Deck 13: Regulation of Financial Institutions

Question 1

Market risk is the risk that the profitability or net worth of the bank will change because of movements in interest rates.

Answer 1

False

Question 2

Contagion between banks occurs when:

A)the financial difficulties of one bank spread to others because of the interconnectedness between banks and the nature of the exchange settlement systems.
B)the financial difficulties of one bank spread to the whole economy because of the interconnectedness between banks and economy.
C)the financial difficulties of one bank spread to other non-bank financial institutions.
D)the financial difficulties of one bank spread to the central bank.

Answer 2

A

Question 3

Financial institution failures are an example of contagion.

Answer 3

True

Question 4

PAIRS integrates a probability rating with an impact rating to provide multiple measures,which is used to determine a supervisory response in the SOARS.

Question 5

Under Basel III,Pillar 2,bank supervisors should review and evaluate banks' internal capital adequacy assessment and strategies,as well as their ability to monitor and ensure their compliance with regulatory capital ratios.

Question 6

Pricing for risk is now a key strategic goal for banks because of credit shortage coupled with increasing bad debts.

Question 7

The probability and Impact Rating System (PAIRS)determines the response APRA should make to the outcomes of PAIRS ratings.

Question 8

The National Credit Code contains provisions only related to the contract period.

Question 9

When regulated financial institutions try to avoid regulation this is known as regulatory struggle.

Question 10

One of the lessons learned from past bank failures around the world is that developing confidence in the financial system will prevent runs on the banks.

Question 11

The Financial Ombudsman Service is an independent dispute resolution service that considers complaints made against banks and their affiliates that operate in Australia.

Question 12

Banks do not have to worry about their capital and liquidity positions as long as they demonstrate sound and prudent management.

Question 13

Companies that wish to conduct banking business in Australia must obtain approval from the RBA.

Question 14

At the core of Basel III is a revised set of standards for capital and liquidity.

Question 15

Bank panics occur when depositors lose confidence in banks in general and 'run' to redeem their deposits quickly.

Question 16

The Reserve Bank of Australia is responsible for overall bank failures in the financial market.

Question 17

The third Pillar of Basel III specifies the requirements for market risk.

Question 18

The Financial Sector (Collection of Data)Act 2001 requires financial institutions to provide information to the regulatory bodies.

Question 19

APRA's philosophy to supervision is early intervention through active management of regulated financial institutions and the application of SOARS and other early-warning systems and preventative measures.

Question 20

One of the main reasons that financial institutions are regulated is that policy makers believe the big banks will drive out small banks.

Question 21

Under Basel III,to account for credit risk,a bank's assets are multiplied by a credit risk weight,which reflects:

A)the degree of interest rate risk attached to that asset class.
B)the degree of liquidity risk attached to that asset class.
C)the degree of counterparty risk attached to that asset class.
D)the degree of credit risk attached to that asset class.

Question 22

The Reserve Bank of Australia is responsible for:

A)overall systemic stability and liquidity of the financial system.
B)overall safety and soundness of the system and the conduct of monetary policy.
C)overall systemic stability,the payments system and the conduct of monetary policy.
D)overall safety and soundness of the financial system.

Question 23

Basel III Pillar 2 encourages additional good risk management practice that enhances pillar one procedures by requiring banks to:

A)manage risks not fully covered in pillar 1 such as credit concentration risk.
B)manage factors not covered by pillar 1 such as interest rate risk.
C)manage factors that are external to the bank such as business cycle affects,political risk and contagion risks.
D)all of the above.

Question 24

Explain the regulatory dialectic process banks use to circumvent central bank legislation.

Question 25

PAIRS probability rating assessment is derived from:

A)inherent risk of an institution in relation to its business operation.
B)the net risk remaining after consideration of management and control.
C)the capital support the entity has to act as a buffer against unexpected losses.
D)all of the above.

