The Main Costs And Benefits Of The Financial Sector Of Uk

1: Introduction The financial sector, which is seen as the brain of the economy, plays a pivotal role in providing and channeling finance for consumption and investment in UK economic system (Whittaker, 2002). It encompasses a broad range of financial institutions including banks, building societies, insurance companies and pension funds. Banks, which account for 57% of gross value added of the UK financial sector in 2011, are the key players in the UK financial system (Burgess, 2011). In fact, a well-functioning financial sector could underpin the prospering economy of UK in normal and non-recessionary times. However, a flawed financial system without proper regulation would eventually lead to economic disaster particularly during†¦show more content†¦A well-functioning financial sector should perform smoothly in these aspects. First, the financial sector provides a safe and efficient payment system, which is essential to support the day-to-day business of the UK economy. Millard and Willi son (2006) suggest that an efficient and stable national payment system decreases the cost of exchanging goods and services, and is essential to the functioning of interbank, capital and financial markets. Second, financial institutions perform the financial intermediation role of transferring funds from surplus units to deficit units (Waitzer Sarro, 2014). In contrast to the barter economy, the financial sector sits between savers and borrowers: taking funds from depositors and making loans to borrowers, linking together households, companies, and governments. As such, financial sector could allocate the surplus funds in the society to their most efficient use in the needed areas (Diamond, 1984). For example, the credit provision to SMEs fuels real business to invest in new buildings and machineries to foster their growth. In this way, financial sector benefits the nation by expanding the whole society’s productive capacity, then improving people’s living standards eventually. Third, a well-run financial system facilitates the management and allocation of certain risks (Baily Elliott, 2013). Financial intermediaries have