12.4 The Regulation Of The Financial System

Question 1

What do governments use regulation to do?

Answer 1

Try and correct market failures to try and correct market failures and achieve a socially optimal level of production and consumption

Also used to limit and deter monopoly exploitation of consumers

Question 2

What does regulation actually mean

Answer 2

Imposing rules and limiting freedoms

Question 3

What does financial regulation involve?

Answer 3

Limiting the freedom of banks and financial institutions

Question 4

Before 2001 who controlled financial regulation in the UK

Answer 4

Bank of England

Question 5

Who are the FSA?

Answer 5

Financial services authority, external regulator with a range of regulatory powers

Question 6

What is the financial policy committee?

Answer 6

Part of the Bank of England

Charged with Primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view of protecting and enhancing the resilience of the UK financial system

Secondary objective is to support the economic policy of the gov

Question 7

What is the difference between the FPC and the FCA

Answer 7

FPC responsible for macro prudential regulation

FCA responsible for micro prudential regulation

Question 8

What is macroprudential regulation concerned with?

Answer 8

Identifying, monitoring and removing risks that affect the stability of the financial system as a whole

Question 9

What is microprudential regulation focused on?

Answer 9

Ensuring stability of individual banks and other financial institutions, involves identifying monitoring and managing risks related to individual firms

Question 10

Who are the prudential regulation authority?

Answer 10

Part of the Bank of England responsible for the microprudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms

Question 11

What does the prudential regulation authority actually do?

Answer 11

Sets standards and supervises financial institutions at the level of the individual firm

Regulated by setting standards which financial institutions are required to follow by assessing risks posted by individual firms

Promote soundness of banks by providing financial services so the stability of the system is ensured

Question 12

What is the financial conduct authority?

Answer 12

Makes sure financial markets work well so that consumers get a fair deal by ensuring the industry is run with integrity so consumers can trust that firms have consumers best interest at heart

Question 13

What is the aim of the financial conduct authority?

Answer 13

-promote effective competition in the interest of consumers

-protect financial markets so as to enhance the integrity of the UK financial system

-protect consumers by securing an appropriate degree of protection for them

Question 14

Prudential regulation authority

Answer 14

Part of the Bank of England responsible for micro prudential regulation and supervision of banks, buildings societies, credit unions, insurers and major investment firms

Question 15

What does the prudential regulation authority do?

Answer 15

Sets standards and supervises financial institutions at the level of the individual firm

By setting standards by which financial institutions are required to follow and supervises by assessing risks posed by individual firms and taking action to make sure they are managed properly

Question 16

What is a banks capital equal to

Answer 16

Value of its assets-the value of its liabilities

Question 17

When is a bank bankrupt ?

Answer 17

When the value of its assets fall to the point it runs out of capital

Question 18

What is a moral hazard?

Answer 18

The tendency of individuals and firms once protected against some contingency to behave so as to make the contingency more likely

Question 19

What increases confidence and stability of banks

Answer 19

The willingness of a bank to act as a lender of last resort and provide liquidity insurance

Question 20

What is the role of the Bank of England?

Answer 20

As a lender of last resort

Question 21

What is the liquidity ratio?

Answer 21

The ratio of a banks cash and other liquid cash to its deposits

Question 22

What is capital ratio

Answer 22

The amount of capital Ona a banks balance sheet as a proportion of its loans

Question 23

Why do banks fail or require gov assistance?

Answer 23

They lacked liquidity or because they had inadequate capital through a combination of these contributory factors

Question 24

What is the difference between liquidity and capital?

Answer 24

On the liquidity side money in a family’s bank account and cash the family has on hand that can be used and easily pay bills are measures of the family liquidity position

On the capital side the family asserts include not just cash but the home, savings account and other investments

The family debts or money it owes are liabilities the difference between the family debts and its assets would provide a measures of the family capital position

Question 25

What is liquidity?

Answer 25

Measure of ability that ease with which assets can be converted into cash

Question 26

What are liquid assets?

Answer 26

Those that can be converted into cash quickly

Question 27

When does liquidity problems arise

Answer 27

When a bank does not no,d sufficient cash to repay depositors or other creditors

Question 28

What is a banks capital

Answer 28

Difference between assets and liabilities

Question 29

What can the banks costal ratio be used as

Answer 29

An indicator of the banks financial health

Question 30

What does financial system risk refer to?

Answer 30

The risk of a breakdown of the entire financial system