Regulation Of The Financial System Flashcards
What is the financial policy committee?
Main role is to identify, monitor and take action to remove /reduce risks that threaten the UK financial system
FPC has the power to instruct commercial banks to change their capital buffers
How does the FPC advise banks?
If the FPC decides that the risk to the financial system is growing, they tell commercial banks to increase their capital buffers
What are the capital buffers part of?
Macro prudential policy
What is the prudential regulation authority?
Responsible for the prudential regulation and supervision of around 1700 banks building society’s credit unions, insurers and major investment firms
What does the financial conduct authority (FCA) do?
- Secure an appropriate degree of protection for consumers
- protect and enhance the integrity of the uk financial system
- promote effective competition in the interests of consumers
What are the financial market failures?
- Moral hazard
- asymmetric information
- monopoly /market rigging
- principal agent problem
- speculative bubbles
- Externalities
- speculation
- incomplete markets
What is an incomplete market?
When the available level of supply is not enough to meet the needs and wants of consumers (only a proportion of demand is met )
What is moral hazard?
Exists in a market where an individual or organisation takes many more risks than they should do because they know that they are either covered by insurance or that the govt will protect them from any damage incurred.
What is systemic risk?
The possibility that on event at the micro level of an individual bank l’insurace company for example could then trigger instability and collapse an entire industry or economy
What are the main functions of a central bank?
- Monetary policy function
- financial stability and regulatory function
- policy operation function
- financial infrastructure provision function
- debt management
What is a liquidity trap?
Occurs where low interest rates and high amount of cash balances in the economy hair so fail to simulate AD
what are automatic stabilizers?
automatic fiscal changes to the economy that occur when a recession or hysteresis occurs or in a rising boom
what is the theory of second best?
The theory of the second best suggests that when two or more markets are not perfectly competitive, then efforts to correct only one of the distortions may in fact drive the economy further away from efficiency.
