Risk Monitoring Tools in Bank Regulation and Supervision – Developments Since the Collapse of Barings Plc.
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This paper consolidates the work of its predecessor, “International Framework for Liquidity
Risk Measurement, Standards and Monitoring: Corporate Governance and Internal Controls”,
by considering monitoring tools which are considered to be essential if risks,(and in particular
liquidity risks which are attributed to a bank), are to be managed and measured effectively by
its management. It also considers developments which have triggered the need for particular
monitoring tools – not only in relation to liquidity risks, but also to the rise of conglomerates
and consolidated undertakings. It highlights weaknesses in financial supervision – weaknesses
which were revealed following the collapses of Barings and Lehman Brothers. As well as
attempting to draw comparisons between the recommendations which were made by the
Board of Banking Supervision (BoBS) following Barings’ collapse, and the application issues
raised by the Basel Committee in its 2009 Consultative Document, International Framework
for Liquidity Risk Measurement, Standards and Monitoring, it highlights the links and
relevance between both recommendations.
In drawing attention to the significance of corporate governance, audit committees, and
supervisory boards, the importance of effective communication between management at all
levels, to ensure transmission and communication of timely, accurate and complete
information, is also highlighted. Through a comparative analysis of two contrasting corporate
governance systems, namely, Germany and the UK, it analyses and evaluates how the design
of corporate governance systems could influence transparency, disclosure, as well as higher
levels of monitoring and accountability.
Whilst highlighting the need for, and the growing importance of formal risk assessment
models, the paper also emphasises the dangers inherent in formalism – as illustrated by a rules
based approach to regulation. It will however, demonstrate that detailed rules could still
operate within a system of principles based regulation – whilst enabling a consideration of the
substance of the transactions which are involved. In addressing the issues raised by principles
based regulation, the extent to which such issues can be resolved, to a large extent, depends
on adequate compliance with Basel Core Principle 17 (for effective banking supervision) –
and particularly on the implementation, design and compliance with “clear arrangements for
delegating authority and responsibility.”
Keywords
HG Finance