Financial Conduct Authority (FCA) UK Regulation Sample Exam

One of the key purposes of the Capital Requirements Directive is to ensure that firms:

1. Hold adequate capital and systems to manage their business and its associated risks

2. Maximize shareholder value

3. Reduce operational costs

4. Expand their investment portfolios

The correct answer is: Hold adequate capital and systems to manage their business and its associated risks

The Capital Requirements Directive (CRD) plays a pivotal role in maintaining the stability and integrity of the financial system by setting out specific requirements for capital that financial firms must hold. This directive is designed to ensure that firms possess sufficient capital to cover the risks associated with their business activities. By requiring financial institutions to maintain an adequate capital buffer, the directive helps to mitigate systemic risk and enhances the overall resilience of these firms during economic downturns or financial crises. Adequate capital allows firms to absorb potential losses, support ongoing operations, and protect customers. It also instills confidence in the financial system among consumers and investors, underpinning the notion of sound risk management. Thus, the focus of the Capital Requirements Directive is primarily on robust capital management and risk mitigation rather than on corporate strategies like maximizing shareholder value, reducing operational costs, or expanding investment portfolios. The other options reflect objectives that, while important in their own right, are not central to the purpose of the Capital Requirements Directive. This directive specifically emphasizes capital adequacy and effective risk management systems as foundational requirements for the stability of individual firms and, by extension, the broader financial system.