Macroeconomics 5.3 Financial regulation Flashcards
What is the purpose of financial regulation?
To ensure the stability and integrity of the financial system, protect consumers, and promote competition
Financial regulation employs various methods to achieve these objectives.
What are the roles of a central bank?
- Issuing currency
- Managing monetary policy
- Acting as a lender of last resort
Central banks also oversee the banking system and ensure financial stability.
Why is the regulation of financial institutions important?
It prevents financial crises, protects consumer interests, and promotes confidence in the financial system
Effective regulation can enhance economic stability and growth.
What is Quantitative Easing (QE)?
A monetary policy where a central bank purchases financial assets to inject money into the economy
QE aims to lower interest rates and increase liquidity.
What is the relationship between yields and bond prices?
Inverse relationship: as yields rise, bond prices fall, and vice versa
This is due to the fixed interest payments of bonds becoming more or less attractive compared to new bonds.
What is Microfinance?
Financial services provided to low-income individuals or those without access to typical banking services
Microfinance aims to empower entrepreneurs and foster economic development.
What was the Global Financial Crisis (GFC) of 2007-09?
A severe worldwide economic crisis that led to the collapse of financial institutions and significant economic downturn
The crisis was triggered by the housing bubble and high-risk mortgage lending.
What contributed to the GFC?
- Excessive risk-taking by financial institutions
- Poor regulatory oversight
- High levels of debt and leverage
These factors created a fragile financial environment.
What was the problem with regulation during the GFC?
Regulatory bodies failed to adequately monitor and manage systemic risks in the financial system
This led to a lack of preparedness for the crisis.
What were the outcomes of the GFC?
Short term: severe recession, bank failures, high unemployment
Long term: regulatory reforms, changes in financial practices
The GFC prompted a reevaluation of financial regulation and oversight.
What is the role of the Bank of England?
- Issues banknotes
- Acts as banker to the government
- Maintains monetary stability
The Bank of England is also responsible for managing inflation and financial stability.
What is macroprudential regulation?
Regulation focused on the stability of the financial system as a whole rather than individual institutions
It aims to mitigate systemic risks.
What is the purpose of the Prudential Regulation Authority (PRA)?
To promote the safety and soundness of financial institutions, ensuring they can withstand financial shocks. Microprudential.
The PRA is part of the Bank of England.
What is the purpose of the Financial Policy Committee (FPC)?
To identify, monitor, and mitigate systemic risks to the financial system
The FPC works to ensure financial stability. Macroprudential
What is the purpose of the Financial Conduct Authority (FCA)?
To protect consumers, enhance market integrity, and promote competition in the financial services sector
The FCA regulates financial firms providing services to consumers.
What does insufficient liquidity in a bank lead to?
Increased vulnerability to failure due to an inability to meet short-term obligations
Banks need adequate liquidity to manage daily transactions and unexpected withdrawals.
What is the role of the International Monetary Fund (IMF)?
To oversee the international monetary system and provide financial assistance to countries in need
The IMF aims to ensure global economic stability.
What is the purpose of the World Bank?
To promote economic development and reduce poverty in developing countries
The World Bank provides long-term financing for development projects.
What are the ten core policies of the Washington Consensus?
- Fiscal discipline
- Redirection of public spending
- Tax reform
- Liberalizing interest rates
- Competitive exchange rates
- Trade liberalization
- Liberalization of foreign direct investment
- Privatization
- Deregulation
- Secure property rights
These policies aimed to promote economic growth and development.
Why did the IMF provide a bailout to Greece in 2010?
To help Greece manage its debt crisis and stabilise its economy with a Euro110 billion loan
The bailout aimed to prevent default and restore investor confidence.
What is the difference between monetary stability and financial stability?
Monetary stability focuses on controlling inflation and interest rates; financial stability focuses on the overall health of the financial system
Both are essential for sustainable economic growth.
What are three ways the Bank of England can affect the money supply?
- Adjusting interest rates
- Conducting open market operations
- Changing reserve requirements
These actions influence lending and liquidity in the economy.
What are SDRs issued by the IMF?
Special drawing rights which can be used by central banks to exchange for 5 currencies. Help to stabilise the financial system in times of stress.
Why might the role of the Bank of England in the financial system be regarded as an example of ‘moral hazard’?
Because by acting as the lender of last resort, commerical banks may take greater risks knowing the bank will be saved.
How often does the FPC stress test the financial system?
Twice a year
Should the FPC and PRA let a bank fail?
Yes but in a controlled way to minimise the risks to the system. However, sometimes banks can be seen as ‘too big to fail’.
What is leverage?
In banking this is used to calculate the amount a bank can lend. In the case of leverage, the ratio of loans to the amount of capital the bank holds in debts and shares. Leverage was seen as a cause of the GFC and is limited to control the amount of lending banks do against debt.
