RISK BASED FINANCIAL REGULATIONS

Risk Based Financial Regulations in Financial Services



[Name of the Institute]Risk Based Financial Regulations in Financial Services

Financial Regulations

Financial regulations is a type of regulation according to which financial institutions and service providers are required to work within the specified requirements, procedures and limitations. All of these regulations are necessary to maintain the reliability and sustainability of financial system. A regulatory body can design these regulations, which can be either government or non-government institution (Mayes. D. & Wood. G, 2007. p. 69-71).

Importance of Risk Based Financial Regulations

Risk has become a center of attractions for financial Institutions in order to get it mitigated and managed but it broadly depends on the definition of risk for each organization. The importance of risk can be comprehended from the issues of control, answerability, responsibility and liability in modern world. Previously, systematic risk was more focused by banks as compare to non-financial institutions.

According to Basle Committee's Principle, key issue pertaining to risk for a bank is to ensure that banks must practice safe and sound operations and keep a certain capital in order to address the financial distress situations faced banks. Risks are embedded in banking operations. Banking supervision division is required to understand these risks and monitor that banks must identify, measure and mange these risks. Therefore all banks are required to set a minimum capital adequacy requirement to address risk arouse from banking operations as recommended by Basle Committee (Ojo. M., 2010, p. 249-267).

Risks associated with Financial Institutions

According to Basle Committee on Baking supervision (2006), Risks that need to be addressed by banks and financial service providers are described below:

Banks must have adequate policies and procedures to identify, measure, monitor and control Country and transfer risks while conducting international transactions such as borrowing and investing. Banks should maintain specified provisions and capitals to address these risks.

Banks must have accurate processes and tools to identify, assess, evaluate, quantify, measure and control market risks. Supervisors are authorized to impose limits and restrictions of specific capital charge pertaining to market risk disclosures.

Banks must implement and design strategies to cater liquidity risk by adequate liquidity management practices that incorporates risk appetite of financial institution. It must have proper policies and procedures to identify, monitor, manage and control liquidity risk and must manage it on day-to-day basis. Banks must have adequate contingency plans in place to handle liquidity issues.

Banks are required to have risk management policies and practices to identify, assess, monitor and mitigate adverse effects of operational risk. These policies should comply with the scope and complex structure of bank.

Banks should satisfy supervisors and regulators that it has implemented effective system to identify, quantify, oversee and control Interest rate risk in its daily transactions. An adequate strategy should be designed and approved by the bank's top management.

The role of Financial Service Authority

The FSA was originally created in 1997 and initiated working independently in 2001. FSA is liable to regulate financial institutions that are involved in deposit taking, allocating, and handling and organising investment or ...