4.4.3 - contd

Question 1

Define capital ratio

Answer 1

measures ratio of a bank’s capital to loans. it gives a measure of the risks associated with the bank’s lending and of the bank’s stability

Question 2

define liquidity ratio

Answer 2

measures the ratio of highly liquid assets to the expected short term needs for cash

Question 3

define systemic risk

Answer 3

possibility that an event at the micro level of an individual bank could then trigger financial instability or the collapse of the entire industry thus threatening the economy

Question 4

Define microprudential regulation

Answer 4

oversight and financial regulation of financial institutions on an individual basis so they dont take excessive risks and act faily to customers

Question 5

aims of microprudential regulation

Answer 5

• ensure individual financial institutions act fairly towards their customers
• prevent financial institutions from taking excessive risks whihc could lead to bankruptcy

Question 6

define macroprudential regulation

Answer 6

approach to financial regulation that aims to mitigate risk to the financial system as a whole (aims to protect resilience of system by reducing/removing systemic risk)

Question 7

role of Financial conduct authority

Answer 7

• • protect consumers and increase confidence in financial institutions by …
    bans misealding adverts for financial products/services (loan sharks)
• promote comp in financial markets so better deals for customers (deregulation)
• supervise fair and legal conduct of firms (no market rigging)
• ban financial products that aren’t of benefit to consumers (mis-selling loans)

Question 8

role of financial policy commitee

Answer 8

• monitors and protects financial system from systemic risk
• issue instructions from PRA AND FCA to tackle problems that threaten financial system
• adivse gov on managing f markets

Question 9

role of prudential regulation of authority

Answer 9

• supervising firms and financial institutions to ensure that they successfully manage risk
• specifiy capital and liquidity ratios
• set industry standards for conduct and management
  PROMOYE COMPEITION AND STABILITY

Question 10

What two things does regulation focus on

Answer 10

• competition
• sturcture of firms and risk management

Question 11

Why does regulation focus on competition

Answer 11

if financial markets are competitive, it benefits consumers

Question 12

Why does regulation focus on structure and risk management

Answer 12

ensures firms are stable by gettign them to meet their capital and liquidity ratios/preventing them from taking excessive risks

Question 13

drawbacks of regulation

Answer 13

• regulators risk regulatory capture
• if regulation is too strict, lead to restrictions on credit which harms econ growth
• growth of shadow banking system

Question 14

what type of regulator is FCA

Answer 14

microprudential - protect customers and increase confidence in financial institutions

Question 15

problems with financial market regulations

Answer 15

• moral hazard: bank bailouts and liquidity assurance scheme promote reckless behavior as they will be covered anyways, thus incentivising excessive risk and harmful decisions
• regulatory capture: form of government failure where those bodies regulating industries become sympathetic to the businesses they are supposed to be regulating so costs of int outweigh ebenfits
• assymetric information: regulators have less information on bank balance sheets than the bank so they struggle to set appropiate capital and liquidity
• unintended consequences: deregulation, shadow-banking (overly strict regulation on commerical banking makes it unprofitable to bankers move to hedge fund (shadow banking) less strict), max interest rates; excess demand, discourage lending harming e growth

Question 16

evaluate financial regulation

Answer 16

• balance needed to protect consumers and protect against systemic risk but to maintain bank profitability
• regulation should promote equity without damaging efficiency
• costs vs benefits

Question 17

Who owns regulators