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Holistic Exam > Nine > Flashcards

Nine Flashcards

1
Q

What were the objectives of regulation?

A
  • Ensure customers are not disadvantaged
  • Banks hold enough capital
    Market is competitive enough for consumers and businesses
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2
Q

What are the two regulatory bodies?

A
  • Financial Conduct Authority - financial conduct

- Prudential Regulation Authority - capitalisation of banks

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3
Q

Twin peaks model what is it?

A
  • It divides responsibilities easily between 2 regulatory bodies?
    1) PRA - Prudential Regulation Authority - responsible for the prudential regulation of larger prudentially significant firms such as deposit takers, insurance companies and some investment firms
    2) Financial conduct authority - responsible for the conduct of firms on the way they develop, market, sell and service finance products - less prudentially significant firms such as financial advisors, investment broker managers, etc
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4
Q

What is the Financial Policy Committee?

A
  • Has a key role from a macroprudential supervision and sustain financial stability by preventing risks that will affect the system as a whole
  • Looks at structural factors
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5
Q

What are the 5 controlled functions required to be approved by the regulator?

A

Governing functions - those who run the business, director
Required functions - roles required by regulations, money laundering officer
Systems and control functions, head of finance or internal audit
Significant management functions, senior managers
Customer functions, those giving advice to customers

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6
Q

What is CONC?

A

It is the Consumer Credit Sourcebook as a result of FCA taking over regulation of consumer lending from the Office of Fair Trading in April 2014 - and implements Consumer Credit Acts of 1974 & 2006

FCA rules for :
- Marketing
- Selling
- Disclosure
- Customer information
- Debt Handling
- Administration of consumer credit
& Fair Treatment of customers
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7
Q

What are the main provisions of the Consumer Credit Act 2006?

A
  • There is generally no limit to the amount of loan covered by the Act
  • Borrowers protected are unincorporated, partners three or less or soletrader any others outside the scope
  • Complaints can be taken to the Financial Ombudsman
  • Easier to challenge unfair lending practices and loan agreements
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8
Q

What are the six categories of regulated activities?

A
  • Credit broking
  • Debt related activities (debt adjusting, debt counselling, debt administration and debt collecting)
  • Entering into a regulated consumer hire agreement as an owner
  • ’’ ‘’ as a lender
  • Providing credit information services and credit references
  • Operating an electronic system in relation to lending
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9
Q

What is the FLA mediation service?

A

Customers of member firms that are under FLA’s Business Finance Code - FLA offers service and it is run by the Chartered Institute of Arbitrators who will appoint a qualified mediator if necessary

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10
Q

What is the main principle of the Accords?

A

It specifies a calculation method to determine how much capital a bank should set aside to cover the losses in the event of defaults (customers not paying).
This allows banks to meet all its obligations such as repaying depositors
- Creates more robost fiscal disciplines in banks and thereby promotes confidence in the financial services industry

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11
Q

What are each Basels key aspects

A
  • Basel 1 = framework for depsot takers and minimum capital requirements
  • Basel 2 -
    Pillar 1 = Capital requirements
    Pillar 2 = Supervisory review
    Pillar 3 = Market discipline
  • Basel 3 = More stringent and adds to Basel 2 because of the 2007.8 crisis. More for internationally active banks and result of the wider economy when there were issues.
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12
Q

What is the standardized risk weights?

A

Retail exposures = 75%

Wholesale exposure = 100%

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13
Q

What is the advanced Basel?

