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Analysis and Management of Risk Regulator Perspective

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					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
•   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
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
Senior Management Responsibilities
Principles 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
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
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
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
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
Analysis and Management of Risk: A
      Regulator’s Perspective

             Michael Ainley
   Head of Wholesale Banks Department
     UK Financial Services Authority

				
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