Topic 19 Flashcards
What is prudential management?
To ensure firms have adequate risk management systems in place, particularly in relation to financial risks.
What are the three levels of prudential standards?
- The market as a whole
- Individual firms
- Individual consumers
What is the basel committee on banking supervision?
This is a multinational body acting under the auspices of the bank for international settlements.
Its role is to strengthen the regulation, supervision and activities of banks to enhance financial stability
What is capital adequacy?
Ensuring that a business holds sufficient reserves of capital to ensure it is sustainable
What is Solvency?
The extent to which a business’s assets exceeds its liabilities
What is solvency ratio?
Capital as a percentage of the risk-adjusted value of assets
How do the regulators define ‘liquidity risk’
The risk that a firm, though solvent, does not have sufficient financial resources available to enable it to meet its obligations as they fall due.
What is operational risk?
The risk of loss as a result of failed or inadequate internal processes, people and systems or as a result of external events, such as a natural disaster.
How do you calculate capital requirements for operational risk?
Multiply the institutions gross annual income (averaged over the past three years) by 0.15
What are the three pillars of basel II?
Pillar 1 - Details capital requirements in respect to three aspects of a banks operations: Credit risk, operational risk and market risk
Pillar 2 - Gives banking regulators more effective supervisory tools and enables them to deal with the individual components of risk.
Pillar 3 - Contains a set of disclosure requirements so that the capital adequacy of an organisation can be properly assessed.
What are ‘stress tests’ under Basel II?
Computer simulations to understand the effect of particular of particular events on the firm. Stress tests ascertain the extent to which a firm would have sufficient capital in certain adverse economic conditions.
What two main areas does Basel III cover?
- Regulatory capital
- Asset and liability management
What is regulatory capital?
The amount of capital that a bank is required to hold in order to meet regulatory requirements.
What are the two precise definitions and there broad classes of what can be counted as regulatory capital?
Tier 1 - capital, which includes share capital and disclosed reserves
Tier 2 - capital, which is known as supplementary capital.
What is the minimum required solvency ratio under Basel III?
10.5%
How are the value of a banks assets adjusted to take into account the risk they present?
Loans to governments are considered extremely safe so will have a risk weighting of 0%
Where as personal loans (unsecured lending) carry a much higher risk so would have a risk weighting of 100%
What is a minimum leverage ratio?
A banks Tier 1 capital divided by its average total consolidated assets
What leverage ratio are banks expected to keep?
A leverage ratio in excess of 3%
Basel III introduced two new ratios that banks must comply with in respect to asset and liability management, what are they?
Liquidity coverage ratio (LCR)
Net stable funding ratio (NSFR)
What is the objective of the liquidity coverage ratio (LCR)?
To ensure high-quality liquid assets available to the bank exceed the net cash outflows expected over the next 30 days.
Essentially meaning it is ensuring the bank has short term liquidity available if needed.
What is the objective of net stable funding ratio (NSFR)?
NSFR aims to protect a banks longer term position.
The NSFR requires that long-term financial resources exceed long-term commitments.
(long term in this context is taken as being more than 1 year)
What are capital requirements directives (CRD’s)?
The way in which the requirements from BASEL is implemented into law (via a directive from the EU)
What is total loss-absorbing capacity (TLAC)?
There are additional capital requirements for banks deemed systemically important or too big to fail.
The TLAC requirements aim to bolster global systemically important banks (G-Sibs) capital and leverage ratios, ensuring these banks are equipped to continue critical functions without threatening market stability or requiring further taxpayer support.
What is the minimum total loss-absorbing capacity requirements for global systemically important banks (G-Sibs)?
Since 1 January 2019 - At least 16% of the resolutions groups risk weighted assets
Increasing to at least 18% as of 1 January 2022
