Safeguarding Systemic Stability Flashcards
What are prudential capital requirements?
These requirements ensure that each member of the financial system is resilient and in a position to confront financial shocks and imbalances, as indicated in the Basel Accord Set, by the Basel Committee on Bank Supervision.
What are financial intermediaries?
These are entities that act as middlemen between two parties in a financial transaction. A commercial bank is a typical type of financial intermediary. Other examples include investment banks, insurance companies, broker deals and mutual funds.
What is systemic risk?
This is the risk that an event at company level could trigger instability, or the collapse of the system, as the result of the domino effect.
What is financial regulation aimed at?
Financial regulation is aimed at achieving systemic stability by minimizing systemic risk as much as possible. This has been the main aim of financial regulation post the financial crisis of 2008. It is also aimed at reducing the impact of failure when it does occur.
What is counter cyclical stock?
This is stock at moves in an opposite direction to economic trend.
What is then CRD and what does it propose ?
The CRD is the Capital a Requirements Directive that was revised in the De Lorisiere a Report post the financial crisis. It sets the prudential requirements for banks and investment firms. It requires them to:
- hold better and more capital reserves
- manage cash and liquidity in a more efficient manner
- hold counter cyclical stock
- rely less on external credit ratings
What are the two channels of systemic risk ?
The psychological channel (ie the instinct of the herd) and the information channel. Examples: Bear Stearns and Northern Rock respectively.
Explain the difference between micro and macro prudential supervision.
Macro prudential supervision is financial regulation aimed to mitigate systemic risk of the financial system as a whole. Whereas micro prudential supervision is aimed at the individual firm, to ensure that it is working soundly and has enough assets to cover a financial shock.
What is a stress test?
A stress test is a micro prudential supervision tool that is used on firms to check their reaction to different financial shocks and situations.
What is the shadow banking system?
This refers to all unregulated banking activities carried out by regulated institutions.
Name the macro and micro prudential supervisors of Malta and the EU.
Macro-prudential supervisors EU: European Systemic Risk Board (ESRB)
Micro-prudential supervisors EU:
1. European Securities and Market Authority
2. European Banking Authority
3. European Insurance and Occupational Pensions Authority
Macro-prudential supervisors Malta: Central Bank
Micro-prudential supervisors Malta: Malta Financial Services Authority (MFSA)
What is a money market fund?
This is an investment scheme open to the general public where money is invested in multiple bonds. A run on money market funds may cause a financial crisis. Consider the bankruptcy of the Lehman Brothers.
