Unit 1: The Nature of Risk and Regulators Flashcards
What does CFR stand for?
Council of Financial Regulators
What are the two main goals of the Council of Financial Regulators (CFR)?
- Efficiency/Effectiveness of financial regulation.
- Stability of the Australian financial system.
Who are the 4 members of the Council of Financial Regulators (CFR)?
- APRA
- ASIC
- RBA
- The Treasury
Does the Council of Financial Regulators (CFR) have regulatory or policy decision making powers?
No, but the members of the CFR do.
What is macro prudential risk?
The extent that the fragility of a bank or other financial institution could affect the market and/or economy as a whole.
What is regulatory risk?
The risk that changes in regulation could lead to disruption and increased compliance/operational costs.
What are the two categories of risk?
- Absolute
- Speculative
What is ‘absolute’ risk?
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.
What is ‘speculative’ risk?
Possibility of a loss or gain based on a decision to accept or decline a risk.
Example: betting.
What are the six main types of risk Banks in Australia are typically exposed to?
- Credit
- Liquidity
- Market
- Conduct
- Operational
- Compliance
What is another name for credit risk?
Default risk
What is credit risk (aka default risk)?
Risk that lent money will not be repaid (either in full or in part)
What is liquidity risk?
The risk that there are insufficient liquid assets to meet current and future payment obligations.
What is funding risk?
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.
What is market risk?
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.
What is conduct risk?
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.
What is operational risk?
Risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
What does BEAR stand for?
Banking Executive Accountability Regime
What is the intent of the BEAR legislation?
To improve executive accountability in ADIs, recognising that leadership is key to driving cultural change.
What are four measures introduced with BEAR?
- Executive registration with APRA
- Increased powers over remuneration policy
- Remuneration defferal
- Penalties for ADIs
Under BEAR, what power does APRA have over ADI remuneration policy?
APRA holds power to require ADIs to review and adjust their remuneration policies when APRA believes they are not appropriate.
Within BEAR, what is remuneration deferral and what is it’s purpose?
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.
Under BEAR, what is an ‘accountable person’?
Senior executives and directors of ADIs.
What is the civil penalty APRA will impose on ADIs that do not appropriately monitor the suitability of their executives to hold senior positions?
Up to $200 million.
When did the BEAR regime become effective for all ADIs?
1 July 2019
What is the Financial Accountability Regime (FAR)?
An extension of the BEAR which extends the FAR beyond APRA-regulated entities and includes those regulated by ASIC
What are 3 key differences between BEAR and FAR?
- Both APRA and ASIC will administer the FAR.
- New definition for entities to recognise the broader range that will be subject to FAR.
- The penalty framework will be strengthened.
How do APRA and ASIC view conduct risk differently?
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.
What is ASIC’s primary responsibility?
Regulate the conduct of financial services companies to ensure they meet risk management obligations.
