Question 1

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

Accepted Answer

Market risk refers to the risk of losses in financial markets due to factors such as changes in interest rates, stock prices, currency exchange rates, and commodity prices, not just interest rates alone.

Question 2

Contagion between banks occurs when:

Accepted Answer

Contagion between banks primarily refers to the spread of financial difficulties from one bank to others due to their interconnectedness and the nature of exchange settlement systems.

Question 3

Financial institution failures are an example of contagion.

Accepted Answer

Financial institution failures can lead to a chain reaction affecting other institutions and markets, spreading financial instability, which is known as contagion.

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.

Accepted Answer

The answer of PAIRS integrates a probability rating with an...

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.

Accepted Answer

Pillar 2 of Basel III focuses on the supervisory review process, which requires bank supervisors to evaluate banks' internal processes for assessing capital adequacy and their strategies to maintain 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.

Accepted Answer

Banks aim to manage risk effectively to maintain profitability and stability, especially during times of credit shortages and rising bad debts.

Question 7

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

Accepted Answer

The answer of The probability and Impact Rating System (PAIRS)determines...

Question 8

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

Accepted Answer

The National Credit Code covers various aspects of consumer credit, not just the contract period, including disclosure, fees, interest rates, and consumer rights.

Question 9

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

Accepted Answer

Regulatory capture occurs when regulated financial institutions try to avoid regulation.

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.

Accepted Answer

Developing confidence in the financial system does not prevent runs on the banks, as evidenced by the numerous bank runs that have occurred despite high levels of confidence in the financial system.

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.

Accepted Answer

The Financial Ombudsman Service (FOS) in Australia was an independent body that resolved disputes between consumers and financial service providers, including banks, until it was replaced by the Australian Financial Complaints Authority (AFCA) in 2018.

Question 12

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

Accepted Answer

Banks must maintain adequate capital and liquidity positions to ensure financial stability and meet regulatory requirements, regardless of their management practices.

Question 13

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

Accepted Answer

Companies that wish to conduct banking business in Australia must obtain approval from the Australian Prudential Regulation Authority (APRA), not the Reserve Bank of Australia (RBA).

Question 14

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

Accepted Answer

Basel III is a global regulatory framework that strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and leverage.

Question 15

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

Accepted Answer

Bank panics happen when a large number of customers withdraw their deposits simultaneously due to fears that the bank will become insolvent, leading to a self-fulfilling prophecy.

Question 16

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

Accepted Answer

The Reserve Bank of Australia is responsible for monetary policy, financial system stability, and issuing currency, but not directly responsible for individual bank failures.

Question 17

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

Accepted Answer

The third Pillar of Basel III focuses on market discipline through disclosure requirements, not specifically on market risk.

Question 18

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

Accepted Answer

The Financial Sector (Collection of Data) Act 2001 mandates financial institutions to submit data to regulatory bodies for monitoring and regulatory purposes.

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.

Accepted Answer

APRA (Australian Prudential Regulation Authority) emphasizes early intervention and active management to ensure the stability of financial institutions, using tools like SOARS (Supervisory Oversight and Response System) for early-warning 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.

Accepted Answer

Regulation of financial institutions is primarily aimed at ensuring stability, protecting consumers, and maintaining the integrity of the financial system, rather than specifically preventing big banks from driving out small banks.

Quiz 13: Regulation of Financial Institutions