Financial Regulation – OCR Spec

Financial Regulation – OCR Spec

Courses Info

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

Role in regulation of the Banking Industry

  • Regulation helps to ensure the behaviour of banks is clear to institutions and those who conduct business with the bank
  • It is important to regulate banks as they have a massive influence in the economy

UK Banking Industry is regulated by:

  • Prudential Regulation Authority (PRA) – encourages the safety / efficiency of banks, investment firms, credit unions, and ensures policyholders are protected
  • Financial Conduct Authority (FCA) – ensures financial firms are honest with their consumers and aims to protect the interests of consumers, such as encouraging competition within the Banking Industry. It also regulates risks and ensure the stability of the financial system

Why may a bank fail?

Global Financial Crisis

  • This refers to the world decline in GDP in 2008 and 2009
  • Before the Global Financial Crisis, asset prices were high and there was a boom in economic demand
  • There were risky bank loans, borrowers had poor credit histories and many households defaulted on their mortgages
  • Consequently, banks had lost huge funds and required assistance from the government
  • Banks may struggle to provide depositors with money on demand if there are insufficient funds in a vault or they lose money on investments

Liquidity and Capital Ratios

Liquidity Ratios

These are used to determine the likelihood of a company being able to pay-off their short term obligations,

A bank is more secure in paying off their short-term obligations if the liquidity ratio is higher.

Investors and creditors look at a banks liquidity ratio when making payments.

Capital Ratios

These compare a bank’s equity capital to its risk-weighted assets and determines it’s financial strength

In terms of risk, physical cash has zero, whereas credit has a much larger amount

Investor confidence will fall if banks have a low liquidity or capital ratio due to the risk of it failing

The role of the International Monetary Fund and World Bank in regulating the global financial system

They seek to provide the world’s financial systems with stability and structure

The International Monetary Fund

The IMF aims to keep payments and receipts between countries logically ordered.

It also promotes monetary cooperation between nations and ensures jobs are supported by encouraging free trade globally.

The IMF promotes exchange rate stability and tries to prevent competitive depreciations in the currency occurring

World Bank

The World Bank aims to promote economic and social progress by increasing productivity and reducing poverty.

It can also loan funds to member countries and helps the rebuilding of countries after suffering natural disasters such as an earthquake


Quick Fire Quiz – Knowledge Check

1. Explain the importance of regulation in the banking industry (4 marks)

2. Identify and explain two main regulators in banking industry (6 marks)

3. With application to the Global Financial Crisis, explain why a bank may fail (6 marks)

4. Explain the importance of liquidity ratios (4 marks)

5. Explain the importance of capital ratios (4 marks)


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