Chapter 2: International Risk Regulation Flashcards

1
Q

What are the 3 pillars of the Basel Accord

A

1 - Minimum regulatory capital requirements - calculates minimum level of capital a firm should hold (Capital/(credit risk +market risk + operational risk) > 8%)
2 - Supervisory review process - enables firm to offer own opinion on how much capital they should hold
3 - Market discipline - public disclosure of certain prescribed aspects of the firm’s capital and approach to risk management

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the purpose of the Basel Accord

A

Capital adequacy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the BIS

A

The bank of international settlements is an organization that serves as a bank for central banks, and fosters international monetary and financial cooperation. “The regulators regulator”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the BCBS

A

The Basel Committee on Banking Supervision exists in order to enhance understanding of supervisory issues and improve the quality of banking supervision worldwide. The committee ensures that banks have sufficient reserves to withstand specific levels of risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is an example of ‘Moral Hazard’

A

When depositors no longer have an incentive to consider a bank’s financial viability before depositing funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is economic capital

A

A bank’s best estimate of the capital it needs to manage its own risk profile.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is regulatory capital

A

A mandatory level of capital which a regulator requires a bank to hold.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What types of risk affect the level of capital which should be held within a bank (Capital ratios)

A

Credit, market and operational

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

As of 2023, what enhancements have been made to the Basel Accord

A

Countercyclical capital buffer - restricts bank’s participation in credit booms
Leverage Ratio - Minimum amount of loss absorbing capital
Set of liquidity requirements/ratios

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the Basel Accord preconditions

A

Sound and stable macroeconomic policies
Well-established framework for financial stability policy formulation
well-developed public infrastructure
Clear framework for financial crisis management, recovery and resolution
Mechanisms for providing an appropriate level of systemic protection or public safety net
effective market discipline

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What assessment do UK banks have to complete in order to meet Basel pillar 2

A

Internal capital and liquidity assessment:

Assess risks and mitigations
Subject the results to stress testing
Determine appropriate level of capital and liquidity for those risks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the key sections of the capital and liquidity assessment (Basel Pillar 2)

A

The firm’s risk exposure
The firm’s view on the adequacy of its risk management
The firm’s financial and capital plans
Stress and scenario tests
The firm’s capital and liquidity adequacy
The ‘use test’

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the principles of home/host international banking (Basel Concordat)

A

Parent banks and parent supervisory authorities should monitor the risk exposure of the banks or banking groups for which they are responsible, wherever business is conducted
The creation of cross-boarder banking should receive prior consent from both home and host country
Home country has right to gather information from cross-boarder establishments
If host country determines any of the above is not being met, they can impose restrictions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

define ‘supervision’ in a regulatory sense

A

day-to-day regulatory relationships with banks - the process of monitoring them to ensure they are complying with regulatory requirements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the financial services act of 2012

A

Maintain arrangements to determine whether persons on whom requirements are imposed by this act are complying with them

Protect consumers
Protect financial markets and enhance integrity of UK financial system
Promote effective competition in the interest of consumers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are the FCA’s 11 ‘Principles for Business’

A

Conduct business with integrity
Conduct business with due skill, care and diligence
Take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems
Maintain adequate financial resources
observe proper standards of market conduct
Pay due regard to the interest of its customers
pay due regard to the information need of clients and communicate this to them fairly
Manage conflicts of interest fairly, both between itself and customers and between two clients
Take care to ensure the suitability of its advice to customers
Arrange adequate protection for client assets
Deal with regulators in a cooperative way

17
Q

What is conduct risk

A

the risk of a firm behaving in a way which delivers poor outcomes for consumers

18
Q

What is the SMR

A

The senior managers regime requires firms to map out management responsibilities and prepare statements and responsibilities for individuals carrying out senior management functions (SMFs)