Regulation Of The Financial System

Question 1

What is the financial policy committee?

Answer 1

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

Question 2

How does the FPC advise banks?

Answer 2

If the FPC decides that the risk to the financial system is growing, they tell commercial banks to increase their capital buffers

Question 3

What are the capital buffers part of?

Answer 3

Macro prudential policy

Question 4

What is the prudential regulation authority?

Answer 4

Responsible for the prudential regulation and supervision of around 1700 banks building society’s credit unions, insurers and major investment firms

Question 5

What does the financial conduct authority (FCA) do?

Answer 5

• 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

Question 6

What are the financial market failures?

Answer 6

• Moral hazard
• asymmetric information
• monopoly /market rigging
• principal agent problem
• speculative bubbles
• Externalities
• speculation
• incomplete markets

Question 7

What is an incomplete market?

Answer 7

When the available level of supply is not enough to meet the needs and wants of consumers (only a proportion of demand is met )

Question 8

What is moral hazard?

Answer 8

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.

Question 9

What is systemic risk?

Answer 9

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

Question 10

What are the main functions of a central bank?

Answer 10

• Monetary policy function
• financial stability and regulatory function
• policy operation function
• financial infrastructure provision function
• debt management

Question 11

What is a liquidity trap?

Answer 11

Occurs where low interest rates and high amount of cash balances in the economy hair so fail to simulate AD