Regulation Of The Financial System Flashcards
What is the Financial Policy Committee’s (FPC) main role
To identify, monitor, and take action to remove or reduce risks that threaten the resilience of the UK financial system as a whole
What does the FPC publish
A Financial Stability Report identifying key threats to the stability of the UK financial system
What does the FPC have the power to do
Instruct commercial banks to change their capital buffers
What happens when the FPC decides that the risks to the financial system are growing
They may tell the commercial banks and other lenders to increase their capital buffers to help absorb unexpected losses on their assets (bad debts etc)
What does prudent mean
Being careful at times of uncertainty
What is the UK Prudential Regulation Authority (PRA)
Part of the Bank of England - it is responsible for the prudential regulation and supervision of around 1,700 banks, building societies, credit unions etc.
What areas does the PRA focus on
- insurance providers
- buy-to-let mortgage lenders
- credit unions
- other specialist lenders
What are credit unions
Small and local non-profit lending institutions
Who owns credit unions
Their members and typically serves those customers who are unable to access standard retail bank products through the banks or building societies
What is liquidity
The ease and cost with which assets can be turned into cash and used immediately as a means of exchange
Examples of liquid assets
Cash
Treasury bills
Stocks
What are treasury bills
Short term government loans
What is a liquidity ratio
The ratio of assets held by a bank on their balance sheet to their overall assets
What may a liquidity ratio refer to
A reserve assets ratio for s bank which sets the minimum liquid reserves that a bank must maintain in the event of a sudden increase in withdrawals
What may a high liquidity ratio limit
The amount of lending that a bank is able to do - it must maintain higher amounts of cash
What does a commercial bank’s capital ratio measure
The funds it has in reserve against the riskier assets it holds that could be vulnerable in the event of a crisis
What is a ‘stress test’
Tests the EU runs to check whether banks have enough of a capital buffer to weather difficult economic/financial conditions (known as disaster scenarios)
What is tier 1 capital ratio
A measurement of s commercial bank’s equity capital compared with its total assets
What is leverage ratios
An indicator of the ability of a bank or building society to absorb losses
What does the leverage ratio refer to
Th share of the total value of s firm’s assets and its other commitments that is funded with high-quality capital capable of absorbing losses while a firm is a ‘going concern’
What does a low leverage ratio mean
A commercial bank or building society flies on debt to fund their activities
What happened in June 2015
The FPC directed the PRA to require each major U.K. commercial bank and building society to meet a leverage ratio requirement and hold buffers over that requirement
