Unit 1: The Nature of Risk and Regulators

Question 1

What does CFR stand for?

Answer 1

Council of Financial Regulators

Question 2

What are the two main goals of the Council of Financial Regulators (CFR)?

Answer 2

1. Efficiency/Effectiveness of financial regulation.
2. Stability of the Australian financial system.

Question 3

Who are the 4 members of the Council of Financial Regulators (CFR)?

Answer 3

1. APRA
2. ASIC
3. RBA
4. The Treasury

Question 4

Does the Council of Financial Regulators (CFR) have regulatory or policy decision making powers?

Answer 4

No, but the members of the CFR do.

Question 5

What is macro prudential risk?

Answer 5

The extent that the fragility of a bank or other financial institution could affect the market and/or economy as a whole.

Question 6

What is regulatory risk?

Answer 6

The risk that changes in regulation could lead to disruption and increased compliance/operational costs.

Question 7

What are the two categories of risk?

Answer 7

1. Absolute
2. Speculative

Question 8

What is ‘absolute’ risk?

Answer 8

The situation where there is either a chance of loss, or no loss - but there is no chance of gain.

For example, the risk of an accident when driving a car - there is a chance of an accident, or no accident.

Question 9

What is ‘speculative’ risk?

Answer 9

Possibility of a loss or gain based on a decision to accept or decline a risk.

Example: betting.

Question 10

What are the six main types of risk Banks in Australia are typically exposed to?

Answer 10

1. Credit
2. Liquidity
3. Market
4. Conduct
5. Operational
6. Compliance

Question 11

What is another name for credit risk?

Answer 11

Default risk

Question 12

What is credit risk (aka default risk)?

Answer 12

Risk that lent money will not be repaid (either in full or in part)

Question 13

What is liquidity risk?

Answer 13

The risk that there are insufficient liquid assets to meet current and future payment obligations.

Question 14

What is funding risk?

Answer 14

The risks that a bank or financial institution cannot attract sufficient deposits, or raise enough wholesale debt, to fund asset growth or replenish liquid assets.

Question 15

What is market risk?

Answer 15

Risk of an adverse impact on a bank’s valuations due to changes in market factors such as foreign exchange rates, interest rates, or equity prices.

Question 16

What is conduct risk?

Answer 16

Bad behaviour of bank employees - either deliberate actions, or inadequacies in bank practices, frameworks, or education programs.

E.g., a failure to meet AML/CTF obligations could lead to accusations of funding terrorism.

Question 17

What is operational risk?

Answer 17

Risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

Question 18

What does BEAR stand for?

Answer 18

Banking Executive Accountability Regime

Question 19

What is the intent of the BEAR legislation?

Answer 19

To improve executive accountability in ADIs, recognising that leadership is key to driving cultural change.

Question 20

What are four measures introduced with BEAR?

Answer 20

1. Executive registration with APRA
2. Increased powers over remuneration policy
3. Remuneration defferal
4. Penalties for ADIs

Question 21

Under BEAR, what power does APRA have over ADI remuneration policy?

Answer 21

APRA holds power to require ADIs to review and adjust their remuneration policies when APRA believes they are not appropriate.

Question 22

Within BEAR, what is remuneration deferral and what is it’s purpose?

Answer 22

Accountable persons are required to defer 40-60% of variable remuneration for a period of four years.

This is intended to insure that accountable persons make decisions that are in the long-term interests of banks and their customers.

If an accountable person breaches their BEAR obligations, the ADI is obligated to withhold all or part of their variable remuneration as a penalty.

Question 23

Under BEAR, what is an ‘accountable person’?

Answer 23

Senior executives and directors of ADIs.

Question 24

What is the civil penalty APRA will impose on ADIs that do not appropriately monitor the suitability of their executives to hold senior positions?

Answer 24

Up to $200 million.

Question 25

When did the BEAR regime become effective for all ADIs?

Answer 25

1 July 2019

Question 26

What is the Financial Accountability Regime (FAR)?

Answer 26

An extension of the BEAR which extends the FAR beyond APRA-regulated entities and includes those regulated by ASIC

Question 27

What are 3 key differences between BEAR and FAR?

Answer 27

1. Both APRA and ASIC will administer the FAR.
2. New definition for entities to recognise the broader range that will be subject to FAR.
3. The penalty framework will be strengthened.

Question 28

How do APRA and ASIC view conduct risk differently?

Answer 28

APRA: Focuses on how conduct impact a risk within the bank and the potential weaknesses and vulnerabilities that may result.

ASIC: Focuses on conduct risk and customer impact in terms of ensuring all customers are treated fairly, financial products perform as expected, and banks are aware of any behavioural biases with customers or information imbalances.

Question 29

What is ASIC’s primary responsibility?

Answer 29

Regulate the conduct of financial services companies to ensure they meet risk management obligations.