The regulation of the financial system Flashcards
What are the two bodies under control of the Bank of England?
FPC and PRA
What do the FPC, FCA and PRA do?
To prevent something like the finanical crisis happening again, whichhelps maintain stability in the financial system
What is the difference between Prudential regulation authority (PRA) and Finanical policy comittee (FPC)?
PRA works within the BOFE, but they are micro regulators maintaining the stability of banks. Whereas the FPC are macro regulators who regulates risk in banking and ensures the financial system is stable. It clamps down on unregulated parts and loose credit. T
What is the FCA ( Financial conduct authority)
They are another Micro They report to the treasury ( government run), there role is to protect consumers also they promote competition ( make sure there is no collusion)
Why might banks fail due to the idea of short term borrowing and long term lending?
Banks might lose money on investments, and if there are insufficient funds in a vault, banks might not be able to provide depositors with money when it is demanded.
How is the 2008 finanical crash an example of the problem of short term borrowing and long term lending?
Before the crash, asset prices were high and rising, and there was a boom in economic demand. There were risky bank loans and mortgages, where government securities were backed by subprime mortgages ( high interest rate to compensate for the risk) . This means the borrowers had poor credit histories, and after house prices crashed in the US in 2006, several homeowners defaulted on their mortgages in 2007. Banks had lost huge funds, and required assistance from the government in the form of bailouts. ( money provided to help the crisis)
What is a moral hazard?
A moral hazard is a situation where there is a risk that the borrower does things that the lender would not deem desirable, because it makes the borrower less likely to repay a loan. It usually occurs when there is some form of insurance for the mistake.
How is the idea of a moral risk relevant to banks?
Banks might take more risks if they know the Bank of England or the government can help them if things go wrong. ( seen in finanical crash)
What is the systematic risk in the financial sector?
This is when a problem in one part of the financial sector can cause the whole sector to collapse
What are some of the negative externalities associated with systematic risks?
- large drops in GDP
- large drops in employment and salary levels
(the bank is a huge apart of the economy any disaster in the banking system leads to a huge effect in the economy)
What are two types of bank lending limits as a form of regulation to protect from bank failure and systemtic risk?
Liquidity ratios and a firms capital ratio
What is a bank’s liquidity ratio?
A liquidity ratio is used to determine how able a company is to pay off short-term obligations (Ratio between the liquid assets and the liabilities). This prevents risk of the Liquidity crisis. ( regulators will tell you what ratio you have)
Do higher or lower liquidity/capital ratios indicate stability?
Higher
What is an exampleof financial regulations brought in following 2008?
Deposit guaranteed - government backed savings up to an amount to give people confidence to put money in the bank
What is the capital ratio?
A capital ratio is a comparison between the equity capital and risk-weighted assets of a bank. ( on balance sheet equity capital is capital where firms must pay divendend to banks and assets are loans) ( for every pound loaned out they have 15p worth of capital)
