Banking Regulations

Question 1

Money added to the economy

Answer 1

Initial Deposit/Reserve Ratio; Ex: $100 initial deposit and reserve ratio is 10%, so total money added = (100/.10) = 1000

Question 2

Money multiplier

Answer 2

Reciprocal of the reserve ratio; Multiplier = (1/Reserve Ratio). Ex: 1/0.1 = 10. So, money is increasing by (100*10) = 1000

Question 3

Co-operative Banking

Answer 3

Rabobank in Netherlands and Credit Agricole in France have roots in agricultural cooperative banking

Question 4

BCBS

Answer 4

BASEL Committee on Banking Supervision

Question 5

Types of Regulation

Answer 5

Three types of regulation: Systematic, Conduct of business regulation, Prudential

Question 6

Capital Adequecy Requirement

Answer 6

Ensuring that banks carry enough capital so that they do no become bankrupt when difficulties occur. It aims to ensure that a bank is solvent in the long-term.

Question 7

Minimum Liquidity

Answer 7

However, banks also require the ability to manage immediate liquidity shortfalls, which is why regulators may also impose minimum liquidity standards

Question 8

Elements of Basel I, II, III

Answer 8

Basel I (1988) - Credit risk, Basel II (2006) - Credit requirement for operational risk, Basel III (after 2008) - Higher capital adequecy ratio, Liquidity, leverage

Question 9

Moral hazard

Answer 9

Occurs where a party that is insulated from risk has more information about its actions or intentions than the party paying for the negative consequences of the risk, and thus has a tendency or incentive to behave inappropriately.

Question 10

Principal-Agent Problems

Answer 10

Arises when the interests of the agent (bank) and the principal (customer) are not aligned. They are a direct consequence of asymmetric information and the nature of financial contracts.