G20 Designs New Paradigm For Risk Management

The G20s 44 item action plan, now in the hands of a powerful FSB with a mandate to move quickly, will pose a real challenge for current risk practices at global financial institutions. The new FSB will advise on regulatory

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The G20s 44-item action plan, now in the hands of a powerful FSB with a mandate to move quickly, will pose a real challenge for current risk practices at global financial institutions.

The new FSB will advise on regulatory policy, regulatory standards best practices and supervisory guidelines. This means that decisions about the new framework for risk management will not only happen quicker, but that the changes will result in new questions being asked of senior management this year.

Under the new paradigm, senior management will have to pull together information from all the silos within their organisation to explain to multiple regulators their plans for risk management and how their business is preparing to cope with a variety of market scenarios, says PJ Di Giammarino, CEO, JWG-IT.

28 supervisory colleges have already been established for the most systemically important firms and the remainder will be in place by June 2009, continues Di Giammarino. The Basel Committee on Banking Supervision (BCBS), chaired by the Governor of Netherlands Bank, has been given the responsibility of defining benchmarks, tools and metrics that supervisors can use to assess the banks liquidity buffers, funding sources and stress testing practices.

The BCBS has been charged with working with the Committee on the Global Financial System (CGFS), chaired by the Deputy Governor of Bank of France, to launch a joint research programme that will, amongst other things, define robust measures of funding and liquidity risk which could assist assessments and pricing by the private sector.

JWG-IT recognises these are significant developments, as:

– Regulators will now be free to exorcise devils in the regulatory regimes, legal frameworks and tax systems that have impeded effective risk supervision to date,

– Large financial institutions, including hedge funds, will have to reassess their governance and operating models in order to align to common standards,

– Regional coordinating organisations, such as the European Commission and CESR, will need to align their focus with the new global mandate,

– Standards bodies and associations will need to take account of both national and international developments in the political and regulatory landscapes,

– A much-touted outcomes, or principles-based, regulatory approach will be put to the international test as more prescriptive standards emerge,

– There will be new opportunities for the FS supply chain to help fill the gaps.

L.D.

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