Chapter 2- Monetary Policy Flashcards
What are Sectoral Capital Requirements (SCRs)?
It’s when the FPC can temporarily increase capital requirements on exposures to specific sectors
What is a leverage ratio requirement?
Limits financial institutions on their exposure relative to their capital base, helping them to absorb losses and remain solvent
What is regulated by: loan-to-value, debt-to-income and interest-cover-ratio limits?
They are limits on residential mortgage lending
What is the interest coverage ratio?
The ratio of expected rental income from a buy-to-let property to the estimated mortgage interest payments over a given time period
What is stress testing?
When the FPC assesses banks’ resilience and makes sure they have enough capital to withstand shocks,, and to support the economy if a stress does materialise
What is the FPC?
Financial Policy Committee
What is ring-fencing?
It separates banks’ retail banking activities from their investment banking activities
What is the PRA and what does it do?
The Prudential Regulation Authority. It is responsible for the prudential regulation and supervision of financial institutions
What are the 3 main objectives of the PRA?
- Promote safety and soundness of financial institutions
- For insurers to contribute to the securing of an appropriate degree of protection for policy holders
- To facilitate effective competition
What is the FCA and what does it do?
Financial Conduct Authority. It is responsible for promoting effective competition, ensuring that relevant markets function well, and for the conduct regulation of all financial services firms
What are the 5 key principles by which Monetary Policy is conducted?
- Clear precise objectives
- Flexibility: MPC has discretion to set policy to meet targets
- Openness and transparency: publications of MPC member voting records
- Accountability: BoE is accountable to government
- Credibility
What does it mean that the inflation target is symmetrical?
Being below target is just as bad as being above
What are the 2 core purposes of the Bank of England?
- Monetary Stability
- Financial Stability
Describe Monetary Stability
Stable prices & confidence in the currency. Monetary policy that provides framework for non-inflationary economic growth
Give 3 main ways the Bank of England brings about financial stability
- Reinforcing trust and confidence in money
- Supervising financial market infrastructure
- Acting as a lender and market maker of last resort in times of financial stress
What is the primary objective of the FPC?
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
Give 3 main instruments of the FPC
- Countercyclical buffer rate
- Sectoral Capital Requirements (SRC)
- Leverage ratio requirement
What is the countercyclical buffer rate?
The FPC decides the cushion of capital with which to absorb potential losses banks must have. The rate increases when it seems risks are building up
How does Quantitative Easing work?
The BoE electronically creates new money and uses it to purchase gilts from private investors such as pension funds and insurance companies. These investors typically don’t want to hold on to this money, because it yields a low return so they tend to buy other assets thus increasing issuance of equity and bonds which stimulates spending
What is a gilt?
UK Government bond
What is the Term Funding Scheme (TFS)?
Enables banks to borrow funds from the BoE at close to the bank rate for up to 4 years so as to reinforce the transmission of bank rate cuts to those interest rates faced by households and businesses
Give 2 pros of the BoE’s operational independence
- The MPC has more expertise than the government
- BoE protected from political pressure
Give a con of the BoE’s operational independence
The BoE is substantially limited in various ways
What are Monetary Aggregates?
Ways of measuring the money in an economy