Financial Regulation & Supervision Flashcards

What does 'systemic risk' refer to in financial regulation?

Answer: Risk of collapse of an entire financial system due to interconnected failures

Systemic risk is the risk that the failure of one institution or market segment could trigger a cascading collapse across the broader financial system.

What is 'macroprudential regulation' primarily concerned with?

Answer: Overseeing the financial system as a whole to prevent systemic crises

Macroprudential regulation focuses on the health of the entire financial system rather than individual institutions, aiming to prevent systemic crises.

Under Regulation T, the Federal Reserve limits initial margin requirements for purchasing securities on credit. The current standard initial margin requirement is:

Answer: 50%

Regulation T sets the initial margin requirement at 50%, meaning investors must put up at least half the purchase price when buying securities on margin.

Which international body sets global standards for banking regulation and supervision?

Answer: Basel Committee on Banking Supervision (BCBS)

The Basel Committee on Banking Supervision, hosted by the Bank for International Settlements, develops global regulatory standards like the Basel Accords.

A 'systemically important financial institution' (SIFI) designation under Dodd-Frank subjects an institution to:

Answer: Enhanced prudential standards and Federal Reserve supervision

SIFIs face enhanced prudential standards including stricter capital, leverage, and liquidity requirements, as well as stress testing and resolution planning obligations.

What is the 'prompt corrective action' (PCA) framework used for?

Answer: Triggering mandatory regulatory responses as bank capital falls to defined thresholds

PCA requires regulators to take progressively severe corrective actions as a bank's capital ratios fall through defined threshold levels.

Which regulatory exam process requires large banks to demonstrate they can survive a severe economic downturn?

Answer: Stress testing (DFAST/CCAR)

Dodd-Frank Act Stress Testing (DFAST) and the Comprehensive Capital Analysis and Review (CCAR) require banks to prove they can withstand hypothetical severe economic scenarios.