Credit institutions under EU banking law Flashcards
3 Main EU weaknesses in 2008
1) Cross-boder activities not adequately addressed by cross-border supervision and crisis manageemnt
2) No legal tools allowing for recovery and resolution of banks in crisis
3) Vicious cycle between sovereign debt of member states and domestic banking systems
Financial intermediation definition and 5 advantages
FI = middlemen between suppliers of capital (savers, investors, SHs) and investors in real assets (borrowers of funds)
Advantages: 1) Financial expertise (informational function)2) reduction in transaction costs (economies of scale) 3) risk and portfolio diversification (insurance function) 4) maturity transformation of ST liab into LT assets (liquidity function) 5) contribute to economic growth)
Types of banks
1) General public banks (universal, commercial, investment)
2) higher-level institutions (no direct contact with public): central banks, supervising banks/authorities
Commercial banks
1) accept deposits
2) lending
3) payment services
Investment banks
IB services, do NOT take deposits Two main lines: sell side (trading, underwriting, research) buy side (advice to funds etc.)
Fractional reserve system
Commercial banks only hold fraction of assets in cash/reserves, rest is given out as loans -> use deposits to extend loands and thus create money
Main features of banking system (why vulnerable?)
1) Low cash to assets (liquidity) i.e. maturity mismatch
2) low capital to assets (leverage)
3) risky asset portfolio
Conduct of business regulation/supervision
relates to interaction of financial institutions with their customers in regulated financial markets dealing with investments
Macro prudential regu/superv
relates to imbalances in financial system and detection of systemic risks that can arise from that. focus of safety of fin. and econ. system as a whole through prevention of creation of systemic risk (systemic risk = risk of breakdown of entire fin. system)
Micro-prudential regu/superv
safety and soundness of individual fin. inst. as well as depositor/investor protection (day-to-day)
Four stages of micro-prudential supervision
1) authorisation/licensing: filter aimed at having safe system. should consider conditions of firm and activities that firm wants to perform. not too lax nor too restrictive
2) Supervision stricto sensu: ongoing monitoring and oversight of health . enforcement, risk monitoring and control. Instruments: reports, ratings, onsite examinations, internal audit, stress tests. CAMEL system: 1) check aspects (asset quality, capital adequacy, liquidity, internal controls/management, earnings) standalone 2) composite rating
3) sanctioning: institutional and personal
4) bank crisis management: 1) lender of last resort 2) deposit insurance scemes 3) government policies of protection 4) resolution vs insolvency 5) early intervention and preventive measures
Macro-prudential supervision and composition fallacy
Composition fallacy = false assumption that robustness of individual entities equals robustness of entire system
Instruments of macro
countercyclical capital buffers capital requirements leverage ratios provisioning liquidity buffers loan to value margin requirements, central counterparties disclosure requirements
CRR
Capital requirements regulation. defines credit institution as business thta takes deposits from public and grants credit. CRD IV, BRRD, SSMR and DGSD assume this definition
Concept of deposits
1) object is only money
2) should be related to a banking transaction ebtween depositor and bank
3) funds repayable either upon request or fixed term.
4) principal amount must be paid back at face value
5) does not matter if with or without interest
