TOPIC 19 - Prudential supervision

Question 1

The EU Directive, Solvency II, aims to:

a) increase the amount of available capital for a bank to meet liquidity demands.

b) reduce the risk of an insurance company being unable to meet its claims.

c) restrict banks’ lending to a percentage of their capital.

d) ensure banks and building societies keep customer deposits separate from its own funds.

Answer 1

b) reduce the risk of an insurance company being unable to meet its claims.

Question 2

Under Basel III regulatory capital requirements, which of the following assets would have the lowest risk weighting?

a) Gilts.

b) Secured loans.

c) Unsecured loans.

d) Mortgages.

Answer 2

a) Gilts.

Question 3

The Basel Committee acts under the auspices of the:

a) International Monetary Fund.

b) World Bank.

c) European Central bank.

d) Bank for International Settlements.

Answer 3

d) Bank for International Settlements.

Question 4

When looking at capital adequacy, a firm’s solvency ratio is its:

a) capital as a percentage of its risk-adjusted assets.

b) risk-adjusted assets as a percentage of its capital.

c) capital reserves as a percentage of its turnover.

d) liabilities as a percentage of its risk-adjusted assets.

Answer 4

a) capital as a percentage of its risk-adjusted assets.

Question 5

Although it has adequate assets, Blazing Bank is unable to meet customers’ demands to withdraw cash. This means it has a:

a) liquidity problem.

b) liability concentration problem.

c) capital adequacy problem.

d) solvency shortage.

Answer 5

a) liquidity problem.

Question 6

Total loss‑absorbing capacity (TLAC) requirements apply to:

a) Investment companies.

b) Globally systemically important banks.

c) Insurance companies.

d) All banks and deposit-takers.

Answer 6

b) Globally systemically important banks.

Question 7

The Basel III net stable funding ratio, requires that a bank’s:

a) short-term financial resources exceed short-term commitments.

b) assets meet specified quality requirements.

c) income and profits meet certain stability standards.

d) long‑term financial resources exceed long‑term commitments.

Answer 7

d) long‑term financial resources exceed long‑term commitments.

Question 8

Basel III liquidity coverage ratio requires a bank’s available high‑quality liquid assets to exceed the net cash outflows expected over the next:

a) 7 days.

b) 14 days.

c) 28 days.

d) 30 days.

Answer 8

d) 30 days.

Question 9

The Capital Requirements Directives (CRDs) apply to banks, building societies and insurers.

a) True
b) False

Answer 9

b) False

It applies to banks, building societies and investment companies.

Question 10

Under Basel II, the capital required to cover operational risk is gross annual income multiplied by:

a) 0.10.

b) 0.15.

c) 0.20.

d) 0.25.

Answer 10

b) 0.15.

Question 11

Who is responsible for the prudential regulation of deposit-takers and insurers?

a) Financial Conduct Authority (FCA).

b) Prudential Regulation Authority (PRA).

c) Monetary Policy Committee (MPC).

d) Financial Policy Committee (FPC).

Answer 11

b) Prudential Regulation Authority (PRA).

Question 12

Why does the FCA concentrate on managing the failure of an individual firm if it happens rather than proactively seeking to prevent its failure in the first place?

Answer 12

The FCA is the prudential supervisor for smaller firms that, in general, would not present a risk to the wider financial system if a particular one were to fail. Therefore, the regulator concentrates its resources on managing a firm’s failure in an orderly way to mitigate the impact on its customers.

Question 13

Capital adequacy requirements are based on the principle that in the event of a firm making a loss:
a) it can approach the Bank of England for additional funds.
b) its depositors, not its shareholders, should bear the loss.
c) the Basel Committee will determine whether the firm has sufficient capital to continue trading.
d) its shareholders, not its depositors, should bear the loss.

Answer 13

d) its shareholders, not its depositors, should bear the loss.

Question 14

What is a bank’s solvency ratio?

Answer 14

Capital as a percentage of the risk‑adjusted value of assets.

Question 15

How did Basel II seek to ensure that capital adequacy requirements more accurately reflected the risks represented by a firm’s assets?

Answer 15

Under Basel II, instead of simply calculating their capital requirement as a percentage of the total value of their assets, firms were required to categorise each asset according to the risk it represented and hold more
capital in relation to the riskier assets.

Question 16

Under Basel III, banks in the EU must work towards a minimum solvency ratio of what level?
a) 10.5 per cent.
b) 8 per cent.
c) 5 per cent.
d) 4 per cent.

Answer 16

a) 10.5 per cent.

Question 17

Basel III introduced new measures with regard to a bank’s capital and asset liability management. Which of these measures is aimed at protecting the long-term financial stability of a bank?
a) The liquidity coverage ratio.
b) The net stable funding ratio.
c) The Tier 1 capital measure.
d) The Tier 2 capital measure.

Answer 17

b) The net stable funding ratio.

Question 18

What are the key aims of Solvency II?

Answer 18

To reduce the risk of an insurance company being unable to meet its claims;

to reduce losses suffered by policyholders should an insurer be unable to meet all claims in full;

to establish a system of information disclosure that makes regulators aware of potential problems at an early stage;

to promote confidence in the financial stability of the insurance sector.

Question 19

Which of the following sections of the FCA Handbook contains details of the prudential requirements applying to MiFID investment firms?

a) BIPRU.
b) IFPRU.
c) MIPRU.
d) MIFIDPRU

Answer 19

d) MIFIDPRU