4.12.4 - The Regulation of the Financial System Flashcards
What is the financial policy committee?
The part of the BoE charged with the primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system.
What is the prudential regulation authority?
The part of the BoE responsible for microprudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms.
What is the main difference between the FPC and PRA?
The FPC is more concerned with macroprudential regulation.
The PRA is more concerned with microprudential regulation.
What is macroprudential regulation?
Identifying, monitoring and acting to remove risks that affect the stability of the financial system on the whole.
What is microprudential regulation?
Ensuring the stability of individual banks and other financial institutions.
Involves identifying, monitoring and managing risks that relate to individual firms.
What is the financial conduct authority?
Aims to make sure that financial markets work well so consumers get a fair deal, by ensuring that the financial industry is run with integrity and that consumers can trust that firms have their best interests at heart, and by providing consumers with appropriate financial products and services.
What is the aim of the FCA?
- Protect consumers by ensuring appropriate degrees of protection.
- Protect financial markets to enhance the integrity of the UK financial system.
- Promote effective competition in the interests of consumers.
What is the capital of a bank?
Assets minus the value of liabilities.
What happens if the capital of a bank runs out?
The bank becomes insolvent or bankrupt.
How is the confidence in the banks increased?
The BoE acting as a lender of last resort.
How do banks show moral hazard?
The banks pursue huge profits because they know the BoE will act as a lender of last resort, and the government will bail them out.
As a result, there is insufficient incentive to act prudently.
What is moral hazard?
The tendency of individuals and firms, once protected against some contingency, to behave so as to make that contingency more likely.
Why did moral hazard increase after ‘08?
Initially, the BoE wanted to let banks fail to teach other banks a lesson. They reconsidered and essentially nationalised banks because a crisis could quickly occur across the entirety of the commercial banking system.
The BoE and government replaced the policy of allowing banks to fail with rescuing banks deemed ‘too big to fail’ to prevent further economic damage.
What is a liquidity ratio?
The ratio of a bank’s cash and other liquid assets to its deposits.
What is a capital ratio?
The amount of capital on a bank’s balance sheet as a proportion of its loans.
