Topic 3 Flashcards
(33 cards)
What is environmental sustainability
Reducing negative human impact on the earths Eco systems by good environmental management and managing consumption of earths resources
What is economic sustainability
Reducing undesirable consequences of economic activities, to maintain production and consumption of a sustainable scale
What is social sustainability
Creating communities which have good well being, peace, security and justice
Making education available, reducing the income gap, creating a fairer sustainable society
Explain the Wall Street crash and the Great Depression
In early 20s people had been buying stocks and shares in vast numbers, share prices increased, sudden rise was unsustainable, when bubble burst, prices fell and many failed and went bankrupt, high unemployment followed
How does failing providers affect sustainability
They couldn’t make payments or access money, no confidence over safety of money
Businesses Couldn’t pay wages or buy resources
Governments would stop receiving taxes
What % of national output is the financial services sector responsible for
6.9%
What is a systemic risk?
Risk of affecting the stability of whole financial system
When cumulative losses build up from the initial event can cause a series of losses along a chain of institutions/markets, then the system will fail
In what 2 circumstances is there high risk of systemic risk
When provider makes up large proportion of the market. Known as ‘Systemically Important Financial Institutions’
When large provides work together and become interconnected and interdependent
In event of failure of SIFI, government plans to take immediate action to prevent systemic failure and restore confidence, what problems are there associated with this support?
Costs too much to tax payers and increases government deficit
Not seen fair that banks keep profits in good times but rely on public in bad times
There is concern over moral hazard - that the expectation of government help may lead to less than prudent management decisions
WhAt is the United Nations General Assembly committed to promoting?
The integration of the three components of sustainable development as interdependent and mutually reinforcing pillars - economic, social and environmental
What is bank resolution?
A procedure which takes place when a bank is at risk of failure - financial authorities save any viable parts and close down the rest
Not desirable but failure is a feature of the market system which the economy is based on - process allows for firms to fail in an orderly way
The PRA see failure of a provider as a feature of a properly functioning market, not as a regulatory failure
The Banking Act Reform gave the Bank of England the power to set up a Special Resolution Regime (SRR), what does this do?
Allows the BoE to deal with a failing organisation in a controlled manner, either by:
Arranging for institution to e sold to a private sector buyer
Transferring institution property to a ‘bridge bank’ (belongs to BoE) until sale can be arranged
Put into temporary public ownership
Applying for insolvency
When deciding how to treat failed institution, Bank must consider what 5 objectives?
Protect and enhance stability of system Protect and enhance public confidence in stability of system Protect depositors Protect public funds Avoid interfering with property rights
The financial crisis highlighted weaknesses in system, regulators had to impose stricter controls which had to be monitored closely, prudential regulation requires banks to make their balance sheets safer, what are the 5 main ways to do so?
Banks must hold more capital by issuing more shares to shareholders - If the bank fails, any money left goes to the creditors and depositors, not shareholders
Banks must hold liquid assets - essential to have enough liquid reserves to meet all short term obligations of the next 30 days
Must rely more heavily on customer deposits rather than short term loans
Banks must reduce their leverage - the more credit created, more risk of not being able to honour debts
Banks must tighten their lending criteria and adopt responsible lending policy
Explain how sustainability affects shareholders
They own the banks, want to make good profits to receive high dividends and want share prices to rise
Some use shares for income or to pay into pension plans
Others are ‘speculators’ who buy and sell shares to make short term profits
Explain how sustainability affects directors
The top managers who are in charge of big strategic decisions - responsible for sustainable decision making - they want well performing banks so that they get large salaries and bonuses - but any problems are blamed on them
Explain how sustainability affects consumers
They buy the products and they want a range to choose from at good prices and to be treated fairly
Explain how sustainability affects employees
They want good salaries, job security, interesting work, promotional prospects and training
They can encourage sustainable behaviour by advising and helping individuals to make sustainable borrowing and saving decisions
What is a sustainable financial product?
Designed to meet the long term needs of those who buy it - addresses basic need of customers and is also profitable fro providers - wont be sustainable unless it complies with certain basic rules
Explain (un)sustainability of mortgages
Sustainable - long term and low interest, meets customer needs, in event of default bank gets money back by selling the property
Unsustainable - if principles of lending are not adhered to, too much lent to those who cannot afford it
Define responsible borrowing and lending
Defined as borrowing as much as they can afford, given present and future expected income and expenditure
Explain the pre financial crisis of responsible borrowing and lending
Culture of high lending and high borrowing, interest was low - created a consumer culture - large mortgages and lots of debts, over-indebted
Explain the post financial crisis of responsible borrowing and lending
People became wary and stopped spending, banks had to tighten lending criteria
Many banks couldn’t raise working capital, went into liquidation, unemployment rises
Explain deleveraging
Post crisis - people stopped spending, and started saving in order to pay off their debts
