The Growing Importance of Risk in Financial Regulation

This paper traces the developments that have contributed to the importance of risk in regulation. Not only does it consider theories associated with risk, it also discusses explanations as to why risk has become so important within regulatory and governmental circles. Two forms of risk regulation, namely risk based regulation and meta regulation are considered. As well as considering the application of both in jurisdictions such as the UK, the paper places greater focus in discussing the importance of meta regulation in jurisdictions such as Germany, Italy and the US. The preference for meta regulation is based on the premises, not only of the advantages considered in this paper but also on the application of Basel 11 in several jurisdictions. Whilst meta regulation also has its disadvantages, the impact of risk based regulation on the use of external auditors plays a part in the preference for meta regulation

The Growing Importance of Risk in Regulation

This paper traces the developments that have contributed to the importance of risk in regulation. Not only does it consider theories associated with risk, it also discusses explanations as to why risk has become so important within regulatory and governmental circles. Two forms of risk regulation, namely risk based regulation and meta regulation are considered. As well as considering the application of both in jurisdictions such as the UK, the paper places greater focus in discussing the importance of meta regulation in jurisdictions such as Germany, Italy and the US. The preference for meta regulation is based on the premises, not only of the advantages considered in this paper but also on the application of Basel 11 in several jurisdictions. Whilst meta regulation also has its disadvantages, the impact of risk based regulation on the use of external auditors plays a part in the preference for meta regulation.meta regulation; enforced self regulation;risk; compliance

Beyond the Financial Crisis:Addressing Risk Challenges in a Changing Financial Environment

The Financial Crisis has not only highlighted the importance of addressing issues such as liquidity risk – it has also brought to the fore the need to focus on unregulated instruments such as hedge funds, which are of systemic importance to the financial industry. Risk is an area which, owing to its increasing significance, requires greater focus. A move to risk based strategies is evidenced by the growing popularity of risk based regulation and meta regulatory strategies. Given the presence of an unregulated hedge fund industry however, such attempts do not suffice on their own. Further, the systemic nature of risk exacerbates the problem of such unregulated institutions. This paper aims to address complexities and challenges faced by regulators in identifying and assessing risk, problems arising from different perceptions of risk, and solutions aimed at countering problems of risk regulation. It will approach these issues through an assessment of explanations put forward to justify the growing importance of risks, well known risk theories such as cultural theory, risk society theory and governmentality theory. These theories will be considered against a background of themes such as dynamism, evolutionism, developments in science and industry, cultural attitudes to risk, and the need to be responsive and reflexive to changes which have arisen in modern society. Theoretical models and hybrids of a responsive model of regulation such as Enforced self regulation and meta regulation, which have the potential to address the problems relating to risk will be addressed. By virtue of the pro cyclical nature of risk, the inability of Basel 2 to address risk cycles were revealed during the Northern Rock Crisis. Other flaws and deficiencies inherent in Basel 2, a form of meta regulation, will be highlighted. The relevance of internal control systems to an efficient system of regulation, the reasons for which meta regulation is not only considered to be the most responsive form of regulation, but also one which assigns central role to internal control systems will be discussed. The contested nature of risk and the difficulties attributed to its quantification, raise questions about its ability to function effectively as a regulatory tool. If risks could be eliminated in their entirety however, then regulation would serve no purpose. This paper aims generally therefore to direct attention to those areas which could be addressed, namely institutional risks, and measures whereby such risks, even though impossible to eliminate, could be minimize

Responsive regulation:achieving the right balance between persuasion and penalisation

This paper not only considers the regulatory challenges faced by regulators, but also the potential of responsive regulation and particularly meta regulation to address these challenges. It explores developments which have necessitated a change from the traditional form of regulation, that is, command and control regulation to more responsive hybrids of regulation. Even though traditional regulation has its advantages, its inability to address the demands of changing business environments has resulted in the adoption of more flexible forms of regulation such as risk based regulation and responsive regulation. Whilst the potential of responsive regulation is considered, the complexities and challenges faced by the regulator in identifying and assessing risk, solutions aimed at countering problems of risk regulation, along with the problems arising from different perceptions of risk will be addressed only briefly.meta;responsive;risk;regulation;bank

Risk Perception and Drug Safety Evaluation

The authors present a Risk communication framework based on a survey of empirical research concerning public Risk perceptions. They also apply it to the area of pharmaceutical regulation to suggest more effective regulatory strategies

Beyond the Financial Crisis: Addressing risk challenges in a changing financial environment

Paper presented at "Strategies For Solving Global Crises Conference: The Financial Crisis and Beyond" (October 2009). Also published in "Corporate Finance: Governance, Corporate Control & Organization Journals" (July 2010) The Financial Crisis has not only highlighted the importance of addressing issues such as liquidity risk – it has also brought to the fore the need to focus on unregulated instruments such as hedge funds, which are of systemic importance to the financial industry. Risk is an area which, owing to its increasing significance, requires greater focus. A move to risk based strategies is evidenced by the growing popularity of risk based regulation and meta regulatory strategies. Given the presence of an unregulated hedge fund industry however, such attempts do not suffice on their own. Further, the systemic nature of risk exacerbates the problem of such unregulated institutions. This paper aims to address complexities and challenges faced by regulators in identifying and assessing risk, problems arising from different perceptions of risk, and solutions aimed at countering problems of risk regulation. It will approach these issues through an assessment of explanations put forward to justify the growing importance of risks, well known risk theories such as cultural theory, risk society theory and governmentality theory. These theories will be considered against a background of themes such as dynamism, evolutionism, developments in science and industry, cultural attitudes to risk, and the need to be responsive and reflexive to changes which have arisen in modern society. Theoretical models and hybrids of a responsive model of regulation such as Enforced self regulation and meta regulation, which have the potential to address the problems relating to risk will be addressed. By virtue of the pro cyclical nature of risk, the inability of Basel 2 to address risk cycles were revealed during the Northern Rock Crisis. Other flaws and deficiencies inherent in Basel 2, a form of meta regulation, will be highlighted. The relevance of internal control systems to an efficient system of regulation, the reasons for which meta regulation is not only considered to be the most responsive form of regulation, but also one which assigns central role to internal control systems will be discussed. The contested nature of risk and the difficulties attributed to its quantification, raise questions about its ability to function effectively as a regulatory tool. If risks could be eliminated in their entirety however, then regulation would serve no purpose. This paper aims generally therefore to direct attention to those areas which could be addressed, namely institutional risks, and measures whereby such risks, even though impossible to eliminate, could be minimized.risk; theories; financial; regulation; Financial; Crisis

Really responsive risk-based regulation

Regulators in a number of countries are increasingly developing "risk-based" strategies to manage their resources, and their reputations as "risk-based regulators" have become much lauded by regulatory reformers. This widespread endorsement of risk-based regulation, together with the experience of regulatory failure, prompts us to consider how risk-based regulators can attune the logics of risk analyses to the complex problems and the dynamics of regulation in practice. We argue, first, that regulators have to regulate in a way that is responsive to five elements: (1) regulated firms' behavior, attitude, and culture; (2) regulation's institutional environments; (3) interactions of regulatory controls; (4) regulatory performance; and (5) change. Secondly, we argue that the challenges of regulation to which regulators have to respond vary across the different regulatory tasks of detection, response development, enforcement, assessment, and modification. Using the "really responsive" framework, we highlight some of the strengths and limitations of using risk-based regulation to manage risk and uncertainty within the constraints that flow from practical circumstances and, indeed, from the framework of risk-based regulation itself. The need for a revised, more nuanced conception of risk-based regulation is stressed