Financial regulation

Question 1

Name the 3 financial regulators

Answer 1

Financial Policy Committee
Prudential Regulation Authority
Financial Conduct Authority

Question 2

FPC prudentials?

Answer 2

Macro prudential regualtion

Question 3

PRA prudentials

Answer 3

Micro prudential regualtion

Question 4

FCA prudentials

Answer 4

Micro prudential regulation

Question 4

What is the main objective of the FPC

Answer 4

monitor and protect against systemic risk within the financial sector

Question 5

What are systemic risks?

Answer 5

When there are risks embedded throughout the whole financial sector, affecting the entire banking system. Failure of one bank in one circumstance affects other banks

Question 6

FPC’s role as an instructor

Answer 6

Instructs the PRA and FCA on how to limit systemic risks once any potential shocks have been identified. Then can advice the government on potential state intervention

Question 7

Other role of the FPC

Answer 7

Can utilise the lender of last resort function of the Bank of England because they can provide emergency liquidity to banks

Question 8

Stress tests done by the FPC

Answer 8

FPC performs annual stress tests to assess the health and functionality of banks to be able to identify potential shocks in the economy, been a prominent role since 2008

Question 9

Role of Prudential Regulation Authority

Answer 9

role to maintain the stability of banks and the banking sector as a whole, preventing bank failure and systemic risk

Question 10

Regulation role of PRA

Answer 10

PRA has the power to enact and enforce banking regulation such as reserve requirements

Question 11

Main role of the Financial Conduct Authority

Answer 11

To protect public interest and consumers thus promoting confidence confidence in financial products and institutions

Question 12

FCA and market rigging

Answer 12

FCA overlooks firms in the financial sector to ensure that all activity is legal and no market rigging is taking place

Question 13

FCA and financial products

Answer 13

FCA have a regulatory to protect consumers and the public interest by banning the misselling of financial products

Question 14

Example of a financial product

Answer 14

Life insurance

Question 15

What are the 3 types of financial regulation?

Answer 15

Impose limits on bank lending
Deregulation to increase competition
Provide emergency liquidity

Question 16

What is the basal agreement (basal III recommendations)

Answer 16

Regulation agreed on and recommended by industry experts and regulators to reduce the risks of bank failure and systemic risk

Question 17

Deregulation of markets

Answer 17

reducing paper work and red tape for banks, making it easier for banks to close down or start up, reducing limits on lending

Question 18

Provision of emergency liquidity

Answer 18

Bank of England and FPC can both provide this lender of last resort function
Prevents liquidity crises
Reduces potential collapse of whole financial market

Question 19

State 4 cons of financial regulation

Answer 19

Liquidity assurance schemes and bailouts lead to moral hazard
Risk of regulatory capture
Information failure
Asymmetric information

Question 20

What is regulatory capture

Answer 20

When managers or CEOs of commercial banks form relationships with regulators, influencing decision making regarding the regulation that commercial banks face.

Question 21

Effects of regulatory capture

Answer 21

Maximum interest of society are ignored and instead regulators make decisions that best suit the private needs ad wants of commercial banks managers, leading to government failure

Question 22

(Ev) Is financial regulation really needed?

Answer 22

Banks themselves do not want to fail because it is a business and therefore a case could be made that regulation in the form of limit lending is not necessary because commercial banks will tend to apply their own limits to protect against bank failure. So regulation may not be needed and should be left to the market unless banks are struggling or regulatory bodies like the PRA and FCA believe a bank is behaving irrationally.

Question 23

Example of a bank in America that failed

Answer 23

Lehman Brothers

Question 24

What mortgages did Lehman Brothers lend out?

Answer 24

Adjustable rate subprime mortgages

Question 25

When did Lehman Brothers file for bankruptcy?

Answer 25

15th of September 2008

Question 26

What are 4 types of Financial market failure?

Answer 26

Asymmetric information Speculation and market bubbles Negative externalities Moral Hazard

Question 27

Define financial market failure

Answer 27

When free financial markets fail to allocate financial products and services at the socially optimum level of output, resulting in a net loss of social and economic welfare

Question 28

What is an example of a negative externality in the financial market failure

Answer 28

taxpayers having to indirectly fund government spending to prevent the collapse of major banks, like when the US government used more than $700 billion of taxpayers money to keep banks afloat in 2008

Question 29

What is another key negative externality (post 2008)

Answer 29

After the 2008 financial crisis, banks stopped lending money to people and businesses. Firms couldn't borrow money to reinvest and reduce costs, causing firms to cut back on factors like labour, which led to millions of people being unemployed as a result

Question 30

Explain lender of resort function of the central bank

Answer 30

When commercial banks suffer liquidity problems, where they dont have enough short term liquid assets to meet the needs of depositors and other shirt term liabilities. Central bank steps in the provide emergency or non-emergency liquidity prevent a liquidity crisis or bank failure

Question 31

Pro of lender of last resort function

Answer 31

protects confidence in savings and the banking sector to maintain living standards and growth

Question 32

Con of lender of last resort function (liquidity assurance schemes)

Answer 32

Creates moral hazard. Banks know that if they are ever short of liquidity, the central bank will intervene and help