Finance as Credit

1)      What is the financial sector?

2)      Difference between financing a corporation and financing a house?

3)      Retail Banking VS Corporate Banking

1)      Many people believe that when they deposit their money into the bank they believe they are lending the banks money.  This common information asymmetry is one reason why banks are able to sell inappropriate financial products that majority of the time lead to miss-selling scandals. The financial sector is established by the existence of all the other industries and economic activities, consequently the view that financial intermediaries are merely the main aspect on how the economy works is the view that is embraced by apologists for the financial sector. Marxist tradition would argue that financial intermediaries extract rent from the real economy and gradually usurp it via financialisation. 2008 financial crisis showed that much financing had been steered unto an artificial bubble with little or no connection to the real economy at all, creating credit with no corresponding creation of goods and services. Followers of Hyman Minsky economist argue that mainstream policy battles around changes to the system of rules that underpin financial activities. Policy process sets out what the systems should do and the web of regulation is supposed to guide financial institutions towards that politically defined vision.

2)      When you financing a corporation is very much the same as financing a house. Instead of one individual being the equity investor, it is an army of shareholders that take the role. Numerous bank provide huge loans, and other debt investors lend via bonds arranged by investment bank. It’s the same principle as buying a house but involves more players and larger sums. A corporation is a collection of income producing assets ring fenced under a common name, acting as a conduit by which equity investors and debt investors can obtain

Claim on those.

3)      Retail banking vs corporate banking when we deposit money in a bank, we are selling them short term credit, and when we borrow from a bank, we are buying credit which is long term. Majority of the time we are not sure if we are paying a fair interest rate. This is known as information asymmetry which plays key advantage to Banks. Retail bankers consist of marketing department that convinces people to deposit and an IT service feeding loan applications into spreadsheets for statistical assessment. There are few bankers who assess loans. Corporate bankers offer similar services but they hire accurate bankers to assess loans, build relationships with large clients. For example HSBC’s corporate banking division will have individual bankers who specialise in for instance, deciding whether to lend a property company £80 million to build a new warehouse. They will be guided by a senior manager who will direct them to set a lending and risk targets for different sectors.

Various ecosystems are interlinked, corporate ecosystem relies on the banking ecosystem and the investor ecosystem and all of them in the final analysis relies on us individual