Regulation Of The Financial System

Question 1

What is the Financial Policy Committee’s (FPC) main role

Answer 1

To identify, monitor, and take action to remove or reduce risks that threaten the resilience of the UK financial system as a whole

Question 2

What does the FPC publish

Answer 2

A Financial Stability Report identifying key threats to the stability of the UK financial system

Question 3

What does the FPC have the power to do

Answer 3

Instruct commercial banks to change their capital buffers

Question 4

What happens when the FPC decides that the risks to the financial system are growing

Answer 4

They may tell the commercial banks and other lenders to increase their capital buffers to help absorb unexpected losses on their assets (bad debts etc)

Question 5

What does prudent mean

Answer 5

Being careful at times of uncertainty

Question 6

What is the UK Prudential Regulation Authority (PRA)

Answer 6

Part of the Bank of England - it is responsible for the prudential regulation and supervision of around 1,700 banks, building societies, credit unions etc.

Question 7

What areas does the PRA focus on

Answer 7

• insurance providers
• buy-to-let mortgage lenders
• credit unions
• other specialist lenders

Question 8

What are credit unions

Answer 8

Small and local non-profit lending institutions

Question 9

Who owns credit unions

Answer 9

Their members and typically serves those customers who are unable to access standard retail bank products through the banks or building societies

Question 10

What is liquidity

Answer 10

The ease and cost with which assets can be turned into cash and used immediately as a means of exchange

Question 11

Examples of liquid assets

Answer 11

Cash
Treasury bills
Stocks

Question 12

What are treasury bills

Answer 12

Short term government loans

Question 13

What is a liquidity ratio

Answer 13

The ratio of assets held by a bank on their balance sheet to their overall assets

Question 14

What may a liquidity ratio refer to

Answer 14

A reserve assets ratio for s bank which sets the minimum liquid reserves that a bank must maintain in the event of a sudden increase in withdrawals

Question 15

What may a high liquidity ratio limit

Answer 15

The amount of lending that a bank is able to do - it must maintain higher amounts of cash

Question 16

What does a commercial bank’s capital ratio measure

Answer 16

The funds it has in reserve against the riskier assets it holds that could be vulnerable in the event of a crisis

Question 17

What is a ‘stress test’

Answer 17

Tests the EU runs to check whether banks have enough of a capital buffer to weather difficult economic/financial conditions (known as disaster scenarios)

Question 18

What is tier 1 capital ratio

Answer 18

A measurement of s commercial bank’s equity capital compared with its total assets

Question 19

What is leverage ratios

Answer 19

An indicator of the ability of a bank or building society to absorb losses

Question 20

What does the leverage ratio refer to

Answer 20

Th share of the total value of s firm’s assets and its other commitments that is funded with high-quality capital capable of absorbing losses while a firm is a ‘going concern’

Question 21

What does a low leverage ratio mean

Answer 21

A commercial bank or building society flies on debt to fund their activities

Question 22

What happened in June 2015

Answer 22

The FPC directed the PRA to require each major U.K. commercial bank and building society to meet a leverage ratio requirement and hold buffers over that requirement