Chapter 2: International Risk Regulation

Question 1

what is the role of the BIS?

Answer 1

Bank for International Settlements serves as a bank for central banks, and fosters international monetary and financial cooperation

Question 2

what is the nature of regulatory guidelines produced by the BIS?

Answer 2

do not have any force in national or international law, and countries around the world that choose to implement them do so by making changes to their own legal and regulatory processes

Question 3

why does the BCBS exist ?

Answer 3

Basel Committee on banking supervision. exists in order to enhance understanding of supervisory issues and improve the quality of banking supervision worldwide – a sort of ‘regulators’
regulator’.

Question 4

what does the BCBS establish?

Answer 4

establishes standards on capital adequacy to ensure that banks have sufficient reserves to withstand specific levels of risk. also establishes a set of core principles to which national regulators are expected to adhere in their interaction with financial services firms in their jurisdictions

Question 5

what three pillars are capital adequcy requirements groups into?

Answer 5

1. calculation of the minimum level of capital which a firm should hold.
2. enables the firm itself to offer its own view of the level of capital it should hold
3. public disclosure of certain prescribed aspects of the firm’s capital and approach to risk management

Question 6

what does the Basel accord stipulate?

Answer 6

stipulates the minimum capital ratios that should be maintained by banks in member countries

Question 7

how does the basel committee seek to achieve its aims?

Answer 7

by setting minimum standards for the regulation and supervision of banks; by sharing supervisory issues, approaches and techniques to promote common understanding and to improve cross-border cooperation

Question 8

what are the preconditions that the Basel committee sets out?

Answer 8

1. Sound and sustainable macroeconomic
2. well-established framework for financial stability policy
3. well-developed public infrastructure
4. clear framework for financial crisis management,
5. Mechanisms for providing an appropriate level of systemic protection
6. Effective market discipline.

Question 9

what is the point of the 29 core principles for Effective Banking Supervision?

Answer 9

de facto global standard for sound regulation and supervision of banks

Question 10

what do the different sections of the 29 core principles cover?

Answer 10

1–13 address supervisory powers, responsibilities and functions
14–29 cover supervisory expectations of banks

Question 11

what does pillar 1 of the basel accord involve?

Answer 11

applying ‘formulaic’ methods for calculating the regulatory capital.

Question 12

what can the basic Pillar 1 capital requirement for banks can be expressed as

Answer 12

capital/ credit risk + market risk + operational risk >8%

Question 13

what does pillar 2 of the basel accord involve?

Answer 13

firms submitting information, enable the regulator to assess the amount of capital that should be held

Question 14

what is the extra information in pillar 2 concerned with?

Answer 14

• risks not covered under Pillar 1
• way that risk is managed
• quality of the controls’ infrastructure
• way in which the calculated risk profile relates to the strategic and financial plans of the firm

Question 15

what does pillar 3 require firms to do?

Answer 15

to publish information about the way they manage the risks they face.

Question 16

what is the purpose of the sound principle documents published by the Basel Committee?

Answer 16

guidance on different aspects of risk management. include all the main risk areas

Question 17

what does the formalised process for meeting pillar 2 of the Basel Accord require firms to do?

Answer 17

• assess its risks mitigants
• subject the results to rigorous stress testing
• determine an appropriate level of capital and liquidity for their risks

Question 18

what are the key elements of the Internal Capital and Liquidity Assessment Framework?

Answer 18

The Firm’s Risk Exposure, Firm’s View on the Adequacy of its Risk Management Processes, Firm’s Financial and Capital Plans, Stress and Scenario Tests, Use Test, and the final setting of the capital and liquidity level

Question 19

what does the capital and dividend plan need to be compared to ?

Answer 19

the aggregated results of the various separate risk assessments to make sure that they’re in line with each other

Question 20

what is the benefit of the internal capital and liquidity assessment process becomes more widely adopted within a firm?

Answer 20

more diligence in their inclusion of risk factors earlier in the new business design process, risk taken more seriously by senior managers

Question 21

What does , the Basel Concordat on Cross-Border Banking Supervision provide?

Answer 21

a framework for multi-jurisdiction supervision, focus on international banks’ solvency, liquidity and fx positions.

Question 22

what is the man home principle?

Answer 22

that parent banks and parent supervisory authorities should monitor the risk exposure of the banks or banking groups for which they are responsible

Question 23

what does the concordat on Cross-Border Banking Supervision set out?

Answer 23

certain principles which the Basel Committee
believes should govern the supervision of banks’ foreign establishments by parent and host authorities

Question 24

what are the principles set out by the Cross-Border Banking Supervision concordat?

Answer 24

1. All international banks should be supervised by a home country authority
2. The creation of a cross-border banking establishment should receive the prior consent of host country and the home country authority.
3. Home country authorities should possess the right to gather information from cross-border
   banking establishments.
4. If the host country authority determines that any of these three standards is not being met, it could impose restrictive measures

Question 25

what are the two broad approaches to financial regulation?

Answer 25

1. specific legal rules which must be obeyed. This is known as the ‘statutory approach’
2. o set out in more general terms the types of behaviour that are expected of firms and individuals. This is known as the ‘principles-based approach’

Question 26

why do adherents prefer principles/statutory-based approaches?

Answer 26

adherents of principles-based regulation favour it because they believe that it is impossible to write a rule for every specific situation that a regulated firm might encounter

many practitioners operating in compliance or legal departments are more comfortable
with a rules-based approach as they can utilise the detailed guidance surrounding it

Question 27

what can supervision be described as?

Answer 27

day-to-day regulatory relationship with firms – the process of monitoring them to ensure they are complying with the regulatory requirements

Question 28

what principles are firms supervised according to and how are their risks assessed?

Answer 28

supervised according to the risks they present to statutory objectives and their risks are assessed in terms of impact and probability

Question 29

how is the determination to protect customers reflected by the FCA

Answer 29

In their 11 principles for business? first 5 (indirect effect on customers), second 5 (direct effects on customers) last (firm and regulator relationship)

Question 30

what does a regulators ‘conduct of business’ address?

Answer 30

the way in which business is done, particularly in product marketing, distribution and management

Question 31

when do regulators expect conduct risk to be considered?

Answer 31

at every stage of the product or service lifecycle

Question 32

what does the SMR focus on?

Answer 32

Senior Managers Regime. focus on individuals who hold key roles in relevant firms. Firms must ensure that relevant persons are aware of conduct rules and their application

Question 33

what is the final part of the principles-based approach?

Answer 33

the definition of regulatory processes that define the regulators supervisory and disciplinary functions. these outlines the regulators areas of assesment and their ability to infringe disciplinary action

Question 34

what does the base level of supervisory intensity depend on?

Answer 34

risk impact and probability scores assigned to a firm

Question 35

what areas of an authorised firm does the regulator need to asses?

Answer 35

management and culture, control functions, capital and liquidity

Question 36

what additional areas do regulators asses for firms with retail presence?

Answer 36

customers, products, markets