IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system
Which of the following best describes the main purpose of prudential regulation of banks and insurers?
Prudential regulation exists to protect depositors and policyholders and to keep financial institutions safe and sound, mainly through capital, liquidity and risk management requirements. It does not guarantee profits, set uniform prices or abolish competition between firms.
- ATo protect depositors and policyholders and promote the safety and soundness of institutionsCorrect
- BTo guarantee a minimum profit for every regulated firm
- CTo fix the interest rate on all loans and deposits
- DTo ensure that all firms charge identical prices to consumers
- To eliminate competition among financial institutions
Explanation
Prudential regulation focuses on solvency, capital adequacy and sound risk management so that customers' funds are protected and failures are less likely. It does not guarantee profits, fix prices or remove competition.
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