The growing importance of risk in financial regulation

ABSTRACT

This paper traces the developments that have contributed to the importance of risk in
regulation. Not only does it consider theories associated with risk, it also discusses
explanations as to why risk has become so important within regulatory and governmental
circles. Two forms of risk regulation, namely risk based regulation and meta regulation are
considered. As well as considering the application of both in jurisdictions such as the UK, the
paper places greater focus in discussing the importance of meta regulation in jurisdictions
such as Germany, Italy and the US. The preference for meta regulation is based on the
premises, not only of the advantages considered in this paper but also on the application of
Basel 11 in several jurisdictions. Whilst meta regulation also has its disadvantages, the
impact of risk based regulation on the use of external auditors plays a part in the preference
for meta regulation.

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