RRM SEM 1

1.     What is Regulation?

• a.      The imposition of rules by the government to modify the economic behaviour of individuals and firms in the private sector.

• Any rules that significantly affect how markets and firms operate.

• a.      Both A and B.

• None of the above.

1.     What does Deregulation refer to?

• a.      The relaxation of constraints on the business activities of financial firms.

• Financial institutions diversifying into activities which were previously avoided or prohibited

• Both A and B.

• None of the above.

1.     What are the core objectives of financial regulation according to Llewellyn (1999)?

• a.      To sustain systemic stability.

• To maintain safety and soundness of the financial institutions.

•  To protect the consumer

• All of the above.

What is systemic risk?

•       The probability of experiencing an intense systemic event.

• The risk inherent in any financial system that comes from the nature of the markets in which the institutions operate.

• Both A and B.

• None of the above.

What is prudential regulation?

• Regulation that preserves the safety and solvency of financial institutions.

• Regulation that requires banks to hold capital in proportion to the credit risks taken

• Both A and B.

• None of the above.

What is the rationale behind consumer protection regulation?

• The consumer makes decisions on the basis of perfect information.

• An information asymmetry exists between the purchaser and the provider of financial services.

• Both A and B.

• None of the above.

Define prudential regulation

•   A type of financial regulation that requires financial firms to control risks and hold adequate capital.

• A type of regulation that governs financial intermediaries’ conduct toward their clients.

• Both A and B.

• None of the above.

What is Conduct of Business Regulation (COB)?

• A type of financial regulation that requires financial firms to control risks and hold adequate capital.

• A type of regulation that governs financial intermediaries’ conduct toward their clients.

• Both A and B.

• None of the above.

What are the economic rationales for regulation according to Llewellyn (1999)?

• Correction of other market failures.

• Need for monitoring financial firms and the economies of scale that can be achieved in this area.

• Need for consumer protection.

•  All of the above.

What are some examples of problems that compromise consumer welfare due to market failures?

• Inadequate information provided to the consumer.

• Asymmetric information resulting in a purchaser not being in the same position as the vendor of financial services.

• Agency costs: Potential principal agent problems relating to conflicts of interest as agents try to maximise their income whereas the customer wants the most appropriate products for their needs.

• All of the above.