Final Study Guide 11 Flashcards
What is Legislative/Regulatory Risk
- Unfavorable or unanticipated changes in laws or regulations
- The risk that new or changed legislation will have a large positive or negative effect on an investment.
What is a Law
Laws are the products of written statutes, passed by either the U.S. Congress or state legislatures. The legislatures create bills that, when passed by a vote, become statutory law.
Regulations
Regulations are standards and rules adopted by administrative agencies that govern how laws will be enforced
- They refer both to the process of monitoring and enforcing law as well as documents that contain the details of a written rule
Examples of Legislative Risk
- Healthcare in the United States
- Environmental Impacts
- Labor
- Tax Legislation
Major Regulatory Initiatives
- Basel Banking Standards
- COSO (Committee of Sponsoring Organizations of the Treadway Commission)
- Federal Insurance Office (FIO)
- Financial Stability Board (FSB)
Dodd-Frank
An act to promote financial stability of the United States by improving accountability and transparency in the the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive practices
Dodd-Frank Critical Requirements
- Minimum Leverage Capital Requirements
- Higher Capital Ratios
- Higher Liquidity Requirements
- Volcker Rule
Volcker Rule
trading for hedging or customers’ accounts only but not for firm’s own account
Dodd-Frank Act - Financial Industry Regulation established the
Financial Stability Oversight Council (FSOC)
Financial Stability Oversight Council (FSOC)
- To facilitate regulatory coordination among agencies
- To facilitate information sharing and collection
- To designate nonbank financial companies for consolidated supervision
Key Risks at Financial Services Firms
- Weak capital (too little, or too illiquid)
- Opaque Financial Reporting
- Runs on the bank
- Improper or illegal business practices
Key areas of regulatory focus in Financial Services
- Strong capital (Safer but less profitable)
- Banks reserve requirements
- Well-managed risk
- Financial reporting consistency and transparency
Systemically Important Financial Institutions
(SIFIs)
A bank, insurance company, or other financial institution whose failure might trigger a financial crisis. Colloquially known as “Too Big To Fail”.
FSOC’s stress testing framework criteria
- Size
- Interconnectedness
- Substitutability (Lack of substitutes)
- Leverage (exposure or risk in relation to its equity capital)
- Liquidity risk and maturity mismatch
- Existing regulatory scrutiny
Consumer Financial Protection Bureau, which
Aims to protect consumers from unfair, deceptive, or abusive practices and take action against companies that break the law
Regulatory And Legal Constraints (examples)
- Sherman Antitrust Act
- Clayton Antitrust Act (an amendment to Sherman
Act passed in 1914) - Federal premerger notification program (provides
the FTC and the Department of Justice with information about large mergers and acquisitions
before they occur) - Glass-Steagall Act of 1933 (Prohibited commercial
banks from engaging in investment banking activities)
Diversity Prediction Theorem: Wisdom of Crowds
The aggregation of information in groups results in decisions that are often better than could have been made by any single member of the group
What model to deal with uncertainty
The Six Hats Model – Avoids “Groupthink”
White paper hat
The white hat is about data and information. It is used to record information that is currently available and to identify further information that may be needed.
Fire and warmth hat
The red hat is associated with feelings, intuition, and emotion. The red hat allows people to put forward feelings without justification or prejudice.
Sunshine hat
The yellow hat is for a positive view of things. It looks for benefits in a situation. This hat encourages a positive view even in people who are always critical.
The Black hat
The stern judge relates to caution. It is used for critical judgment. Sometimes it is easy to overuse the black hat.
The Green Hat
The vegetation and rich growth is for creative thinking and generating new ideas. This is your creative thinking cap.
The Blue hat
The sky and overview is about process control. It is used for thinking about thinking. The blue hat asks for summaries, conclusions and decisions.
