4.4.3 - contd Flashcards
Define capital ratio
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
define liquidity ratio
measures the ratio of highly liquid assets to the expected short term needs for cash
define systemic risk
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
Define microprudential regulation
oversight and financial regulation of financial institutions on an individual basis so they dont take excessive risks and act faily to customers
aims of microprudential regulation
- ensure individual financial institutions act fairly towards their customers
- prevent financial institutions from taking excessive risks whihc could lead to bankruptcy
define macroprudential regulation
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)
role of Financial conduct authority
- protect consumers and increase confidence in financial institutions by …
bans misealding adverts for financial products/services (loan sharks)
- protect consumers and increase confidence in financial institutions by …
- 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)
role of financial policy commitee
- 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
role of prudential regulation of authority
- 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
What two things does regulation focus on
- competition
- sturcture of firms and risk management
Why does regulation focus on competition
if financial markets are competitive, it benefits consumers
Why does regulation focus on structure and risk management
ensures firms are stable by gettign them to meet their capital and liquidity ratios/preventing them from taking excessive risks
drawbacks of regulation
- regulators risk regulatory capture
- if regulation is too strict, lead to restrictions on credit which harms econ growth
- growth of shadow banking system
what type of regulator is FCA
microprudential - protect customers and increase confidence in financial institutions
problems with financial market regulations
- 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
