U2: T19 - PRUDENTIAL SUPERVISION Flashcards
CRD IV consists of two pieces of legislation:
- the Capital Requirements Regulation (CRR);
- the Capital Requirements Directive (CRD).
There is a key difference in the way the CRR has been implemented compared with the CRD.
Can you explain what it is?
The CRR is a regulation so all its terms are binding in full on all the UK businesses to which it applies. The CRD is a Directive so the UK government had some discretion as to how best to implement its requirements within the UK. The CRD requirements have been included in the PRA and FCA Handbooks.
Who is responsible for the prudential regulation of deposit-takers and insurers?
a) Financial Conduct Authority (FCA).
b) Prudential Regulation Authority (PRA).
c) Monetary Policy Committee (MPC).
d) Financial Policy Committee (FPC).
b) Prudential Regulation Authority.
Why does the FCA concentrate on managing the failure of an individual firm if it happens rather than proactively seeking to prevent its failure in the first place?
The FCA is the prudential supervisor for smaller firms that, in general, would not present a risk to the wider financial system if a particular one were to fail. Therefore, the regulator concentrates its resources on managing a firm’s failure in an orderly way to mitigate the impact on its customers.
Capital adequacy requirements are based on the principle that
in the event of a firm making a loss:
a) it can approach the Bank of England for additional funds.
b) its depositors, not its shareholders, should bear the loss.
c) the Basel Committee will determine whether the firm has sufficient capital to continue trading.
d) its shareholders, not its depositors, should bear the loss.
d) Capital adequacy requirements are based on the principle that shareholders, not depositors, should bear any loss.
What is a bank’s solvency ratio?
Capital as a percentage of the risk‐adjusted value of assets.
How did Basel II seek to ensure that capital adequacy requirements more accurately reflected the risks represented by a firm’s assets?
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.
Under Basel III, banks in the EU must work towards a minimum solvency ratio of what level?
a) 10.5 per cent.
b) 8 per cent.
c) 5 per cent.
d) 4 per cent.
a) 10.5 per cent.
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?
a) The liquidity coverage ratio.
b) The net stable funding ratio.
c) The Tier 1 capital measure.
d) The Tier 2 capital measure.
b) The net stable funding ratio
What are the key aims of Solvency II?
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.
Which of the following sections of the FCA Handbook contains details of the prudential requirements applying to MiFID investment firms?
a) BIPRU.
b) IFPRU.
c) MIPRU.
d) MIFIDPRU.
a) MIFIDPRU details the prudential requirements for MiFID investment firms.
The EU Directive, Solvency II, aims to:
a) reduce the risk of an insurance company being unable to meet its claims.
b) restrict banks’ lending to a percentage of their capital.
c) ensure banks and building societies keep customer deposits separate from its own funds.
d) increase the amount of available capital for a bank to meet liquidity demands.
a) reduce the risk of an insurance company being unable to meet its claims.
The Basel III net stable funding ratio, requires that a bank’s:
a) assets meet specified quality requirements.
b) long‑term financial resources exceed long‑term commitments.
c) income and profits meet certain stability standards.
d) short-term financial resources exceed short-term commitments.
b) long‑term financial resources exceed long‑term commitments.
Basel III liquidity coverage ratio requires a bank’s available high‑quality liquid assets to exceed the net cash outflows expected over the next:
a) 7 days.
b) 14 days.
c) 28 days.
d) 30 days.
d) 30 days.
The Basel Committee acts under the auspices of the:
a) Bank for International Settlements.
b) European Central bank.
c) World Bank.
d) International Monetary Fund.
a) Bank for International Settlements.
Under Basel II, the capital required to cover operational risk is gross annual income multiplied by:
a) 0.10.
b) 0.15.
c) 0.20.
d) 0.25.
b) 0.15.
