Unit 2 Topic 19- Prudential regulation Flashcards

1
Q

What is prudential management?

A

Industry regulators ensuring firms have adequate risk management systems in place, particularly in relation to financial risks.

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2
Q

Who is responsible for prudential regulation?

A

The PRA is responsible for the prudential regulation of all deposit-takers, insurers and significant investment firms.The FCA is responsible for the prudential regulation of firms for which it is the sole regulator, typically smaller businesses.

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3
Q

What is the relationship between international prudential regulation to the UK’s regulators?

A

The UK’s regulators are driven by regulatory requirements at an international level.

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4
Q

What is the Basel Committee on banking supervision?

A

The Basel Committee is a multinational body acting under the auspices of the Bank for International Settlements.Its role is to strengthen the regulation, supervision and activities of banks to enhance financial stability.

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5
Q

Define Capital Adequacy.

A

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

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6
Q

Define Solvency.

A

The extent to which a business’ assets exceed it liabilities. An example from the financial services industry would be mortgage lenders whose assets are the loans made to consumers; liabilities are the funds borrowed to facilitate those loans, from deposit-taking or from the money markets.

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7
Q

Define Solvency Ratio.

A

Capital as a percentage of the risk-adjusted value of assets.

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8
Q

Define Liquidity.

A

The ease and speed at which an asset can be converted to cash.

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9
Q

What are the three main ways a firm’s assets can provide liquidity?

A
  • By being sold for cash.
  • By reaching their maturity date.
  • By providing security for borrowing.
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10
Q

What is operational risk?

A

Operational risk is the risk of loss as a result of failed or inadequate internal processes, people and systems (ef staff fraud, or a computer failure, or as a result of external events, such as a natural disaster.)

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11
Q

What is a basic approach to calculating capital requirement for operational risk?

A

Multiplying the institution’s gross annual income (averaged over the past 3 years) by 0.15.

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12
Q

What are the Basel accords?

A

Basel Committee on Banking Supervision issuing minimum capital requirements for banks.

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13
Q

What is Pillar 1 of Basel II?

A

Details capital requirements in respect of three aspects of a banks’s operations: credit risk, operational risk and market risk

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14
Q

What is Pillar 2 of Basel II?

A

Gives banking regulators more effective supervisory tools and enables them to deal with the individual components of risk.

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15
Q

What is Pillar 3 of Basel II?

A

Contains a set of disclosure requirements so that the capital adequacy of an organisation can be properly assessed.

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16
Q

What are the two main areas Basel III covers?

A
  • Regulatory capital
  • Asset and liability management
17
Q

What is the minimum solvency ratio Basel III requires banks to reach?

A

10.5%

18
Q

What are the two broad classes of capital in relation to regulatory capital?

A
  • Tier 1 capital, which includes share capital and disclosed reserves (ie profits retained in the business rather than being paid as dividends).
  • Tier 2 capital, which is known as supplementary
19
Q

What is leverage ratio and what is the minimum value mandated by Basel III?

A

A bank’s Tier 1 capital divided by its average total consolidated assets. 3%

20
Q

What are the two new ratios introduced by Basel III that banks must comply with in respect of asset and liability management?

A
  • Liquidity coverage ratio (LCR)
  • Net stable funding ratio (NSFR)
21
Q

What is Liquidity coverage ratio (LCR) in respect of asset and liability management (Basel III)?

A

The LCR requires that high-quality liquid assets available to the bank exceed the net cash outflows

22
Q

What is Net stable funding ratio (NSFR) in respect of asset and liability management (Basel III)?

A

The NSFR aims to protect the bank’s longer term position. The NSFR requires that long-term financial resources exceed long-term commitments; long term in this context is taken being more than one year.

23
Q

What is the Capital Requirements Directive?

A

The CRDs establish a supervisory framework that aims to minimise the effects of a firm failing.They do this by ensuring that firms hold sufficient financial resources to cover the risks their business activities present.

24
Q

What is Total loss-absorbing capacity (TLAC)?

A

The Financial Stability Board (FSB), an international organisation consisting of national regulators and central banks, issued a minimum TLAC for 30 banks identifies as global systemically important banks (G-Sibs) that the Basel Committee on Banking Supervision (BCBC) deems at risk from being too big to fail.

25
Q

What is the TLAC requirement as of 2023/24?

A

18% from 1 January 2022.

26
Q

What are the main aims of Solvency II?

A
  • Reduce the risk of an insurance company being unable to meet its claims.
  • Reduce losses suffered by policyholders should an insurer be unable to meet all claims in full.
  • Establish a system of information disclosure that makes regulators aware of potential problems at an early stage.
  • Promote confidence in the financial stability of the insurance sector.
  • Reduce the risk of an insurance company being unable to meet its claims.
  • Reduce losses suffered by policyholders should an insurer be unable to meet all claims in full.
  • Establish a system of information disclosure that makes regulators aware of potential problems at an early stage.
27
Q

What the the three main pillars of Solvency II?

A
  • Pillar 1: Capital requirements and the valuation of assets.
  • Pillar 2: Governance and risk-management requirements.
  • Pillar 3: Disclosure and transparency rules.
28
Q

What is the GENPRU sourcebook?

A
  • The general prudential sourcebook for banks, building societies, insurers and investment firms.
  • Details the way that the rules apply to different firms, rules and guidance on minimum capital requirements, and the definitions of different types of capital.
29
Q

What is the BIPRU sourcebook?

A

The prudential sourcebook for banks, building societies and investment firms, and details the rules applying to these firms.

30
Q

What is the IFPRU sourcebook?

A

The prudential sourcebook for investment firms and details the capital requirements for such firms.

31
Q

What is the INSPRU sourcebook?

A

The prudential sourcebook for insurers details the capital requirements and technical provisions for insurance companies.

32
Q

What is the MIPRU sourcebook?

A

The prudential sourcebook for mortgage and home finance firms, and details requirements in respect of capital and professional indemnity insurance.

33
Q

How did Basel II seek to ensure that capital adequacy requirements more accurately reflected the risks represented by a firm’s assets?

A
  • firms were required to categorise each asset according to the risk it represented and hold more capital in relation to the riskier assets.
34
Q

In the EU, the requirements of the various Basel Accords are implemented by which legislation?

A

Within the EU the requirements of the various Basel Accords are implemented by the Capital Requirements Directives, with Basel III being implemented by CRD IV.