lect 7

• Which sector is one of the most heavily regulated in the economy?

  Financial sector
• What does banking regulation establish for bank managers?

  Specific rules
• Banking supervision verifies whether banks comply with regulations through monitoring.
• Banks are special in their role as liquidity providers
• Banks are more prone to trouble than other firms due to their fragility.
• Why can the failure of one bank affect others?

  Interconnectedness
• Sequence of events in a bank run

  1️⃣ Fear of insolvency

  2️⃣ Withdrawal of savings

  3️⃣ Banks sell assets

  4️⃣ Banks become insolvent
• During a bank run, liquidity matters more than solvency.
• What do banks use reserves for during a liquidity crisis?

  Sell assets
• The severity of a bank run is worse for opaque and illiquid assets
• The 2007-2009 financial crisis highlighted the risks in both the banking and shadow banking systems.
• What is the primary rationale for banking regulation?

  Avoid unstable banking system
• Banking regulation aims to eliminate all risks faced by investors and customers.

  False
• Macro-prudential regulation focuses on systemic risk
• What is the main concern of systemic regulation?

  Financial system safety
• Components of a financial safety net system

  1️⃣ Deposit insurance

  2️⃣ Lender of last resort

  3️⃣ Resolution laws
• The lender of last resort function is a primary role of central banks.
• Special resolution regimes provide rules for bank bankruptcy
• What does SIFI stand for in the context of financial institutions?

  Systemically Important Financial Institutions
• Increasing deposit insurance levels after the 2007-2009 crisis was sufficient to stop the spread of the crisis.

  False
• What are the two main focuses of micro-prudential regulation?

  Asset quality and capital adequacy
• Conduct of business regulation focuses on how firms conduct business with their customers
• Some argue that regulation reduces the incentive to prevent bank failures, leading to moral hazard.
• What often drives financial innovation according to critics of regulation?

  Regulatory loopholes
• The scope and complexity of financial regulation have grown in response to the 2007-2008 financial crisis
• Higher compliance costs for financial institutions may lead to higher costs of financial services.
• Which regulatory body in the UK acted as a single regulator until 2013?

  Financial Service Authority
• The Financial Policy Committee monitors and responds to systemic risks
• What does PRA stand for in the context of UK financial regulation?

  Prudential Regulation Authority
• The PRA is responsible for large banks and insurers in the UK.
• The Financial Conduct Authority (FCA) is responsible for conduct of business
• Which European body is responsible for macro-prudential oversight within the EU?

  ESRB
• Basel regulation is a risk-based micro-prudential policy focusing on capital adequacy.
• What is the name of the subsidiary of the Bank of England responsible for prudential regulation?

  Prudential Regulation Authority
• The Financial Conduct Authority is responsible for financial firms, conduct of business, and financial markets
• The European Systemic Risk Board (ESRB) is responsible for macro-prudential oversight within the European Union.
• What does ESMA stand for?

  European Securities and Markets Authority
• Match the regulatory authority with its description:

  PRA ↔️ Subsidiary of the BoE

  FCA ↔️ Responsible for business conduct

  ESRB ↔️ Oversees systemic risk
• Basel regulation is risk-based and micro-prudential, focusing on capital adequacy
• Basel regulation becomes mandatory for a country only when it is converted into law.