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Analysis and Management of Risk: A Regulator’s Perspective

Analysis and Management of Risk: A Regulator’s Perspective. Michael Ainley Head of Wholesale Banks Department UK Financial Services Authority. Risk-Based Supervision in the FSA. First steps - RATE The current system – ARROW The future – ARROW 2. RATE. Identify key units

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Analysis and Management of Risk: A Regulator’s Perspective

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  1. Analysis and Management of Risk: A Regulator’s Perspective Michael Ainley Head of Wholesale Banks Department UK Financial Services Authority

  2. Risk-Based Supervision in the FSA • First steps - RATE • The current system – ARROW • The future – ARROW 2

  3. RATE • Identify key units • Obtain pre-visit information • Preliminary risk assessment • Undertake on-site visit • Final risk assessment • Prepare supervisory programme • Ensure consistency • Formal feedback to bank (and its home regulator) • Employ relevant tools to mitigate risks • Re-evaluate at least annually

  4. FSA Principles of Good Regulation #3 • The restrictions we impose on the industry must be proportionate to the benefits that are expected to result from those restrictions

  5. Senior Management ResponsibilitiesPrinciples of Good Regulation #2 • Regulator must make clear its requirements and leave senior management space to run the business. • Senior management must ensure that appropriate systems and controls are established and maintained • Non-executive directors have a key role

  6. ARROW • Extends risk-based supervision across all types of financial firms • Focuses on risks to FSA’s objectives • Considers PROBABILITY as well as IMPACT of risks crystallising • PROBABILITY x IMPACT = Overall score • Scores used to classify firms A-D • FSA uses classification to determine amount of resources expended on firm • Frequency of ARROW assessments depends on risks presented by firm

  7. ARROW Risk Mitigation • Actions must be clear and time-specific • Firms’ boards asked to agree them • Preference is to require firms to take the necessary action to improve their systems and controls • May involve further work by FSA, home regulator or outside experts • FSA’s own systems prompt supervisors to follow up to ensure that actions are completed on time

  8. ARROW 2 • To retain the key methodology of ARROW • risk measured in terms of impact and probability to our statutory objectives • mitigation proportionate to our assessment of potential harm to those statutory objectives. • Greater proportionality and consistency in response to risks – applying our resources where they will make the most difference • Better communication with firms on our assessment of them • Closer links to theme and sector work • Improved skills and knowledge of supervisory staff • Full compatibility with Basel 2 and Pillar 2

  9. Pillar 2: Banks take centre stage • Pillar 2 requires the bank to calculate for itself how much capital it needs • Better credit risk management and internal systems and controls can reduce the capital requirement

  10. Analysis and Management of Risk: A Regulator’s Perspective Michael Ainley Head of Wholesale Banks Department UK Financial Services Authority

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