CBI Exam Notes: Chapter 5- The Legal and Regulatory Environment Exam Questions And Answers 100% Pass
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CBI Exam Notes: Chapter 5- The Legal and
Regulatory Environment Exam Questions
And Answers 100% Pass
What are the examples given by the Bank of England in regards to the reasons that banks fail? -
answer- They make poor investment decisions and not enough profits
- People and companies who hav...
CBI Exam Notes: Chapter 5- The Legal and
Regulatory Environment Exam Questions
And Answers 100% Pass
What are the examples given by the Bank of England in regards to the reasons that banks fail? -
answer✔- They make poor investment decisions and not enough profits
- People and companies who have put their money in a bank account take it out quicker than the bank
can manage. This is what happens in a 'bank run'
What happens during a 'bank run' - answer✔People and companies who have put their money in a bank
account take it out a lot quicker than the bank can manage
What do regulations help with in regards to banks? - answer✔Regulation helps to reduce many of the
problems that could get a bank into financial difficulty. Although, there is no guarantee that even well-
regulated banks will never fail, regulation should mean that there will be fewer bank failures in the
future.
What do regulations set out to do? - answer✔- Ensure that banks have good management to reduce
chances of bad investment
- Ensures banks hold sufficient capital to act as a shock absorber against unexpected losses
- Used in large UK banks to 'ring-fence' some services from other parts of the banks
Why can banks not regulate themselves? - answer✔- Banking is a risky business and, despite managers
and owners understanding these risks, bank's are set out to make profit. When seeking to make profit,
they may not act as safely as depositors and investors would like them to.
- Also, if banks were to look after themselves, it might not think about how their actions could affect
other banks, the financial system, and wider society.
In regards to banking regulation, what does regulation mean? - answer✔Regulation refers to the setting
of specific rules of behaviour that financial institutions have to abide by. These rules may be set through
legislation (laws) or be stipulated by the relevant regulatory agency.
In regards to banking regulation, what does monitoring mean? - answer✔Monitoring of regulations
refers to the process whereby the relevant authority assesses financial firms to evaluate whether the
rules are being obeyed.
In regards to banking regulation, what does supervision mean? - answer✔Supervision is a broader term
used to refer to the general oversight of the behaviour of financial firms.
What are the 3 main types of regulation? - answer✔- Macro-prudential (systemic) regulation
- Micro- prudential (prudential) regulation
- Conduct of business regulation
What is macro-prudential (systemic) regulation? - answer✔Systemic regulation is concerned primarily
with the safety and soundness of the financial system. I covers all public policy regulation designed to
minimise the risk of bank runs.
What is macro-prudential supervision? - answer✔Macro-prudential supervision is concerned with the
aggregate effect of the actions of individual banks. It is also known as top-down supervision
What is micro-prudential (prudential) regulation? - answer✔Prudential regulation is mainly about
consumer protection. It relates to the monitoring and supervision of financial institutions, with
particular attention being paid to asset quality and capital adequacy. Prudential regulation rules require
financial firms to hold sufficient capital and have adequate risk controls in place
What is micro-prudential supervision? - answer✔Micro-prudential supervision checks that individual
financial firms are complying with financial regulation. It involves the collection and analysis of
information about the risks that firms take, their systems and their people. It is also know as bottom-up
supervision
What is the purpose of conduct of business regulation? - answer✔Its purpose is to protect customers
from harm, preserve and enhance the integrity and orderly operation of financial markets, and
otherwise serve the public interest.
What is conduct of business regulation about? - answer✔Conduct of business regulation is all about
disclosure of information, fair business practices, and the honesty, integrity, and competence of
financial institutions and their employees.
What does conduct of business regulation focus on reducing the likelihood of? - answer✔In general,
conduct of business regulation focuses on establishing rules and guidance to reduce the likelihood of:
- consumers receiving bad advice
- supplying institutions becoming insolvent before contracts mature
- contracts turning out to be different from what the customer was expecting
- fraud and misrepresentation taking place
- employees and financial advisers acting incompetently
- insider trading
- money being laundered
What is the role of the central bank? - answer✔A central bank is a financial institution that is responsible
for overseeing the monetary system for a nation, or group of nations, with a view of fostering economic
growth without inflation.
What is inflation and how does it affect us? - answer✔Inflation is the increase in the prices of goods and
services over time. As prices rise, our money buys us less. If our cost of living increases, then our
standard of living decreases
What is the key functions of a central bank? - answer✔1. control the issue of notes and coins
2. control the amount of credit money created by banks, that is, the money supply
3. have some control over non-bank financial intermediaries that provide credit
4. use monetary policy to control credit expansion, liquidity, and the money supply of an economy
5. oversee the financial sector to prevent crises
6. act as a lender of last resort (LOLR) to protect depositors, prevent widespread panic withdrawals, and
otherwise prevent damage to the economy caused by the collapse of financial institutions
7. act as the government's banker
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