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CeMAP Unit 2 > Topic 19 Prudential Supervision > Flashcards

Topic 19 Prudential Supervision Flashcards

1
Q

What is Prudential Regulation?

A

Ensuring that firms have risk management systems in place (particularly in relation to financial risks)

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2
Q

What are the levels of prudential standards?

A
  1. Market to ensure the use of a safe efficient and stable market
  2. Individual firms to minimise the risk of business failure
  3. Individual customers able to work should a company fail
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3
Q

A problem in one economy could cause problems in another

True or False

A

True

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4
Q

What committee sets out prudential regulation of banks globally?

A

The Basel Committee

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5
Q

What does the Basel Committee do?

A

Strengthen the regulation, supervision & activities of banks to enhance financial stability

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6
Q

What does the Bank for International Settlements do?

A

Oversee the Basel Committee

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7
Q

What is Capital Adequacy?

A

Capital as percentage of risk adjusted value of assets

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8
Q

Capital in the context of capital adequacy is often referred to as the funds of the business

True or False

A

True

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9
Q

If a loan is written off it is the responsibility of who

Depositors or the Shareholders

A

Shareholders

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10
Q

What is Solvency?

A

The extent to which a business’s assets exceed it’s liabilities

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11
Q

What is Solvency Ratio?

A

Capital as a proportion of the value of the bank’s assets

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12
Q

What is Liquidity?

A

The speed at which an asset can be turned into cash

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13
Q

Though solvent a firm does not have enough financial reserves available to meet it’s obligations

Is what?

A

How regulators define liquidity risk

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14
Q

What are the 3 ways a forms assets can provide liquidity?

A
  1. Being sold for cash
  2. Reaching maturity
  3. Providing security for borrowing
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15
Q

How do firms avoid asset and liability concentrations?

A

Ensuring a wide spread of maturity dates

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16
Q

What is Operational Risk?

A

Financial loss as a result of:

  • Failed or inadequate internal processes
  • People & Systems
  • Natural disasters
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17
Q

How are capital requirements measured for operational risks?

A

Average of the firms gross annual income (over 3 years) by 0.15

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18
Q

What capital requirements for operational risk do large institutions with different businesses lines use?

A

Standardised approach (with different multiples for each line)

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19
Q

When did the Basel Committee first issue capital requirements on banks?

A

1988

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20
Q

What does Basel II do?

A

Requires banks to hold levels of capital appropriate to the risk of lending and investment

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21
Q

According to Basel II as risk increases what do banks have to do?

A

Increase capital requirements

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22
Q

Which Pillar of Basel II is this?

Capital requirements detailed in 3 arears.

  1. Credit Risk
  2. Operational Risk
  3. Market Risk
A

Pillar 1

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23
Q

Which Pillar of Basel II is this?

Gives banking regulators more effective supervisory tools for individual components of risk

A

Pillar 2

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24
Q

Which Pillar of Basel II is this?

Set of disclosure requirements so that capital adequacy of a firm can be properly assessed

A

Pillar 3

25
Q

In regards supervision & disclosure of Basel II what must a bank do?

A

Carry out a “Stress Test” to understand the effects of particular events on a firm

26
Q

What 2 areas does Basel III

A
  1. Regulatory Capital
  2. Asset & Liability Management
27
Q

What is the solvency ratio for banks in Basel III?

A

10.5%

28
Q

What are the 2 main classes of capital according to the regulatory capital section of Basel III?

A

Tier 1 and Tier 2

29
Q

What regulatory capital tier of Basel III is this?

  • Capital
  • Share capital & disclosed reserves
A

Tier 1

30
Q

What regulatory capital tier of Basel III is this?

  • Supplementary Capital
A

Tier 2

31
Q

The risk rating of a banks assets is not determined by the type of assets it’s holds?

True or False

A

False

Risker assets such as unsecured lending carry a greater risk

32
Q

What is leverage ratio for regulatory capital?

A

A banks tier 1 capital divided by it’s consolidated assets

33
Q

What is the percentage of leverage ratio for regulatory capital in Basel III?

