Edited by Benton E. Gup
Chapter 10: Risk and the probability of insolvency: a regulatory perspective
Few concepts in finance and regulation have received more attention than risk: how to define it, estimate it, monitor it, and ultimately manage it. Risk assessment and monitoring requires estimation of the probability of incurring future losses, the magnitude of such losses, and who bears the losses. Regulators charged with monitoring risks taken by banks have increasingly replaced compliance-based banking regulations with risk-based supervision (RBS) since the mid-1990s. In its more sophisticated forms, RBS recognizes the importance of monitoring risks as a forward-looking process that exists in every phase of regulation from licensing through to bank resolution. Estimating likelihood of incurring losses and the size of the losses become essential components of risk monitoring. As commonly practiced, however, RBS has failed to keep up with advances in risk analytics that appear in the financial and economics literature. A gap has developed between risk assessments made by banks and those made by regulators. Banks actually estimate and quantify risk to themselves. Risk-based supervision does not require regulators to actually estimate and quantify risks to banks, their counterparties, and society at large. Many RBS regulators make no attempt to estimate probability of future losses or incorporate probability into risk assessments. The “risk” in RBS takes on a different and more qualitative meaning than probability defined in a statistical sense.
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.