The growing importance of risk in financial regulation



THE GROWING IMPORTANCE OF RISK IN FINANCIAL REGULATION

Marianne Ojo1

In his book, Risk Society: Towards a New Modernity, Beck (1992) illustrates the fact that
“societies have become more reflexive about risk.”2 In many countries, even though there has
been growing formalisation in that the regulatory and supervisory process is more statute and
rules-based, emphasis has shifted not only from rules to risks, but also to management
responsibilities. Regulation is often perceived as consisting of command and control strategies
whereby the regulator imposes detailed rules with which the regulator monitors compliance.3
However, meta regulation is a type of regulatory strategy which draws firms into regulatory
processes and attempts to both influence and make use of firms internal risk management and
control strategies4 As a result, supervision is not so much about the simple monitoring of
firms' compliance with regulatory rules but more about evaluating and monitoring firms'
awareness of the risks created by their business and of their internal controls.5

In most countries however, different rules are applied to different types of financial
businesses and these indicate the sectoral differences which exist in central business activities
and risk exposures of these businesses.6 As an illustration, credit risk is the dominating risk
for banking institutions since loans constitute the major share of assets which are typically
known to exist within a bank.7 Even though balance sheets of individual bank institutions
reveal differences, lending activities constitutes the core of the commercial banking business.8
Other classes of risk which are connected to the general business of commercial banking
include liquidity and other market risks.

Meta regulation can be described as the regulation of self-regulation.9 Meta risk regulation
concerns the management of internal risk and being able to use the firms' own internal risk
management systems to achieve regulatory objectives.10 The Basel II Capital Accord provides
an example of the operation of meta regulation in that bank capitalisation is not to be imposed
externally by regulators but will be determined by a bank's own internal risk management
models provided these models are considered by regulators to be adequate.11 One major
advantage of meta-risk regulation is that it should enable the regulator exploit the expertise of
the industry in an age when the complexity and volatility of modern risk calls into question

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Research Fellow, Center For European Law and Politics (ZERP), University of Bremen, Graduate
Teaching Associate, School of Social Sciences and Law, Oxford Brookes University

U Beck Risk Society: Towards a New Modernity 1992 Beverly Hills Sage

J Gray and J Hamilton, Implementing Financial Regulation : Theory and Practice (2006) 36
ibid
ibid

See 'Supervision of Financial Services in the OECD Area' pg 4 <

http://www.oecd.org/dataoecd/29/27/1939320.pdf>
ibid

ibid

The last but one chapter of Christine Parker’s book, The Open Corporation: Self Regulation and
Corporate Citizenship
, provides this title. The theme of meta regulation was developed by Peter
Grabosky, where he refers to “meta-monitoring” as government monitoring of self-monitoring. See J
Braithwaite, ‘Meta Risk Management and Responsive Governance’ Paper to Risk Regulation,
Accountability and Development Conference, University of Manchester, 26-27 June 2003

J Gray and J Hamilton, Implementing Financial Regulation : Theory and Practice (2006) 37
ibid



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