Regulation of the financial system Flashcards
Equity?
the value of share capital issued by firms as part of their financial capital
coupon?
the fixed interest on a bond
maturity date?
the date of repayment for a bond
What happens if banks isnt liquid
has to borrow money and pay interest from the financial markets
PRA
- micro-prudential regulation
- aims to improve financial stability by ensuring financial institutions are managed properly and maintain certain capital and liquidity ratios
FPC
- macroprudential
- identify, monitor and take action to remove systematic risks.
- stress tests
Systematic risk?
risks that could lead to a collapse in the whole or a significant part of the financial system
Stress Tests?
hypothetical exercises that see how banks would be affected by various economic shocks
FCA
- micro prudential
- aims to protect consumers and ensure healthy competition between financial institutions
moral hazard
occurs when one institutions takes on too much risk, knowing that if the risk fails, someone else will cover the costs of that risk
Capital liquidiity ratio
where banks hold set amounts of liquid assets as a proportion of their overall lending or capital
Systemic risk?
risk that applies to the whole sector
Issues with regulation
- restricts economic activity - if lending is too difficult to obtain
- may divert financial service industry output to other countries = jobs lost
- requires time and money
- unintended consequences = development of a shadow banking sector
Why banks fail?
- if they do not have sufficient capital, they are at risk from a fall in the value of their assets
- insufficient liquid assets make a bank vulnerable to where customers rush to withdraw their deposits before the bank runs out of cash
- bank of england provides liquidity
Liquidity ration
requirements on banks to hold a particular amount of their deposits in cash
- the higher the liquidity ratio, the less a bank can lend out
