The Scottish Financial Sector

The Scottish Financial Sector

The Scottish Financial Sector

The Scottish Financial Sector

Excerpt

The intention of this book is to outline and explain the past, present and future development of capital markets and financial intermediation in Scotland. Chapter 1 provides a short history of financial markets and institutions in Scotland and explores the causes of financial development before examining the benefits that have flowed from the existence of a regional financial sector and capital market. A principal function of the capital market is to transfer funds from those economic units such as households which have a surplus of savings to those economic units such as companies which have a deficit of savings. These financial flows between economic units and financial institutions are explored in chapter 2 together with the impact of the financial sector on employment.

The transfer of funds between economic units is achieved in two different ways. Savings surplus units, typically households, may purchase directly the financial claims issued by savings deficit units such as companies or the government, a process facilitated by the existence of financial institutions acting as brokers and informants with the purpose of bringing both parties together. Most direct sales of financial securities take place through the medium of the Stock Exchange and this is considered in chapter 3. Besides new issues the stock market provides a market for existing securities. The sale of such securities provides liquidity by enabling savers to realise their holdings easily when they need to and is an important aid to the investment process. It is carried out primarily through intermediaries such as stockbrokers. The role of these intermediaries is also examined in the chapter.

The transfer of funds between savers and lenders is also effected by financial institutions selling their own securities, termed indirect claims, to ultimate lenders and using the proceeds from these sales to purchase securities from ultimate borrowers. The function of the financial institution is to act as an intermediary standing between the ultimate borrowers and lenders in the economy providing more attractive terms to both parties than would otherwise be possible. As economies grow they experience an increase in the relative importance of indirect as compared with direct financing in the economy. The economy experiences a growth of financial sophistication through the use of financial intermediation.

The financial intermediaries operating in Scotland are considered in chapters 4 to 9; chapters 4, 5 and 6 cover deposit institutions, chapters 7 and 8 discuss investment institutions and chapter 9 examines the role of government agencies with intermediary functions.

The Scottish clearing banks are the most important deposit-taking insti-

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