12.4 The Regulation Of The Financial System Flashcards
What do governments use regulation to do?
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
What does regulation actually mean
Imposing rules and limiting freedoms
What does financial regulation involve?
Limiting the freedom of banks and financial institutions
Before 2001 who controlled financial regulation in the UK
Bank of England
Who are the FSA?
Financial services authority, external regulator with a range of regulatory powers
What is the financial policy committee?
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
What is the difference between the FPC and the FCA
FPC responsible for macro prudential regulation
FCA responsible for micro prudential regulation
What is macroprudential regulation concerned with?
Identifying, monitoring and removing risks that affect the stability of the financial system as a whole
What is microprudential regulation focused on?
Ensuring stability of individual banks and other financial institutions, involves identifying monitoring and managing risks related to individual firms
Who are the prudential regulation authority?
Part of the Bank of England responsible for the microprudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms
What does the prudential regulation authority actually do?
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
What is the financial conduct authority?
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
What is the aim of the financial conduct authority?
-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
Prudential regulation authority
Part of the Bank of England responsible for micro prudential regulation and supervision of banks, buildings societies, credit unions, insurers and major investment firms
What does the prudential regulation authority do?
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
What is a banks capital equal to
Value of its assets-the value of its liabilities
When is a bank bankrupt ?
When the value of its assets fall to the point it runs out of capital
What is a moral hazard?
The tendency of individuals and firms once protected against some contingency to behave so as to make the contingency more likely
What increases confidence and stability of banks
The willingness of a bank to act as a lender of last resort and provide liquidity insurance
What is the role of the Bank of England?
As a lender of last resort
What is the liquidity ratio?
The ratio of a banks cash and other liquid cash to its deposits
What is capital ratio
The amount of capital Ona a banks balance sheet as a proportion of its loans
Why do banks fail or require gov assistance?
They lacked liquidity or because they had inadequate capital through a combination of these contributory factors
What is the difference between liquidity and capital?
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
What is liquidity?
Measure of ability that ease with which assets can be converted into cash
What are liquid assets?
Those that can be converted into cash quickly
When does liquidity problems arise
When a bank does not no,d sufficient cash to repay depositors or other creditors
What is a banks capital
Difference between assets and liabilities
What can the banks costal ratio be used as
An indicator of the banks financial health
What does financial system risk refer to?
The risk of a breakdown of the entire financial system
