Risk Tips Issue # 24: Regulatory Risk

  • Feb 09, 2018
  • RIMAN, Boston Consulting Group, RiskNet

To many Risk Practitioners, the landmark regulations of the post-crisis era – the overhaul of the capital adequacy framework, widespread market structure reforms, far-reaching changes to accounting practices – represent a laundry list of potential Operational Risks for their institution.

Fines and penalties for non-compliance, the restructuring of desks and operations and the shuttering of businesses all present complex and hard-to-model threats.

To most Operational Risk Professionals, the Basel Committee on Banking Supervision's proposal to replace the Advanced Measurement Approach (AMA) for modeling Operational Risk is already presenting all manner of  issues.

By requiring firms to hold the same amounts of operational risk capital against all forms of business, Regulators are encouraging firms to enter businesses that exclusively expose themselves to operational risks to maximize their return on equity, argued Operational Risk Practitioners.

 

Is Regulatory Risk among the top risks for every organisation?

 

In order to answer this question we take a closer look at some of the following underlying concern:


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Regulations are changing frequently and becoming more complex as well
 
The number of rule changes that banks must track on a daily basis has tripled since 2011, to an average of 200 revisions a day according to BCG
 
Complex and hard-to-model threats
 
All the rules and regulations since the financial crisis makes it imperative to be quick in our adoption and interpretation. It doesn't give us a lot of time to react

Regulators have used the stick of fines and sanctions to bring more order. There is a danger that these will become more and more punitive, such that it will be difficult for firms to recover. 

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