Regulation Of The Financial Ststem

Question 1

Impacts of the financial global crisis 2007-8

Answer 1

Goverment abolished previous regulator the financial services authority and return the regulatory oversight to the B.O.E

Question 2

3 scenarios of a stress test

Answer 2

Uk GDP fall by 5% over the first year

Uk unemployment doubled to a peak rate of 8.5%

Residential property prices fall by 3% over the first year

Question 3

Run on the banks

Answer 3

Scenario where large number of people wish to withdraw deposits usually in response to some kind of panic

Question 4

Northern Rock 2007

Answer 4

Sold mortgages rarely paid off , sub prime riskey mortgage’s

Question 5

Why do banks fail ?

Answer 5

Low capital ratio
Money owed by bank or soveleny issue value of assets less than value of liabilities

Govements let them

Run on the bank
(Borrowing short term lending long term)

Rogue employees

Low liquidity ratio

Reckleness
(Weak regulation or lack of firewall between investment and commercial wings

Question 6

Capital ratio

Answer 6

Proportion of banks funding that has come in the form of equity (retained profit)

Banks with higher capital ratios are safer

Question 7

Liquidity ratio

Answer 7

Ratio between banks liquid assets and expected outflows

More cash the business holds relative to withdrawals

Higher the liquidity ratio the safe it will be

Question 8

What is the capital ration for most banks ?

Answer 8

9-11 %

If 6% major consequence

Question 9

Why is it good to maintain a high liquidity ratio ?

Answer 9

Prevents bank runs

Question 10

The bigger the bank what does this mean about the capital ratio ?

Answer 10

The more the capital ratio