Topic 3

Question 1

What is environmental sustainability

Answer 1

Reducing negative human impact on the earths Eco systems by good environmental management and managing consumption of earths resources

Question 2

What is economic sustainability

Answer 2

Reducing undesirable consequences of economic activities, to maintain production and consumption of a sustainable scale

Question 3

What is social sustainability

Answer 3

Creating communities which have good well being, peace, security and justice
Making education available, reducing the income gap, creating a fairer sustainable society

Question 4

Explain the Wall Street crash and the Great Depression

Answer 4

In early 20s people had been buying stocks and shares in vast numbers, share prices increased, sudden rise was unsustainable, when bubble burst, prices fell and many failed and went bankrupt, high unemployment followed

Question 5

How does failing providers affect sustainability

Answer 5

They couldn’t make payments or access money, no confidence over safety of money
Businesses Couldn’t pay wages or buy resources
Governments would stop receiving taxes

Question 6

What % of national output is the financial services sector responsible for

Answer 6

6.9%

Question 7

What is a systemic risk?

Answer 7

Risk of affecting the stability of whole financial system

When cumulative losses build up from the initial event can cause a series of losses along a chain of institutions/markets, then the system will fail

Question 8

In what 2 circumstances is there high risk of systemic risk

Answer 8

When provider makes up large proportion of the market. Known as ‘Systemically Important Financial Institutions’

When large provides work together and become interconnected and interdependent

Question 9

In event of failure of SIFI, government plans to take immediate action to prevent systemic failure and restore confidence, what problems are there associated with this support?

Answer 9

Costs too much to tax payers and increases government deficit
Not seen fair that banks keep profits in good times but rely on public in bad times

There is concern over moral hazard - that the expectation of government help may lead to less than prudent management decisions

Question 10

WhAt is the United Nations General Assembly committed to promoting?

Answer 10

The integration of the three components of sustainable development as interdependent and mutually reinforcing pillars - economic, social and environmental

Question 11

What is bank resolution?

Answer 11

A procedure which takes place when a bank is at risk of failure - financial authorities save any viable parts and close down the rest

Not desirable but failure is a feature of the market system which the economy is based on - process allows for firms to fail in an orderly way

The PRA see failure of a provider as a feature of a properly functioning market, not as a regulatory failure

Question 12

The Banking Act Reform gave the Bank of England the power to set up a Special Resolution Regime (SRR), what does this do?

Answer 12

Allows the BoE to deal with a failing organisation in a controlled manner, either by:

Arranging for institution to e sold to a private sector buyer
Transferring institution property to a ‘bridge bank’ (belongs to BoE) until sale can be arranged
Put into temporary public ownership
Applying for insolvency

Question 13

When deciding how to treat failed institution, Bank must consider what 5 objectives?

Answer 13

Protect and enhance stability of system
Protect and enhance public confidence in stability of system
Protect depositors 
Protect public funds
Avoid interfering with property rights

Question 14

The financial crisis highlighted weaknesses in system, regulators had to impose stricter controls which had to be monitored closely, prudential regulation requires banks to make their balance sheets safer, what are the 5 main ways to do so?

Answer 14

Banks must hold more capital by issuing more shares to shareholders - If the bank fails, any money left goes to the creditors and depositors, not shareholders

Banks must hold liquid assets - essential to have enough liquid reserves to meet all short term obligations of the next 30 days

Must rely more heavily on customer deposits rather than short term loans

Banks must reduce their leverage - the more credit created, more risk of not being able to honour debts

Banks must tighten their lending criteria and adopt responsible lending policy

Question 15

Explain how sustainability affects shareholders

Answer 15

They own the banks, want to make good profits to receive high dividends and want share prices to rise

Some use shares for income or to pay into pension plans
Others are ‘speculators’ who buy and sell shares to make short term profits

Question 16

Explain how sustainability affects directors

Answer 16

The top managers who are in charge of big strategic decisions - responsible for sustainable decision making - they want well performing banks so that they get large salaries and bonuses - but any problems are blamed on them

Question 17

Explain how sustainability affects consumers

Answer 17

They buy the products and they want a range to choose from at good prices and to be treated fairly

Question 18

Explain how sustainability affects employees

Answer 18

They want good salaries, job security, interesting work, promotional prospects and training

They can encourage sustainable behaviour by advising and helping individuals to make sustainable borrowing and saving decisions

Question 19

What is a sustainable financial product?

Answer 19

Designed to meet the long term needs of those who buy it - addresses basic need of customers and is also profitable fro providers - wont be sustainable unless it complies with certain basic rules

Question 20

Explain (un)sustainability of mortgages

Answer 20

Sustainable - long term and low interest, meets customer needs, in event of default bank gets money back by selling the property

Unsustainable - if principles of lending are not adhered to, too much lent to those who cannot afford it

Question 21

Define responsible borrowing and lending

Answer 21

Defined as borrowing as much as they can afford, given present and future expected income and expenditure

Question 22

Explain the pre financial crisis of responsible borrowing and lending

Answer 22

Culture of high lending and high borrowing, interest was low - created a consumer culture - large mortgages and lots of debts, over-indebted

Question 23

Explain the post financial crisis of responsible borrowing and lending

Answer 23

People became wary and stopped spending, banks had to tighten lending criteria
Many banks couldn’t raise working capital, went into liquidation, unemployment rises

Question 24

Explain deleveraging

Answer 24

Post crisis - people stopped spending, and started saving in order to pay off their debts

Question 25

Explain perilous debt

Answer 25

When someone spends more than half their monthly income to meet repayments - when interest rises, these houses will be hit most

Question 26

What is the Mortgage Market Review (MMR)

Answer 26

Includes recommendations for reform, aiming to ensure continued access to mortgages for customers who can afford them, but to prevent a return to previous poor practices

Question 27

What 2 changes were there in the MMR?

Answer 27

Lenders fully responsible for assessing if mortgage customers can afford the loan - lender held responsible for failings

Lenders allowed to grant interest only mortgages if see evidence of credible strategy in place to repay capital amount eg) endowment policy

Question 28

When assessing ability to repay loan, what 4 things must be considered?

Answer 28

Checking income with employers
Assessing regular committed income
Check if mortgage still affordable if interest rises
Not lending to high risk borrowers

Question 29

Why is a financial system with healthy competition more sustainable?

Answer 29

Places greater obligation on each provider to offer sustainable products at sustainable prices and not engage in irresponsible lending/misselling

Question 30

FCA wants to secure appropriate protection for customers, what 3 things need to be considered?

Answer 30

Different risks of each transaction
Different experience and expertise of consumers
Need for timely provision of accurate information and advice

Question 31

What does the FCA do in terms of consumer protection?

Answer 31

They intervene when customers are treated unfairly and when there is risk to integrity of market
Assesses firms conduct, monitors products, responds to events or problems that threaten integrity

Expects firms to have well trained staff

Works closely to fight financial crime, detect and prevent money laundering, and take action against those using corrupt/unethical methods

Question 32

What 6 penalties can the FCA issue?

Answer 32

Withdrawing authorisation
Prohibiting activities
Suspending firms
Fines
Apply to courts for injunctions and restitution orders
Bringing criminal prosecutions to tackle financial crime

Question 33

Financial organisations can influence sustainability of the environment, economy and society to the extent they can influence actions taken by their customers, there is increased pressure on banks to invest in ethical businesses, what are the Equator Principles?

Answer 33

A set of ethical benchmarks for banks to follow when taking decisions to finance infrastructure projects