Risk management practices and regulatory capital - cross-sectoral comparison

November 2001

The report Risk management practices and regulatory capital responds to the parent committees' request to compare these approaches to gain a better understanding of current industry practices in all three sectors. It was developed by a Joint Forum working group made up of supervisors from all three sectors. In preparing this report, the working group has drawn on interviews with market participants, rating agencies and analysts, as well as on its own experience.

The chairman of the Joint Forum, Jarl Symreng of Sweden, noted that: "This report fills an important gap in supervisory understanding by putting together in one place a significant amount of information about capital regulations in the different sectors as well as their underlying rationales. I believe it will prove a valuable resource to all who are interested in these important issues."

The main sections of the report focus on:

  • Differences in core business activities
  • Similarities and differences in risk management tools
  • Approaches to capital regulation in the three sectors
  • Cross-sectoral risk transfers and investments

The report concludes: "Approaches to risk management and capital are likely to continue evolving rapidly for the foreseeable future. Against this background, supervisors will be confronted with a fundamental tension in the years ahead. Sectoral approaches to capital regulation well reflect the traditional business activities and perspectives within each sector and thus remain quite different from one another. Nevertheless, it is clear that some convergence between the sectors is currently occurring, which may or may not gather pace in the foreseeable future. To the extent that the degree of convergence increases, supervisors will increasingly need to re-evaluate their sectoral regimes for capital and provisions to ensure that they provide an appropriate means of evaluating the capital held by firms in relation to their activities. In this context, the Joint Forum remains committed to providing a mechanism for enhancing the mutual understanding and cooperation among supervisors that will be necessary in addressing these challenges."