FINANCIAL INSTITUTION RISK MANAGEMENT

Financial Institution risk management

Financial institution risk management

Introduction

At the international level, G20 has assumed a leading role in coordinating responses and reforms. In addressing the causes and necessary responses to the global financial crisis, in November 2008, the leaders of the G20 established five main principles for the reforms of the present financial system. The first one was to strengthen the transparency and accountability system. Second one was to enhance the regulatory system. The third one was to promote integrity in financial markets. The fourth one was to reinforce international cooperation and last one was the reforming of the financial architecture. Therefore, it was felt that there is a strong need for some changes in the financial system that is prevailing around the world. (Alexander, 2005, 49)

Importance of FSB

First of all it is important to define the term FSB. Financial Stability Board (FSB) has been established to address vulnerabilities and to develop and implement strong regulatory, supervisory and other policies in the interest of financial stability.

Recommendation

For each of the five principles, G20 established a detailed action plan that included both immediate and medium term actions. The detailed action plans established the core content of the refinements to international financial regulatory standards, which are now taking place through fora such as the FSB and the Basel Committee on Banking Supervision (BCBS). G20 leaders tasked their respective finance ministers to give highest priority to six areas. The first one was to mitigate pro-cyclicality in regulatory policy. The second one was to review and align global accounting standards particularly for complex securities. The third one was to strengthen the resilience and transparency of credit derivative markets and reduce the systemic risks including the improvement of the infrastructure of the over-the-counter (OTC) markets. The fourth one was to review compensation practices as they were related to incentives for risk-taking and innovation. The fifth one was to review the international financial architecture. The last one was to define the scope of systemically important financial institutions and determining the appropriate regulation and oversight. (Weber, 2007, 45)

In April 2009, G20 leaders pledged to do whatever is necessary for the restoration of confidence and growth in the investors and sellers. They even pledged to repair the financial system. There was a need to strengthen the financial regulation. Funding and reforming of the international financial institutions was even very necessary. The rejection of protectionism and promotion of global trade and investment was proposed as well. The last one was to build an inclusive, green and sustainable recovery. In relation to financial regulation and supervision, the leaders committed to build a stronger and more globally consistent supervisory and regulatory framework for the future financial sector to support sustainable growth and serve the needs of businesses and citizens. (Schouzibell, 2010, 85)

Measures taken regarding Risk Management

In September 2009, the G20 reiterated their support for existing initiatives and committed to continuing implementation of agreed actions. In June 2010, G20 leader's refocused attention on financial sector reformed under a four-pillar structure ...