Topic 19 (Prudential supervision) Flashcards
In terms of prudential regulation what are the PRA responsible for?
They are responsible for all deposit-takers, insurers and significant investment funds
In terms of prudential regulation what are the FCA responsible for?
They are responsible for firms which has a sole regulator, usually smaller businesses (They have a general approach to manage failure)
Describe international prudential regulation?
The UK regulators can be driven by regulatory requirements at an international level (can cause global problems)
What is the basel committee on banking supervision?
- A multinational body acting under the auspices of the bank
- It’s 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 businesses assets exceed its liabilities
What is the Solvency Ratio?
The amount of capital as a percentage of risk-adjusted value of assets
What is Liquidity?
Indicates how easily an asset can be turned into cash and thus into real goods and services without loss of capital value
What are the 3 ways a firm can provide Liquidity?
- Sell the asset for cash
- The asset reaches maturity
- Providing security for borrowing
What is meant by Asset concentrations?
Means that the receipts from assets are likely to occur around the same time
How do banks avoid asset and liability concentrations?
A wide spread of maturity dates helps avoid this
What is operational risk?
The risk of loss from failed or inadequate internal processes, people and systems or external events
What was Basel ii brought in to control?
How much capital banks need to hold a guard against financial and operational risks
- Under the accord, firms must have to keep aside capital of 0.15 x their gross annual income
When and why was Basel iii put in place?
2010/11
- Strengthens capital requirements for banks and introduces new regulatory requirements for increased bank liquidity and decreasing bank leverage
What are the 2 broad classes of capital?
> Tier 1 Capital = Includes share capital and disclosed reserves
Tier 2 Capital = Known as supplementary capital
What is the general theme for the level of capital?
The higher the risk presented by the business a bank is carrying out, the higher the level of capital it is required to hold
Describe the min leverage ration introduced by Basel iii?
Banks are expected to maintain a leverage ratio in excess of 3%
(banks tier 1 capital / average total consolidated assets
What are the 2 new measures a bank must comply with?
- The liquidity coverage ratio (LCR) - designed to ensure a banks short term liquidity
- The net stable funding ratio (NSFR) - designed to protect a banks longer term position
What is the aim of Total loss-absorbing capacity (TLAC)?
To booster G-sibs capital and leverage ratios
What is the minimum TLAC requirement for G-sibs?
At least 16% of the resolution groups risk-weighted assets, increasing to 18% in 2022
What is solvency II?
It’s an EU directive for insurance companies and aims to introduce common standards for the regulation of the EU insurance market and enhance consumer protection
What are the main aims for Solvency II?
- Reduce the risk of insolvency
- Reduce losses by policyholders
- Establish a system of information disclosure
- Promote confidence in the financial stability of the insurance sector
