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Credit Institutions Flashcards

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1
Q

What are the three types of general public banks?

A
  • Commercial banks
  • Investment banks
  • Universal banks
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2
Q

What is the role of central banks?

A

Responsible for monetary policy and macroeconomic management of the monetary system

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3
Q

What traditional business activities do commercial banks engage in?

A
  • Accepting deposits
  • Lending
  • Payment services
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4
Q

What defines a universal bank?

A

A bank that accepts deposits, lends money, and carries out a range of financial activities including investment services, property services, and insurance services

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5
Q

Do investment banks take deposits?

A

No, investment banks typically qualify as investment firms

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6
Q

What is a credit institution

A

an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credit for its own account

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7
Q

What triggers the intervention of a deposit guarantee scheme according to the DGSD Directive?

A

The insolvency of a credit institution

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8
Q

What is a deposit?

A

A credit balance resulting from funds left in an account or from normal banking transactions, repayable under legal and contractual conditions
Except:
* existence can only be proven by a financial instrument
* principle not repayable at par
* principle only repayable at par under particular agreement w/ CI or 3P

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9
Q

What is meant by ‘from the public’ in banking terms?

A

Banking activity addressed indistinctly to the general public, not limited to certain groups

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10
Q

What types of financing are included in the concept of ‘granting of credit’?

A
  • Loans
  • Overdraft facilities
  • Financial leases
  • Factoring
  • Consumer credit
  • Guarantees
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11
Q

What is fractional reserve banking?

A

A principle where only a fraction of deposits needs to be kept within the bank to meet depositors’ withdrawals

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12
Q

What are the main sources of bank risks?

A
  • Misjudging creditworthiness of borrowers
  • Liquidity issues leading to balance sheet insolvency
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13
Q

What major weaknesses exist in the old EU banking regime?

A
  • Inadequate cross-border supervision
  • Lack of common recovery and resolution tools
  • Vicious circle between sovereign debt and banking system
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14
Q

What is the main purpose of the Banking Union?

A

To address the fragmentation of the financial EU sector and strengthen cross-border supervision. Cut the link between sovereign debts and domestic banking systems

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15
Q

What is the Single Supervisory Mechanism (SSM)?

A

A system of bank supervision composed of the ECB and national competent authorities of participating Member States

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16
Q

How are significant banks defined within the SSM?

A

Based on total value of assets and other criteria, including cross-border activities

Significant banks superviseb by ECB and

less significant banks get NCA supervision

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17
Q

What is a Joint Supervisory Team (JST)?

A

A team formed of staff from the ECB and relevant NCAs for the ongoing supervision of significant banks

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18
Q

What is required for credit institutions to obtain authorization before commencing activities?

A
  • capital requirement
  • fit and proper requirement
  • holders (>10%) meet sount and prudent management
  • feasibility of operations
  • links with other entities must not prevent supervition
  • adequate structiure
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19
Q

What does ‘other repayable funds’ refer to?

A

Funds received under a contract other than a deposit agreement, repayable at par or with interest

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20
Q

What is the relationship between taking deposits and granting credit?

A

A credit institution takes deposits and lends the raised funds to third parties

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21
Q

What is the significance of trust and confidence in the banking system?

A

They are preconditions for a functioning banking system

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22
Q

What does the term ‘public disclosure requirements’ signify in the context of CRR?

A

Requirements for institutions to disclose certain information to the public

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23
Q

True or False: Non-financial entities can legally carry out banking activities without restrictions.

A

False

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24
Q

Fill in the blank: The core mechanism of maturity transformation in banks is _____ reserve banking.

