Unit 5 Flashcards
Systemic risk
Every bank is affected
Systemic risk
Every bank is affected
Housing bubble
When house quickly prices rise
Regulation
Helps ensure the banks are managed well - that why do not take on too much risk
Take a form of rules and regulations
How banks structure their assets - lending
Less bank failure
Acceptable behaviour and conduct
Principle based regulation
Within financial services typically takes form of broad sets of aims or expectations that promote certain outcomes comes
Supervision
Is the process by which regulators oversee and enforce compliance with these rules and guidance, both in financial system as a whole and in individual institutions
Macro prudential
Stability of the financial system as a whole
Combined effect of the actions of the actions of the individual banks and other institutions
Aim to reduce the likelihood of systemic risk and make the facial system more resilient to external shocks and risks
Take:
Monitoring the financial systems and identifying emerging risk - early action
Example - improving affordability rules on mortgage for a lender so the banks face fever bad debts
Micro Prudential regulations
Individual banks and other financial institutions they often refer to as firms
Aims to inside individual banks are structures to withstand external shocks
Setting requirements for balance sheets, good quality assets, sufficient capital and liquidity and manage their risk sensibly
Micro prudential part 2
Rules for individual banks to apply to manage their assets liability and risk. Banks are always supervised on an ongoing basis
Capital requirements directive IV(CRD IV)
Prudential rules for banks, building societies and investment firms are governed but capital requirements directive IV
Banks that operate prudentially are more likely to be able to meet their obligations even in times of stress.
Bank insolvency and resolution
Banks do fail and cannot pay back the money that they owe.
Resolution allows the bank to continue trade so the customers could still make payments and access their money. The bank maybe taken over by another bank or its assets may have been sold to pay off the debt. Unpaid debt should come for the shareholders capital. When the bank have enough capital the government cannot ask to use taxpayers money to support the failed bank
Conduct regulation
Referred to conduct of business. Aims to ensure that financial markets work well for individual and businesses for an economy as a whole.
Principle based regulation
Broadly stated rules where banks are expected to conduct their business.
Flexibility - and scope for banks to innovate to find competitive advantage. Whilst ensuring the safe guard of customer
Conduct regulation
Disclosure of information fair business practices, and the honesty, integrity and competence of financial institutions and their employees
Consumer credit
Ensuring customers are treated fairly exuded to proving consumers form foreseeable harm which they borrow money. Consumer credit refers to lending to individual and sometimes to small businesses as. Making sure they ain’t taking out to much debt-
Central bank main aim to achieve monetary and financial stability
United States
Federal reserve system - the FED
EU EURO zone
European Central Bank ECB
The ECB and all EU nationnal central bank create European system if central banks ESCB
Monetary stability
Countries currency maintains its value over time.
Helps people understand what a unit of currency will buy.
Rate of inflation
Changes in prices for goods and services overtime. When the rate of inflation is low and stable the country has monetary stability
Monetary policy committee (mpc)
Increases or reduces interest rates to control spending. If the inflation is too low the mix reduces interest rate to encourage people to spend more: causes price to go up faster. This decrease demand for products and services causes price to rise more slowly
Financial policy committee FPC - macro prudential
Acts like a mechanic it makes sure that everything is working as it should and that the fincnail system is stable ( macro prudential supervision) if they find any potential problems they act to put in place policies to reduce it.
Prudential regulation authorises ( PRA) for micro prudential
Safety engineer. It make sure that all pairs of the financial systems have put these remedies in place correctly
Finincail conduct authority (FCA) in an independent public body
Financial policy committee
Macro prudential regulation of the Uk financial system
Job:
To identify, monitor and take action to remove or reduce systemic risk.
Find vulnerabilities and acts to build the resilience of the system
Systemic risk includes unsustainable levels of debt or the amount of lending in the economy growing too quickly
