Regulation of the financial system Flashcards
What does regulation mean?
imposing rules or laws which limit the freedom of individuals and business to make decisions of their own free will
What does financial regulation involve?
limiting the freedom of banks and other financial institutions + people they employ, to behave in a way they may not wish to
What are the three financial agencies in the UK
- financial policy committee (FPC)
- Prudential Regulation Authority (PRA)
- FInancial conduct authority (FCA)
What is the FPC?
part of BoE, monitors + actions to remove or reduce systemic risk to protect and enhance the resiliance of UK financial system
- support the economic policy of the government
What is the PRA?
- part of BoE responsible for microprudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms
What is the FCA?
- primary responsible for micro prudential regulation
- aims to make sure financial markets work well so consumers get fair deal
- ensures markets run with integrity and consumers can trust firms
- provides consumers with approporitae products and services
Explain moral hazard?
exists when a firm or individual pursues profit and takes on too much risk knowing that if it goes wrong someone else will bear significant portion of the cost
What is a banks liquidity ratio?
ratio of cash and other liquid assets owned by the bank to its deposit liabilities
What is a banks capital?
differance between value of the banks assets and its liabilities
What is a banks capital ratio?
amount of capital on a banks balance sheet as a proportion of its loans
What are the main issues with regulation?
*Regulation restricts economic activity – lending is harder, wont be as much
- Regulation may divert financial services industry output to other countries (with jobs being lost). *Regulation requires time and money to plan, implement and monitor.
*Any penalties will need to be used so as to maintain the regulation’s credibility.
*Unintended consequences are likely – e.g. development of a shadow banking sector.
Primary reasons for why banks fail?
- suffers fall in value of assets so its capital liabilities are unmatched
- doesnt have significant liquidity to meet demand of depositors
- regulatory failure
- contagion
Why are financial market regulations necessary?
- externalities of financial instability
- asymetric information
- moral hazard
- monopoly
- speculation
What is systemic risk?
refers to risk of a breakdown of an entire financial system rather than simply the failure of individual parts within the system