A

fractional

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25
What conditions must be met for an authorization to be released?
* Proper legal form and adequacy of the initial capital * Business entrusted to not less than two qualified individuals * Identification of shareholders with qualifying holdings * Feasibility of the proposed programme of operations * Close links with other entities must not hinder supervision * Adequacy of structural organization.
26
What is the significance of shareholders with qualifying holdings?
Holdings above 10% and thresholds at 20%, 30%, 50% or control are relevant to ensure sound management.
27
What criteria does the ECB assess for proposed acquirers?
* Reputation of the proposed acquirer * Knowledge, skills, and experience of management body members * Financial soundness of the proposed acquirer * Supervision structure of the group * Grounds for suspicion of money laundering.
28
What are 'close links' in the context of banking supervision?
'Close links' occur when two or more persons are linked through ownership or control of 20% or more voting rights or capital.
29
What must be included in the programme of operations for authorization?
* Detailed scheme of planned operations * Description of the business and activity performance * Market analysis and operational strategy.
30
What is the importance of capital from a regulatory perspective?
Capital serves as a buffer to absorb unexpected losses and protects the firm and its counterparties.
31
What are the minimum capital requirements for banks?
Banks must meet minimum capital ratios to protect depositors and maintain financial stability.
32
What is regulatory capital?
Regulatory capital is the amount of capital that regulators require banks to hold, expressed as a ratio between capital base and risk-weighted assets.
33
What was established by the G10 countries in 1988?
Minimum levels of capital for internationally active banks.
34
What does the Basel Committee on Banking Supervision (BCBS) do?
Promotes cooperation among member countries on banking supervisory matters to enhance financial stability.
35
What are the three pillars of the Basel framework?
* Pillar I: Minimum prudential requirements * Pillar II: Supervisory review * Pillar III: Market discipline.
36
What is Tier 1 capital?
Tier 1 capital is composed of Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) capital.
37
What is the purpose of the Capital Conservation Buffer?
Requires an additional amount of CET 1 equal to 2.5% of a bank’s total risk-weighted exposures.
38
What is the Liquidity Coverage Ratio (LCR)?
Designed to strengthen liquidity profile over a thirty-day stress scenario.
39
What does the leverage ratio limit?
Limits excessive build-up in leverage by requiring Tier 1 capital to be at least 3% of non-risk weighted exposures.
40
What does Pillar II of the Basel framework address?
Enables supervisors to assess banks’ capital adequacy in relation to the risks they face.
41
What is the CAMEL system used for?
To rate the financial condition of banks based on Capital adequacy, Asset quality, Management, Earnings, and Liquidity.
42
What is the aim of Pillar III in the Basel framework?
To increase market discipline through transparency obligations.
43
What did the BRRD aim to achieve?
To prevent banks’ insolvency and provide resolution tools before insolvency occurs.
44
What is the main objective of the BRRD and the SRMR? | Banks’ Recovery and Resolution Directive; Single resolution mechanism
To hamonizet he process for banks’ insolvency ## Footnote BRRD stands for Bank Recovery and Resolution Directive
45
What does the BRRD provide when a bank becomes insolvent?
Resolution mechanisms to reduce negative impacts on financial markets and government budgets ## Footnote These mechanisms are alternatives to ordinary winding-up and liquidation procedures.
46
Who primarily bears the losses produced by a distressed bank according to the new legislative framework?
Shareholders and creditors ## Footnote They must contribute to an amount of not less than 8% of total liabilities.
47
What is the SRM?
Single Resolution Mechanism ## Footnote It includes the Single Resolution Fund (SRF) and ensures efficient management of bank resolutions.
48
What does the SRM aim to minimize?
Costs to taxpayers and the real economy ## Footnote This is in the context of managing bank resolutions.
49
What is the responsibility of the management body in a bank?
Overall responsibility for the institution ## Footnote This includes approving and overseeing strategic objectives and risk strategy.
50
What must members of the management body possess according to Article 91 CRD?
Sufficient knowledge, skills, and experience | fit and proper ## Footnote They must be of good repute and can be removed by competent authorities if they do not fulfill these requirements.
51
What should the composition of the management body reflect?
* Adequate collective knowledge, skills, * experience * diversity ## Footnote This is necessary to understand the institution's activities and main risks.
52
What attitude must each member of the management body have?
Act with honesty, integrity, and independence of mind ## Footnote This is essential for effectively overseeing management decisions.
53
Fill in the blank: The SRM applies to all banks supervised within the _______. ## Footnote single resolution mechanism
SSM ## Footnote SSM stands for Single Supervisory Mechanism.
54
What types of market failures do the rules address?
Agency problems and negative externalities ## Footnote Also considers bounded rationality and the role of groupthink.
55
What does the management body ensure regarding accounting and financial reporting?
Integrity of the systems, including compliance with law and standards ## Footnote This is part of their oversight responsibilities.
56
What is the previous approach to restructuring distressed banks?
Using public funds (bailout) ## Footnote This approach burdened taxpayers with the cost of defaults.
57
What is required for the recruitment of members to the management body?
A broad set of qualities and competences ## Footnote Banks must also promote diversity within the management body.
58
What does the Capital Requirements Directive do?
Minimum harmonization rules for credit institutions on: * access to business activity; * supervisory powers and tools for the prudential supervision of credit institutions by competent authorities; * disclosure duties towards competent authorities in the field of regulation and prudential supervision of institutions
59
What does the Capital Requirements Regulation do?
prudential requirements for CIs: * own fund req * limits on large exposures * liquidity req * reporting requirements * public disclosures
60
Concequences of the Banking Union
* supervisory powers on stability on Banks * common platform for regulation: 1. supervision 2. resolution mechanisms 3. deposit insurance.
61
What is a counter syslical capital buffer?
accumulated in periods of economic expansion to be used as protection in a downturn | extesion of capital conservation buffer
62
What is the systematic risk buffer
relates to spoecific risks rather than credit to gdp ratio
63
What does supervisory review do?
* Internal capital assessment process (by bank) * Supervisory review (by supervisor)
64
SII Buffer
for systematically important institutions CET 1 capital of up to 3.5%
65
What is the Net Stable Funding Ration
monitor and reduce fuding risk | firm specific liquidity frisk with etra wighting for illiquid assets
66
What does the Management Body do
* overall resp. for inst. * implements inst. strategic abjective, risk strategy & internal governance * integrity of accounting/financial repording * oversight of senior management

Financial Institutions (9 decks)

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