Banking Regulation and Resilience Quiz

A policy isolating retail banking (core functions like deposits and payments) from investment banking activities.

A report commissioned by the UK government in 2011 to address the 2008 financial crisis and improve the UK banking system's stability.

Banks' plans for handling financial distress - two parts: recovery (stabilize) and resolution (restructure/wind down if insolvent).

A plan outlining how a bank will stabilize itself during financial distress to avoid failure.

A plan detailing how a bank will be restructured or wound down if it becomes insolvent, minimizing disruption to the financial system.

A mechanism where, if a bank fails, its creditors (bondholders and shareholders) bear the losses, not taxpayers.

The idea that large banks are too interconnected to fail, leading to widespread financial consequences if they collapse.

A set of policies aimed at mitigating systemic risk and ensuring the stability of the financial system as a whole.

The FPC advises banks on appropriate capital levels to hold, aiming to reduce their incentive to take excessive risks.

The FPC sets limits on how much borrowers can borrow based on their income and property value, controlling excessive household debt and speculative lending.

Stress tests simulate financial shocks to evaluate a bank's ability to withstand adversity, uncovering systemic vulnerabilities before they cause harm.

The FPC coordinates with other agencies to ensure a consistent approach to financial regulation, preventing loopholes and enhancing overall stability.

Countercyclical Capital Buffers (CCBs) adjust capital requirements based on economic conditions, requiring more capital during booms to curb excessive risk-taking.

Leverage ratios are adjusted to curb excessive credit growth, preventing bubbles and promoting financial stability.

LTV and DTI limits are adjusted based on economic conditions, tightening during booms to curb speculation and loosening during downturns to support borrowing.

Adjusting macroprudential tools based on the economic cycle helps mitigate procyclicality, promoting stability and preventing financial crises.

Testing a bank's ability to withstand adverse economic scenarios like recessions or market crashes.

A bank's ability to cover all of its debts and obligations.

A bank's ability to meet its short-term financial obligations.

A tool used to manage systemic risks by requiring banks to hold extra capital during periods of economic expansion.

Capital requirements that are tailored to specific industries or sectors of the economy.

A process of evaluating a bank's financial health under hypothetical stressful scenarios.

An approach to financial regulation that focuses on managing risks to the entire financial system, not just individual institutions.

The tendency of banks to increase lending during economic booms and decrease lending during recessions, which can amplify economic cycles.

The Financial Policy Committee (FPC) in the UK was established to manage macroprudential regulation, aiming to prevent systemic risks and maintain financial stability. It operates as a subcommittee within the Bank of England, which grants it high independence.

The FPC's strength lies in its centralized authority and independence, enabling it to make coordinated and effective decisions in response to financial risks. It operates as a cohesive unit within the Bank of England, minimizing delays and conflicts common in multi-agency structures.

The US Financial Stability Oversight Council (FSOC) is a multi-agency body responsible for overseeing financial stability in the US. It comprises representatives from various regulatory agencies, including the Federal Reserve, SEC, and FDIC.

The FSOC's multi-agency structure, while aiming for comprehensive oversight, can lead to coordination issues, delays, and conflicting priorities, hindering timely responses to emerging financial risks. This fragmented approach was evident in the US's lack of decisive action prior to the 2008 crisis.

The FPC in the UK is a more coordinated and economically driven decision-making body compared to the US FSOC. Its independence from political influence and its role as a subcommittee within the Bank of England allow for focused and effective responses to financial risks.

The Financial Policy Committee (FPC) in the UK acts as a supervisor for macroprudential policy, aiming to ensure financial stability by addressing systemic risks.

Unlike the US FSOC, which has limited power, the FPC has direct authority to influence the financial system. This includes setting capital buffers, controlling risky loans, and adjusting capital requirements.

The FPC's independence allows it to act quickly and decisively on financial stability risks without being influenced by political pressures.

The FPC analyzes data and uses its expertise to assess risks and implement policies to manage them. This includes looking at things like credit availability, asset prices, and the overall economic climate.

The FPC has the power to adjust capital requirements for banks based on the current economic conditions, aiming to prevent excessive risk-taking during booms.

The FPC has the authority to regulate both banks and non-banks, including shadow banks and broker-dealers, to address systemic risks from different parts of the financial system.

The FPC's policies are designed to be adaptable and evolve to keep up with new risks and threats emerging in the financial system.

The FPC serves as a model for effective macroprudential oversight because it's independent, has direct authority, and is able to respond to changing economic conditions.