What is prudential management
Ensuring firms have adequate risk management in place for financial risk
What is capital adequacy
Ensuring businesses hold sufficient capital so risk doesn’t involve customers
What is Solvency
The extent to which businesses assets exceed their liabilities.
e.g. mortgage lenders assets are the loans made to customers. Their liabilities are the funds borrowed to provide the loans
What is a solvency ratio
As a percentage it’s the capital to match the risk of their assets
The ease and speed at which an asset can be converted to cash
What is operational risk?
The risk of loss from failed internal process, people, systems. Could also be external such as natural disasters
What are the Basel accords
The Basel committee on banking supervision first issued minimum capital requirements for banks in 1988.
The rules set out in the Basel accord were adopted by G10 countries
Published in 2004. Required banks to hold capital which was appropriate to the risk in their investments/practises. Also required banks to carry out a stress test. (3 pillars)
Published in 2010. Covers 2 main areas:
Regulatory capital & asset and liability management
Found in Basel III regulatory capital is the amount of capital bank can hold to meet regulatory requirements.
banks also need a minimum solvency ratio of 10.5%.
Asset and liability management
Basel III introduced 2 new ratios that banks must comply to achieve Asset and liability management:
Liquidity coverage ratio (LCR): Requires high quality liquid assets must exceed the net cash flow expected over next 30 days.
Net stable funding ratio (NSFR): Requires that long term financial resources exceed long term commitments.
What is the capital requirements directive
In the EU the requirements of Basel I, II and III are implemented by the CRDs
Total loss-absorbing capacity (TLAC)
In relation to banks that are systemically important. The TLAC requirements are to bolster the banks capital and leverage ratios, ensuring they can continue sufficiently
What is solvency II
Published in 2016 by (EIOPA) is at an international level unlike solvency I. The main aims are:
- Reduce risk that insurance company is unable to meet its claims.
- Reduce losses by policyholders should insurer not meet claims in full.
- Establish a system of information disclosure that makes regulators aware of potential problems at an early stage.
- Promote confidence in the insurance sector.
What are the PRA/FCA prudential standards
Both FCA & PRA are responsible for establishing rules that translate EU legalisation into practical standards that apply to financial service providers.