employees. The banking system has seen a decline in the number of clients for the past ten years because of many reasons. One major reason is that there are now so many new banks offering the same deposit services thereby saturating the market causing the decrease in the market share of each bank. Charles Darwin even stated that in the animal kingdom only one law is obeyed. That law is SURVIVAL OF THE FITTEST. Banks also offer its all its clients loan privileges. This is where the bank earns its interest income. Another service that the financial intermediaries can offer is to produce the financial statements for the clients' convenience. The bank intermediary will produce financial statements in order to show the clients the amounts deposited in the bank. The bank's clients can also be given ATM cards so that the bank's client will not need to fall in line in the bank to withdraw or even deposit money. It is feasible to enter into a pension fund investment. REFERENCES: Levine, R., Law, Finance and Economic Growth, Journal of financial Intermediation Dept of Economics, University of Virginia, 8, 8-35 (1999) Reilly et al., Investment Analysis and Portfolio Management, Dryden Press, London, 1997 Brigham, E., Financial Management, Dryden Press, London, 1985 Shetty et al., Finance, Irwin, London, 1995 Weston et al., Essentials of Managerial Finance, Dryden Press, London, 1993 Gardner et al., The Motley Fool Investment Guide, NY, 1997 Thompson A., Strickland A, Strategic Management, McGrawHill, London, 1999 Meigs et al., Financial Accounting,MGrawHill, London, 1995 Collins et al., The Portable MBA, J. Wiley & Sons, NY,1992 Obrien, V., The Fast Forward MBA, J Wiley & Sons, NY, 1992 Hadjimichalakis et al, contemporary money, banking & financial markets, Irwin,UK, 1995 Reilly, F., Investments, Dryden Press, London, 1986 Hite, M., A Programmed Learning Guide to finance, Irwin, London, 1996 Ross et al, Essentials of Corporate Finance, Irwin, London, 1996 Westerfield et al., Corporate Finance, Irwin, London, 1996 http://www.zen13767.zen.co.uk/madrid.pdf http://www.bankofengland.co.uk/publications/fsr/2000/fsr09art1sec6.pdf#search='financial%20system%20uk' TABLE 1 http://www.zen13767.zen.co.uk/madrid.pdf http://www.bankofengland.co.uk/publications/fsr/2000/fsr09art1sec6.pdf#search='financial%20system%20uk' Read More