Four Steps to Balancing Risk and Regulation
Greater collaboration between financial institutions’ (FIs) risk and prudential regulation areas is essential to reduce risk and optimise performance while meeting regulatory requirements, according to Wolters Kluwer Financial Services.
Selwyn Blair-Ford, the firm’s head of global regulatory policy, told delegates at the ‘RiskMinds Risk & Regulation Forum’ held in Barcelona, Spain of the growing collaboration and dependency between the two functions. Blair-Ford outlined four key steps to achieving equilibrium between risk and regulation:
“Regulators now require more detailed qualitative information and expect to see evidence of effective risk management processes,” said Blair-Ford. “This requires firms to be able to express their risk appetite, demonstrate that the board is responsible for setting it and that the firm is being managed appropriately within those risk parameters.
“As there are now many prudential regulatory calculations that require risk expertise from the departments of finance, treasury, risk, credit and operational risk, it is becoming increasingly essential that risk and compliance work hand in hand to effectively manage the organisation’s risk, report on it quickly and in detail to senior management and regulators, while optimising business performance.”
Blair-Ford added that regulation standards such as Basel III and Dodd-Frank Act require financial institutions to perform multiple risk calculations and modelling techniques such as value at risk (VaR), expected shortfall, loss given default, exposure at default and collateral valuation adjustment (CVA), in order to accurately report on the business’ capital, liquidity, counterparty, credit and market risk to regulatory bodies.
Risk expertise is also required to meet stress testing and reverse stress testing requirements outlined by regulators.