Chapter 2: International Risk Regulation Flashcards
What are the 3 pillars of the Basel Accord
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
What is the purpose of the Basel Accord
Capital adequacy
What is the BIS
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”
What is the BCBS
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
What is an example of ‘Moral Hazard’
When depositors no longer have an incentive to consider a bank’s financial viability before depositing funds
What is economic capital
A bank’s best estimate of the capital it needs to manage its own risk profile.
What is regulatory capital
A mandatory level of capital which a regulator requires a bank to hold.
What types of risk affect the level of capital which should be held within a bank (Capital ratios)
Credit, market and operational
As of 2023, what enhancements have been made to the Basel Accord
Countercyclical capital buffer - restricts bank’s participation in credit booms
Leverage Ratio - Minimum amount of loss absorbing capital
Set of liquidity requirements/ratios
What are the Basel Accord preconditions
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
What assessment do UK banks have to complete in order to meet Basel pillar 2
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
What are the key sections of the capital and liquidity assessment (Basel Pillar 2)
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’
What are the principles of home/host international banking (Basel Concordat)
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
define ‘supervision’ in a regulatory sense
day-to-day regulatory relationships with banks - the process of monitoring them to ensure they are complying with regulatory requirements
What is the financial services act of 2012
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