A

3%

34
Q

What are?

Liquidity Cover Ratio (LCR)
Net Stable Funding Ratio (NSFR)

In relation to Basel III

A

Ratios that banks must comply with in relation to Asset & Liability Management

35
Q

What are the requirements for Liquidity Coverage Ratio (LCR)?

A

Liquid assets available to the bank exceed net cash outflows over the next 30 days

36
Q

When was Liquidity Coverage Ratio (LCR) faised in?

A

Between January 2015 to January 2019

37
Q

What is Net Stable Funding Ratio (NSFR)?

A

Means that long term financial resources exceed long term financial resources

38
Q

When was Net Stable Funding Ratio (NSFR) effective from?

A

2018

39
Q

What is the Capital Requirements Directive (CRD)?

A

Supervisory framework that aims to minimise the effects of a firm failing by ensuring the firm has enough financial resources to cover business activities

40
Q

What is the main purpose of Capital Requirements Directive 5 (CRD 5)?

A

Governs the renumeration of staff and indentify “Material risk takers”

41
Q

Who does the Total Loss-Absorbing Capacity (TLAC) apply to?

A

30 banks identified as too big to fail

42
Q

What is the term for the 30 global banks deemed too big to fail?

A

Global Systematically Important Banks (G-Sibs)

43
Q

What percentage of the resolution group’s risk weighted assets (RWA) is currently a requirement for Global Systematically Important Banks (G-Sibs)?

A

18%

44
Q

What do Solvency 1 & 2 relate to?

A

The capital requirements placed on Insurance Companies to migate their faliure

45
Q

The European Insurance & Occupational Pensions Authority (EIOPA) is responsible for what in relation to what regarding Solvency 2?

A

Implementing Solvency 2

46
Q

What are the below?

  • Reduce the risk of an insurance company being unable to meet it’s claims in full
  • Reduce losses suffered by policy holders should an insurer be unable to meet all claims in full
  • Establish a system of information disclosure that makes regulators aware of potential problems at an early stage
  • Promote confidence in the financial stability of the insurance sector
A

Aims of Solvency 2

47
Q

Which of the 3 Pillars of Solvency 2 is this?

Capital requirements & the valuation of assets

A

Pillar 1

48
Q

Which of the 3 Pillars of Solvency 2 is this?

Governance & risk-management requirements

A

Pillar 2

49
Q

Which of the 3 Pillars of Solvency 2 is this?

Disclosure & transparency rules

A

Pillar 3

50
Q

What does the Solvency Capital Requirement (SCR) consist of for Solvency 2?

A
  • Basic Solvency Capital Requirement (SCR)
  • Allowance for capital risk
51
Q

What is a Own Risk & Solvency Assessment (ORSA)

A

A requirement for insurance companies to complete

52
Q

Which Prudential Sourcebook does INSPRU cover?

A

Insurance and capital requirements

53
Q

Which Prudential Sourcebook does MIFIDPRU cover?

A

MiFID investment firms

54
Q

Which Prudential Sourcebook does MIPRU cover?

A

Mortgage & home finance & requirements of capital gains & professional indemnity insurance

55
Q

What does Investment Firms Prudential Regime (IFPR) cover?

A

Capital requirements post Brexit

56
Q

All the below are what?

  • Own funds
  • Concentration Risk
  • Basic liquid assets requirements
  • Governance
  • Risk Management
  • Disclosure
  • Reporting
A

What is covered by MIFIDPRU

57
Q

Which of this is a binding requirement on UK business?

  • Capital Requirement Directive (CRD)
  • Capital Requirements Regulation (CRR)
A

Capital Requirements Regulation (CRR)

58
Q

Which of this is a directive that the UK government has discretion on how it is applied ?

  • Capital Requirement Directive (CRD)
  • Capital Requirements Regulation (CRR)
A

Capital Requirement Directive (CRD)

59
Q

The Prudential Regulation Authority (PRA) is responsible for the regulation of deposit takers, insurers & significant investment firms.

True or False

A

True

CeMAP Unit 2 (11 decks)

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