Topic 19 (Prudential supervision)

Question 1

In terms of prudential regulation what are the PRA responsible for?

Answer 1

They are responsible for all deposit-takers, insurers and significant investment funds

Question 2

In terms of prudential regulation what are the FCA responsible for?

Answer 2

They are responsible for firms which has a sole regulator, usually smaller businesses (They have a general approach to manage failure)

Question 3

Describe international prudential regulation?

Answer 3

The UK regulators can be driven by regulatory requirements at an international level (can cause global problems)

Question 4

What is the basel committee on banking supervision?

Answer 4

• 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

Question 5

What is Capital Adequacy?

Answer 5

Ensuring that a business holds sufficient reserves of capital to ensure it is sustainable

Question 6

What is Solvency?

Answer 6

The extent to which a businesses assets exceed its liabilities

Question 7

What is the Solvency Ratio?

Answer 7

The amount of capital as a percentage of risk-adjusted value of assets

Question 8

What is Liquidity?

Answer 8

Indicates how easily an asset can be turned into cash and thus into real goods and services without loss of capital value

Question 9

What are the 3 ways a firm can provide Liquidity?

Answer 9

1. Sell the asset for cash
2. The asset reaches maturity
3. Providing security for borrowing

Question 10

What is meant by Asset concentrations?

Answer 10

Means that the receipts from assets are likely to occur around the same time

Question 11

How do banks avoid asset and liability concentrations?

Answer 11

A wide spread of maturity dates helps avoid this

Question 12

What is operational risk?

Answer 12

The risk of loss from failed or inadequate internal processes, people and systems or external events

Question 13

What was Basel ii brought in to control?

Answer 13

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

Question 14

When and why was Basel iii put in place?

Answer 14

2010/11
- Strengthens capital requirements for banks and introduces new regulatory requirements for increased bank liquidity and decreasing bank leverage

Question 15

What are the 2 broad classes of capital?

Answer 15

> Tier 1 Capital = Includes share capital and disclosed reserves
Tier 2 Capital = Known as supplementary capital

Question 16

What is the general theme for the level of capital?

Answer 16

The higher the risk presented by the business a bank is carrying out, the higher the level of capital it is required to hold

Question 17

Describe the min leverage ration introduced by Basel iii?

Answer 17

Banks are expected to maintain a leverage ratio in excess of 3%
(banks tier 1 capital / average total consolidated assets

Question 18

What are the 2 new measures a bank must comply with?

Answer 18

1. The liquidity coverage ratio (LCR) - designed to ensure a banks short term liquidity
2. The net stable funding ratio (NSFR) - designed to protect a banks longer term position

Question 19

What is the aim of Total loss-absorbing capacity (TLAC)?

Answer 19

To booster G-sibs capital and leverage ratios

Question 20

What is the minimum TLAC requirement for G-sibs?

Answer 20

At least 16% of the resolution groups risk-weighted assets, increasing to 18% in 2022

Question 21

What is solvency II?

Answer 21

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

Question 22

What are the main aims for Solvency II?

Answer 22

• 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