A

3 Credit risk features:

  • Probability of default (PD) - the chance the customer will defaullt in the next 12 months
  • Loss given default (LGD) - the percentage loss that would be incurred in the event of default
  • Exposure at default (EAD) - the balance at default, considering further drawing against limits
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14
Q

What is AIRB

A

It is Advanced Internal Ratings-based approach

  • Part of Basel 2
  • Calculation that combines isolates risk factors to determine amount with risk weight.
  • They also ensure that banks and depository institutions have enough capital to both sustain operating losses and honor withdrawals.
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15
Q

What are the special Basel Rules for certain assets

A

If the asset itself is cash generative from the lending such as lending for a power station.
In this example it is the riskiness of exposure from the asset, financial strength of the developer and the market in which the completed asset operates rather than just PD and LGD

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16
Q

Explain (EAD) Exposure at default - amount predicted to be owed by a customer at the time of default within one year time horizon?

A
  • EAD cannot be lower than the present value
  • Statistical evidence must support this model
  • Or the banks must assume the facility becomes fully drawn at default and therefore hold capital for the full limit amount
17
Q

Explain PD (other than just probability customer will default in the next 12 months)

A
  • Mathematical model which uses historical knowledge of how similar customers behave
  • Similar to a scorecard where around 10 characteristics are assigned a number on the degree to which they impact the liklihood of default
  • Total points score is converted to a PD%
  • Different PD calculation models for different customers - e.g. time with bank and income
18
Q

Explain Loss given default (LGD) - estimate of the amount of money that the bank would lose, in the event that the customer defaulted.

A

Measured as a percentage of the balance on the facility, and takes into account the security and any guarantees in place

  • Statistical experience of the losses on actual defaults must be used (unless using AIRB approach)
  • Within asset finance the asset type is key as this may be determining factor at the time of default.
  • Before Basel 3 - it was based on security or asset value adjusting for estimated recovery and realisation.
  • Now Basel 3 - regulator requires LGD models to consider all characteristics which can be shown to impact the eventual loss. Of course the asset value is still key
19
Q

RWAs with operating leases - residual values, how does that change?

A
  • 2 elements to an operating lease that must be considered- credit exposure (outstanding rentals) and residual value exposure the amount expected to realise.
  • Credit exposure - result is the same for any lease therefore RWA calculated the same as any other deal
  • RV exposure - Risk not connected to the customer instead it is linked to the asset and inability to sell it and realise RV.
    Rules specify that a risk weight of 1/t must be applied (t is remaining time in years) and t cannot be less than 1
    two years risk weight is 0.5 (1/2)
    Therefore op leases are capital intensive as they approach maturity
20
Q

A firm’s assets can provide liquidity in 3 main ways?

A
  • Being sold for cash
  • By reaching their maturity date, for example a loan which is due to be repaid by a specific date
  • By providing security for borrowing
21
Q

What is liquidity in relation to banks?

A

‘A measure of a bank’s ability to acquire funds immediately at a reasonable price in order to meet demands for cash outflows’

Not to be confused with capital adequacy

22
Q

What is liquidity coverage ratio (LCR)?

A

Since 1 Oct 2015

- LCR establishes whether a bank can survive next 30 days has high quality assets

23
Q

How is LCR calculated?

A

2 components
1) Banks stock of High quality liquid assets (HQLA) - assets of the highest credit and liquidity such as government securities
2) Total Net cash outflows (TNCO) - cash going out minus cash coming in
HQLA/TNCO x100

Required ratio:
2015 = 80%
2017 = 90%
2018 = 100%

24
Q

Other requirements of standards?

A
  • Banks and other deposit takers required to have systems that identify, measure and mnitor liquidity risk
  • Stress testing must happen computer simulated
  • Must document their policy for managing liquidity
25
Q

What will be the result for banks?

A
  • Increase in capital because of requirements
  • Reduce the level of risk weighted borrowing/finance (reduce overall lending or reduce the amount of associated risk)
  • Additional costs to be compliant and may need to be factored into profit margin
  • Globally systemically important banks may be more strict with their lending due to needing to be higher grade
  • Especially punitive for leasing assets with high residual values
    Bank may look at mortgages instead which has lower risk weighting
    BUT - smaller banks not internationally active are not subject to Basel regulations

Holistic Exam (9 decks)

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