Tut Week 10.docx

Will be from regulators an example of this is basing

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will be from regulators, an example of this is basing a company in a country with favourable tax treatment so as to pay less tax Ratings Arbitrage: A company chooses to take a credit risk exposure to gain a favourable regulatory treatment, an example of this is CDO’s, which were structured to gain a AAA rating for buyers and they minimised regulatory capital requirements, but enviably caused a financial crisis Uneconomic Decision Making ( 迎合 ): Regulated companies enter transactions which are favourable from a regulatory standpoint, but are a lower risk return and will cost the company more. All these types of decision making can have an adverse effect and can cause capital loss 9.3: Why does regulation matter for the regulated financial entity? The main purpose for regulation is to set standards and harmonize with regulation to close loopholes and become more transparent. In relation to regulation for the banking sector. Regulation is important to banks as it seeks to harmonise banks globally with reference to risk recognition and capital adequacy. This is regulated through the Basel regulation. In reference to financial institutions, regulations helps to coordinate efforts across all different product types, being banking, securities or insurance, as well as harmonizing institutions involved in state and federal regulation The Dodd-Frank Act, made in 2010, was regulated to promote market discipline and respond to risks associated with the stability of the U.S market, this resulted in lowering leverage, having a stronger risk-based capital and greater liquidity. The result of this act was to overall reduce systematic risk The Basel III was created to strengthen regulation, supervision and risk management for the banking sector, which targets systematic risk and improve risk management
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9.4: Explain what Table 12.1 on page 204 represents. In this table, we see that in Jan 2012 there are 10 billion of loans and 200m in the reserve for expected losses, this results in a net asset of 9.8 billion. In the next quarter, its shown that the loans reduce by 20m, this is after all recover is factored in. The bank will write off 20m from gross loans and will reduce the reserve by 20m and shown here. The net assets change in the last quarter, being because of economic changes, this exceeds the reserve by 45m so loan reserves increase by 45m but gorss losses doesn’t change, resulting in loss to the net loans. 2 nd presenter 9.5: What does impairment of debt securities mean? Securities are deemed to be impaired if the fair value of an individual security is less than the amortized cost amount as of the reporting date.
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