Regulation & Bank Management

Question 1

Responsibility of Regulators?

Answer 1

Ensuring risks are properly managed and that consumer and the financial system are safe.

Question 2

What is the purpose of risk weighting?

Answer 2

Regulatory attempt to rank assets in relation to their inherent risk; imperfect and generalized- but a useful benchmark in assessing risk profile of financial assets.

Question 3

How often and what are banks are examined on?

Answer 3

Banks are examined periodically (usually annually) to assess the prudence and adequacy of controls in the following areas: (1) capital adequacy (recognition of loan losses, can impact this) ; (2) asset quality; (3) management; (4) earnings (recognition of loan losses, can impact this); (5) Liquidity; (6) sensitivity to market movements.

Question 4

Types of risks?

Answer 4

(1) Market risk,(2) credit risk, and (3) liquidity risk

Question 5

Market Risk

Answer 5

impact of changes in interest rates or financial markets on earnings and market value (interest rate risk is the major factor impacting balance sheets)

Question 6

Credit Risk

Answer 6

inability of borrowers to meet obligations (generally one of the largest sources of risk)
 Mitigated by collateral and underwriting
 Reserve ratios
 Ratio of charge offs
 Internal monitoring and measurement

Question 7

Liquidity Risk

Answer 7

inability to meet unexpected or unanticipated short or long term needs for funding caused by specific or general concerns…

Question 8

How do banks manage capital?

Question 9

How do they measure capital adequacy?

Question 10

What happens if they have too little or too much?

Question 11

Bank Profit Motive against their management of risk?