A-Level Economics: Financial Markets, Banks and the 2008 Crisis

The DfE subject content lists the financial sector as an area of study in its own right: the role of financial markets and their impact on the real economy, financial regulation and the role of central banks. This material goes beneath the headline ideas of monetary policy to the markets and institutions themselves, and to the crisis that reshaped how they are regulated.

It begins with the structure of financial markets: the money market for short-term funds, the capital market for long-term finance through shares and bonds, and the foreign exchange market. You distinguish debt from equity finance and work with government bonds, calculating a current yield (a £5 coupon on a bond priced at £125 gives 4%) and explaining why bond prices fall when market interest rates rise.

The banking section explains how a commercial bank works. You identify assets and liabilities on its balance sheet, weigh its objectives of liquidity, profitability and security and the conflicts between them, and see how making a loan creates a new deposit and so adds to broad money. You then analyse why banks fail: borrowing short and lending long leaves them exposed to runs and to the drying-up of wholesale funding (a liquidity crisis), while losses larger than their capital make them insolvent, which is why capital and liquidity ratios matter.

The 2007–08 financial crisis ties these ideas together: subprime mortgage lending, securitisation that spread and hid risk, high leverage and dependence on short-term funding, and the credit crunch that turned a banking crisis into a recession in the real economy. The regulatory response completes the picture: the Prudential Regulation Authority supervising individual firms, the Financial Policy Committee watching the system as a whole, the Financial Conduct Authority regulating conduct, and the Bank of England as lender of last resort, together with the moral hazard that rescues can create.

The material offers a 12-question quiz with explanations, a flashcard deck of key terms, a printable written sheet of eight questions with model answers (including a bond calculation and an evaluation of bank rescues), and an oral exam in which an examiner questions you on markets, banks and regulation one question at a time. It goes deeper than the category's fiscal and monetary policy material rather than repeating it. For example, AQA covers these points in its sections on financial markets, commercial and investment banks and the regulation of the financial system, and Pearson Edexcel in Theme 4 on the financial sector.

• Distinguish the money, capital and foreign exchange markets, and debt from equity
• Calculate a bond yield and explain the inverse relationship between bond prices and interest rates
• Explain a commercial bank's balance sheet, the conflicts between its objectives and how banks create credit
• Analyse why banks fail, distinguishing liquidity from solvency problems
• Explain the causes of the 2007–08 crisis and the roles of the PRA, FPC, FCA and lender of last resort

Practice material written by Zestly, based on the DfE GCE A level economics subject content (2014), area 'Financial sector' (role of the financial sector and its impact on the real economy; financial regulation; role of central banks), with examples drawn from the AQA (financial markets and monetary policy; regulation of the financial system) and Pearson Edexcel (Theme 4, the financial sector) specifications.