Question 26

In the standardised approach of estimating credit risk in Pillar 1 of Basel III,banks:

A)estimate its own probability of default and effective maturity,while regulator-defined estimates for other credit risk components are used.
B)assign each balance sheet asset and each off-balance sheet item a risk weight that is derived from either an approved external ratings agency or a weight specified by the regulator.
C)provides its own estimates for all credit risk items.
D)provides its own estimates for all interest rate risk items.

Question 27

Capital adequacy requirement in a bank is:

A)the maintenance of adequate levels of capital to enable the bank to continue to operate in the event of unanticipated losses or problems.
B)the maintenance of adequate levels of capital to enable the bank to meet depositors' withdrawal.
C)the maintenance of adequate levels of capital to enable the bank to merge or acquire another bank.
D)the maintenance of adequate levels of capital to enable the bank to withstand external shocks.

Question 28

Bank liquidity management:

A)ensures that just the right amount of liquid resources is available without compromising the performance of the business
B)ensures that just the right amount of capital reserves is available without compromising the performance of the business
C)ensures that just the right amount of cash is available without compromising the performance of the business
D)ensures that just the right amount of funds is available without compromising the performance of the business

Question 29

The SOARS matrix levels of action for APRA to pursue include:

A)normal,oversight,suggested improvement,restructure
B)normal,oversight,mandated improvement,restructure
C)oversight,suggested improvement,restructure
D)suggested improvement,oversight,normal

Question 30

The stages of the Financial Ombudsman Service dispute resolution process are:

A)registration and referral,dispute lodgement,complaints,and decision.
B)registration and referral,case management,complaints and decision
C)registration and referral,case management,and decision.
D)registration and referral,dispute lodgement,case management,and complaints.

Question 31

The National Credit Code is based on:

A)the principle of ensuring that credit is available to all Australian citizens when they need it.
B)the principle of ensuring that financial institutions can't discriminate on who they offer credit to.
C)the principle of truth in lending
D)none of the above

Question 32

When banks find a way to avoid regulations,for example,by establishing separate subsidiaries to circumvent the legislation is called:

A)dialectic circumvent.
B)regulatory struggle.
C)dialectic overtone.
D)regulatory evasion.

Question 33

Basel III Pillar 1 contains methods for estimating minimum capital adequacy requirements for

A)credit risk,market risk and interest rate risk.
B)credit risk,liquidity risk and interest rate risk.
C)credit risk,liquidity risk and capital risk.
D)credit risk,market risk and operational risk.

Question 34

The Foreign Investment Review Board is:

A)responsible for maintaining competition in the Australian economy.
B)responsible for reviewing foreign investment proposals and making recommendations on them to the federal treasurer.
C)responsible for overseeing foreign acquisition of Australian assets.
D)responsible for overseeing foreign banks operating in Australia.

Question 35

What are some of the lessons from past bank failures?

Question 36

The Probability and Impact Rating System (PAIRS):

A)determines the response APRA should make to the outcomes of PAIRS ratings.
B)determines the response APRA should make to the outcomes of bank failures.
C)determines the response APRA should make to the outcomes of financial crisis.
D)assesses the probability that a regulated institution will fail and the effect such a failure would have on the financial system.

Question 37

Explain why financial institutions are regulated.

Question 38

Under Basel III Pillar 2,banks must be able to demonstrate to the regulator that their capital management processes and targets are appropriate and consistent with their:

A)risk,profile and environment
B)risk,capital and environment
C)risk,capital and liquidity position
D)risk,profit and environment

Question 39

Explain the purpose of the Probability and Impact Rating System (PAIRS).

Question 40

In general terms,prudential regulation refers to:

A)eliminating the risk taking of financial institutions to guarantee the safety of depositor's funds.
B)increasing the risk taking of financial institutions to ensure the safety of depositor's funds.
C)limiting the risk taking of financial institutions to ensure the safety of depositor's funds.
D)none of the above.

Question 41

Why is capital adequacy so important to banks?