3.2.5.4 Regulation of the financial sector

• The efficient operation of the financial sector is crucial for the overall functioning and growth of the economy.


  True
• What is the primary reason for regulating the financial sector?

  Ensure efficient and stable operation
• Match the objective of financial regulation with its description:

  Prudential Regulation ↔️ Ensuring safety of financial institutions

  Conduct Regulation ↔️ Promoting fair market practices

  Consumer Protection ↔️ Safeguarding individual interests

  Systemic Risk Regulation ↔️ Mitigating risks to the system
• What are the main functions of the financial sector?

  Capital allocation, risk management, payments system, information provision
• What are the two key regulatory bodies in the UK's financial sector?

  FCA and PRA
• What does the Financial Conduct Authority (FCA) supervise to maintain market integrity?

  Financial firms
• The FCA and PRA are the key regulatory bodies in the UK's financial sector.

  True
• Order the regulatory tools used to oversee the financial sector based on their primary function:

  1️⃣ Capital Requirements

  2️⃣ Liquidity Requirements

  3️⃣ Stress Testing

  4️⃣ Reporting and Disclosure

  5️⃣ Conduct Rules

  6️⃣ Enforcement Actions
• Liquidity requirements ensure institutions maintain adequate liquid assets to meet short-term obligations
• Match the regulatory tool with its function:

  Reporting and Disclosure ↔️ Monitor firm health

  Enforcement Actions ↔️ Deter misconduct
• Capital allocation channels funds from savers to borrowers for productive use
• Why does the interconnected nature of the financial system lead to systemic risk?

  Failure spreads easily
• Effective regulation maintains stability and promotes public confidence in the financial system.


  True
• Capital requirements ensure financial institutions hold sufficient capital
• What is the financial sector defined as?

  Institutions, markets, and intermediaries
• The function of capital allocation in the financial sector involves channeling funds from savers to borrowers who can use them most productively
• Systemic risk in the financial sector arises from the interconnected nature of financial institutions.


  True
• Financial regulation ultimately aims to foster a stable, efficient, and trustworthy financial sector
• Systemic risk in the financial sector can lead to a widespread financial crisis if not properly regulated.


  True
• Match the regulatory body with its role:

  Financial Conduct Authority (FCA) ↔️ Conduct regulation

  Prudential Regulation Authority (PRA) ↔️ Prudential regulation
• The Prudential Regulation Authority (PRA) oversees banks, insurers, and large investment firms
• Match the regulatory body with its primary role:

  Financial Conduct Authority (FCA) ↔️ Conduct regulation

  Prudential Regulation Authority (PRA) ↔️ Prudential regulation
• What do capital requirements ensure for financial institutions?

  Absorb losses
• Stress testing assesses the resilience of institutions to adverse economic conditions.

  True
• What facilitates the flow of funds between savers and borrowers in the financial sector?

  Intermediaries
• The payments system enables the transfer of money and other financial assets.


  True
• Match the function of the financial sector with its description:

  Risk Management ↔️ Manage financial risks

  Information Provision ↔️ Support decision-making
• Financial regulation protects consumers from unfair practices, fraud, and excessive risk
• Match the objective of financial regulation with its description:

  Prudential Regulation ↔️ Safety and soundness

  Systemic Risk Regulation ↔️ Mitigate overall risks

  Consumer Protection ↔️ Safeguard interests
• Stress testing assesses the resilience of institutions to adverse conditions.


  True
• Match the regulatory tool with its function:

  Capital Requirements ↔️ Ensure institutions hold sufficient capital

  Liquidity Requirements ↔️ Maintain adequate liquid assets

  Stress Testing ↔️ Assess resilience to adverse conditions
• Adherence to rules is a key aspect of regulatory compliance.


  True
• High compliance costs can hinder financial innovation
• Technological disruption in finance includes innovations like cryptocurrencies
• Existing regulations sufficiently address climate-related financial risks.

  False
• Liquidity requirements ensure institutions maintain adequate liquid assets
• Regulatory compliance fosters trust in the financial sector
• Risk management involves identifying and mitigating financial risks
• The "too big to fail" problem is fully resolved by current regulations.

  False
• Match the emerging challenge with its limitation:

  Globalization and Interconnectedness ↔️ Coordination of cross-border supervision

  Shadow Banking ↔️ Blind spots in traditional regulations