Regulation

Question 1

Main functions of a central bank (4)

Answer 1

• Monetary policy
• Financial regulation and stability
• Policy operation
• Debt management

Question 2

What policy operations do the BOE carry out? (3)

Answer 2

• Lender of last resort to banking system
• Managing liquidity in the commercial banking system
• Quality of legal tender

Question 3

Prudential regulation authority

Answer 3

Part of the BOE and responsible for the prudential regulation and supervision of
• Banks
• Building societies
• Credit unions
• Insurers
• Major investment firms

Question 4

Financial policy committee (3)

Answer 4

• Aims to reduce risks that threaten the UK financial system
• Publishes a financial stability report
• Power to instruct commercial banks to change their capital buffers

Question 5

Objectives of the financial conduct authority (3)

Answer 5

• Secure consumer protection
• Protect and enhance integrity of the UK financial system
• Promote competition in the interests of consumers

Question 6

Financial instability: effect on confidence (3)

Answer 6

• Negative impact on business investment
• Excess saving
• Reduced demand

Question 7

Financial instability: effect on trust

Answer 7

Public have less trust in financial institutions and banks

Question 8

Financial instability: Inequality (2)

Answer 8

• Poorer communities are more vulnerable at times of recession
• Policy response of low IR hits real incomes of savers

Question 9

Moral Hazard

Answer 9

When an individual or organisation takes many more risks that they should do because they know that they are either covered by insurance or that government will protect them from any damage incurred as a result of those risks

Question 10

Bubbles

Answer 10

Exist when the price of something is driven well above what it should be usually due to the behaviour of consumers

Question 11

Systemic risk

Answer 11

The possibility that an event at the micro level of an individual bank/insurance company for example could then trigger sever instability or collapse an entire industry or economy

Question 12

Liquidity

Answer 12

The ease with which assets can be turned into cash without loss of value

Question 13

Liquidity ratio

Answer 13

The ratio of liquid assets held by a bank on their balance sheet to their overall assets

Banks need to hold enough to cover expected demands from deposits

Question 14

Liquidity ratio equation

Answer 14

Current assets
———————-
Current liabilities

Question 15

Capital ratios

Answer 15

Measures the funds a bank has in reserve against the riskier asset it holds that could be vulnerable in the event of a crisis

Question 16

Capital ratio equation

Answer 16

Capital
————-
Loans

Question 17

Basel recommendation for capital ratios

Answer 17

• 8%
• This includes money raised from selling shares to investors and their retained profits

Question 18

Leverage ratio

Answer 18

Indicator of the ability of a bank or building society to absorb losses

Question 19

Leverage ratio equation

Answer 19

Capital
—————-
Exposures (loans + LT investments)

Question 20

Leverage ration Basel recommendation

Answer 20

• 3%
• The lower the ratio, the higher the reliance on debt to fund activities