The growing importance of risk in financial regulation

conglomerates.

Importance of Risk

“Different explanations have been given as to why risk has become central across regulatory
and governmental circles and these explanations are partly influenced by different approaches
as to what risk is.⁴³ One view in attempting to account for risk as a strategic organising
principle in the public sector, attributes the specific needs of government.⁴⁴ Political scientists,
however suggest that the adoption of the language and practices of risk reflects a deeper, more
complex process, one of “political isomorphism”.⁴⁵ According to this view, risk becomes
accepted and embedded in one organisation or institution such that it acquires recognition
within other organisations and institutions.⁴⁶ Other explanations, mainly from socio-cultural
disciplines suggests that the importance of risk derives from issues related to control,
accountability, responsibility and blame in late modern society.”⁴⁷

Historically, systemic risk was considered to be more relevant for banks generally, and for
large banks particularly than for non-bank financial institutions.⁴⁸ The Basle Committee’s
Core Principles⁴⁹ states that the primary task of bank supervision is “ to ensure that banks
operate in a safe and sound manner and that they hold capital reserves sufficient to support
risks that arise in their business”. According to the drafters of the Basel Core Principles,
“Banking, by its nature, entails a wide array of risks. Banking supervisors need to understand
these risks and be satisfied that banks are adequately measuring and managing them.”⁵⁰ The
Core Principles attempt to address the main risks encountered by banks in Principle Six which
states that banking supervisors should set prudent and appropriate minimum capital adequacy
requirements for all banks.⁵¹

The focus on risks by the Basel Core Principles is illustrated by the number of principles
dedicated to risk related issues.

Principle 12 - Country and transfer risks: Supervisors must be satisfied that banks have
adequate policies and processes for identifying, measuring, monitoring and controlling
country risk and transfer risk in their international lending and investment activities, and for
maintaining adequate provisions and reserves against such risks.

Principle 13 - Market risks: Supervisors must be satisfied that banks have in place policies
and processes that accurately identify, measure, monitor and control market risks; supervisors
should have powers to impose specific limits and/or a specific capital charge on market risk
exposures, if warranted.

J Gray and J Hamilton Implementing Financial Regulation ( 2006) at page 5
ibid
ibid
ibid
ibid

See 'Supervision of Financial Services in the OECD Area' page 5 <

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

'Core Principles For Effective Banking Supervision' October 2006; See

<http://www.bis.org/publ/bcbs129.pdf> (last visited 11th July 2008)

D Quiroz Rendon, ' The Formal Regulatory Approach to Banking Regulation' Badell & Grau Legal
Consultants, see <http://www.badellgrau.com/legalbanking.html> (last visited 10 June 2008) pg 10 of
26

ibid pp 10,11

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