5.3 Financial Regulation

Question 1

What is the role in regulation of the banking industry

Answer 1

Governments might regulate banks with regulation and guidelines

This helps to ensure the behaviour of banks is clear to institutions and individuals who conduct business with the bank

Question 2

What is meant by moral hazards

Answer 2

This is a situation where there is a risk that the borrower does things that the lender would not deem desirable because it makes the borrower less likely to repay a loan

Question 3

What is systematic risk

Answer 3

This in the financial market can be seen as a negative externality

This is the risk of damage of the economy or the financial market

Question 4

What is a liquidity ratio

Answer 4

This is used to determine how able a company is to pay of short term obligations

The higher the ratio the greater the safety margin of the bank

Question 5

What is meant by capital ratio

Answer 5

This is a comparison between the equity capital and risk weighted assets of a bank

This determines a banks financial strength

Question 6

What is the main role and function or a central bank

Answer 6

The central bank manages the currency, money supply and interest rates in an economy

Question 7

Roles of the central bank

Answer 7

Implementation of monetary policy

Acts as the banker for the government

Acts as banker to the banks

Have a role in regulation of the banking industry