topic 19 - prudential supervision

Question 1

International prudential regulation

Answer 1

• The UK’s regulators do not operate in isolation, their work is driven by regulatory requirements at an international level
• The Basel Committee on Banking Supervision sets standards of banks globally
• The EU sets out detailed requirements for banks, building societies and investment firms within the member states

Question 2

The Basel Committee on Banking Supervision

Answer 2

• a multinational body acting under the auspices of the Bank for International Settlements, and based in Basel, Switzerland.
• Role is to strengthen the regulation, supervision and activities of banks to enhance financial stability

Question 3

Capital adequacy

Answer 3

• Ensuring that a business holds sufficient reserves of capital to ensure it is sustainable
• Regulations broadly state that should a business run into difficulties, the business must have sufficient capital to make it very unlikely that deposits will be placed at risk
• This capital is from shareholders and related sources rather than deposits form customers. Shareholders are expected to bear the risks
• minimum requirements for capital adequacy are set to protect a bank’s depositors so they do not lose money

Question 4

Solvency

Answer 4

extent to which a business’s assets exceed its liabilities

Question 5

Solvency ratio

Answer 5

capital as a % of the risk-adjusted value of assets

Question 6

Liquidity

Answer 6

The ease and speed with which an asset can be converted into cash and thus into real goods and services – without significant loss of capital value

Question 7

Capital Requirements Directive

Answer 7

• Total loss-absorbing capacity (TLAC)
• Additional capital requirements for banks deemed systematically important or too big to fail

Question 8

Solvency II

Answer 8

• A directive focused on the capital adequacy of insurers

Question 9

Investment firms prudential regime (IFPR)

Answer 9

• Most larger firms are now subject to IFPR, whose rules can be found in the MIFIDPRU sourcebook
• It reflects the FCA’s approach to capital requirements following Brexit – Jan 2022
• Contains rules on own funds, concentration risk, basic liquid assets requirements, and disclosure and reporting.

Question 10

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

Answer 10

Prudential Regulation Authority (PRA).

Question 11

Capital adequacy requirements are based on the principle that in the event of a firm making a loss:

Answer 11

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

Question 12

What is a bank’s solvency ratio?

Answer 12

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

Question 13

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

Answer 13

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 14

Under Basel III, banks must work towards a minimum solvency
ratio of what level?

Answer 14

10.5%

Question 15

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?

Answer 15

The net stable funding ratio.

Question 16

What are the key aims of Solvency II?

Answer 16

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; and to promote confidence in the financial stability of the insurance sector