Principle 14 - Liquidity risk: Supervisors must be satisfied that banks have a liquidity
management strategy that takes into account the risk profile of the institution, with prudent
policies and processes to identify, measure, monitor and control liquidity risk, and to manage
liquidity on a day-to-day basis. Supervisors require banks to have contingency plans for
handling liquidity problems.
Principle 15 - Operational risk: Supervisors must be satisfied that banks have in place risk
management policies and processes to identify, assess, monitor and control/mitigate
operational risk. These policies and processes should be commensurate with the size and
complexity of the bank.
Principle 16 - Interest rate risk in the banking book: Supervisors must be satisfied that
banks have effective systems in place to identify, measure, monitor and control interest rate
risk in the banking book, including a well defined strategy that has been approved by the
Board and implemented by senior management; these should be appropriate to the size and
complexity of such risk.
As stated earlier, over the years, there has been a growing number of large, internationally
active financial groups which operate in several financial sectors. Financial convergence has
assumed a number of different forms. As well as cross sectoral investments and cross
distribution, convergence is also taking place through cross sector risk transfers.52
Commercial banks, along with their investment and securities branches, have become users of
products such as credit derivatives and other hedging instruments which are used as means of
off-loading specific credit risk exposures.53 As revealed by data from the US Office of the
Comptroller of the Currency, end-sellers of credit risk protection are usually large commercial
banks, insurance companies, collateral managers of collateralized bond obligations, pension
funds and mutual funds.54 Whilst commercial banks, hedge funds and to lesser extent non-
financial companies, appear to be end buyers, banks and securities firms function as
intermediaries - it is not possible to distinguish banks’ participation as intermediaries from
their direct involvement as end-buyers or sellers.55 However, according to the Bank of
England’s Financial Stability Review, is seems on average, that credit risk is being transferred
from the banking sector to insurance companies and investment funds, mainly through
portfolio transactions.56
As a result, new forms of risk have accompanied the changes in relation to financial
structures, which have taken place over the years. Whilst individual entities could appear
risky and the entire organization well-diversified or hedged, risks which did not appear at the
level of individual entities could exist at the group level.57 Risks identified with integrated
financial services groups include lack of transparency owing to complex intra-group
exposures, the risk of contagion as a result of non-existent or ineffective firewalls, multiple
gearing risk, problems emanating from unregulated group members, the possibility of
regulatory arbitrage occurring within financial services groups which involve more than one
type of institution.58
52
53
54
55
56
57
58
See 'Supervision of Financial Services in the OECD Area' page 8 <
http://www.oecd.org/dataoecd/29/27/1939320.pdf>
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ibid at pg 9