CHAPTER 2 Flashcards
What is regulation?
A process where a government authority provides oversight and establishes rules for firms in an industry.
Who is responsible for ensuring compliance with financial regulations?
A regulatory agency or governance body.
What is the purpose of financial regulation?
To manage risks and protect all parties in the financial system by imposing standards and policies.
What are the key objectives of financial regulation?
- Identify drivers affecting financial sustainability
- Recognize financial regulators in the Philippines
- **Identify risks ** in financial markets.
What is Credit Risk?
The probability that a payor will not settle their obligation.
What is Liquidity Risk?
The probability of failing to raise sufficient resources to repay financial obligations.
What is Default Risk?
The probability that currently maturing obligations are not settled on time.
What is Technological Risk?
The probability that services will be interrupted due to technological limitations.
What is Legal Risk?
The probability that new laws, rules, or regulations will affect creditworthiness.
What are the key drivers controlled by financial regulations?
- Competitiveness
- Market Behavior
- Consistency
- Stability
What does Competitiveness in financial regulation ensure?
Parity among parties in access to capital, credit, loan terms, and risk management.
How does financial regulation influence Market Behavior?
By setting policies to regulate disclosure, insider information, entry of new players, and governance requirements.
Why is Consistency important in financial regulation?
To isolate factors affecting financial results for better analysis and reduce risk.
What is Market Stability in financial regulation?
Ensuring financial sustainability by managing market risks and forecasting effectively.
Who are the key financial regulators in the Philippines?
- Bangko Sentral ng Pilipinas
- Insurance Commission
- Philippine Securities and Exchange Commission
- Board of Investments
What is the role of Bangko Sentral ng Pilipinas?
Regulating liquidity management, currency issues, reserves, and exchange rates.
What is a payment system?
A system that enables the transfer of funds from one party to another, effecting settlements.
What are the key functions of payment systems?
- Managing safe and real-time transactions
- Effective risk management
- Facilitating financial market transactions
Financial Institutions
Intermediaries that channel savings into loans or investments.
Commercial Banks
Institutions that provide a secure place for savers and offer loans to businesses and individuals.
Investment Banks
Institutions that assist companies in raising capital and engage in market activities.
Shadow Banking System
Institutions that engage in lending but do not accept deposits and are less regulated.
Primary Market
Market where new securities are issued, involving the issuer directly.
Secondary Market
Market where pre-owned securities are traded among investors.
Broker Market
A market where buyers and sellers are directly connected through brokers.
Dealer Market
A market where dealers execute buy/sell orders without direct interaction between buyer and seller.
Money Market
Market for short-term funds (maturity less than a year), including Treasury bills and commercial paper.
Capital Market
Market for long-term securities like bonds and stocks.
Securitization
Pooling loans and selling securities backed by those loans in the secondary market.
Mortgage-backed Securities
Securities representing claims on cash flows from pooled mortgages.
Glass-Steagall Act
A 1933 act separating commercial and investment banking activities.
Securities Act of 1933
Regulates the sale of new securities to ensure adequate disclosure to investors.
Securities Exchange Act of 1934
Regulates trading in the secondary market and established the SEC.
Dodd-Frank Act
A 2010 law aimed at increasing financial regulation to prevent future crises.
Financial Stability Oversight Council
Created by Dodd-Frank to oversee financial system risks.
Federal Deposit Insurance Corporation (FDIC)
Provides insurance for bank deposits and monitors bank stability.
Foreign Bond Market
International market for bonds issued in a foreign currency and country.
Eurocurrency Market
Market for short-term bank deposits denominated in foreign currencies.
Efficient Market
A market where securities reflect all available information, leading to fair pricing.
Risk in Financial Markets
Includes credit risk, liquidity risk, default risk, technological risk, and legal risk.
Capital Gain
Profit from selling an asset for more than its purchase price.
Marginal Tax Rate
The tax rate applied to the last dollar of income earned.
Market Behavior
Regulations ensuring fairness in information disclosure and entry of new players.
Market Stability
The ability of financial markets to function smoothly despite economic fluctuations.
