Chapter 8: The Development of Risk-Based Regulation in Financial Services: Just ‘Modelling Through’?
1 Julia Black INTRODUCTION ‘Risk-based’ regulation is in essence ‘problem-based’ regulation: regulators seek to anticipate problems and deal with them. As such, there seems nothing novel or striking in this, so why should agencies be celebrating their newly developed approaches? Should they not have been doing this already? This chapter examines the extent to which the introduction of ‘risk-based’ approaches to regulation in three financial services regulators can be regarded as an example of ‘regulatory innovation’, the reasons why those agencies were prompted to devise quite distinctive and novel systems of organizational processes and internal management, how they arrived at the systems they devised, and what some of the outcomes have been to date. The ‘risk-based’ approaches in question are decision-making frameworks which are used to prioritize regulatory activity, focusing it where it is most needed. The ‘risks’ they seek to manage are the risks that the regulator will not achieve its objectives. So far, so familiar: any risk management strategy seeks to identify risks to an organization’s objectives and to manage them. However, in the risk management frameworks devised by these regulators, the risks are seen to arise not from inside the regulatory organization, as is normal for corporate risk management strategies, but from outside: from the activities of the financial institutions that they regulate and, as mediated by those institutions, from the wider commercial and economic environment that those institutions inhabit. The risk-based frameworks are articulated in a set of generalized, abstract principles supplemented by detailed internal guidance;...
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