Regulatory and market differences: issues and observations

May 2006

Abstract

At an industry roundtable hosted by the Joint Forum in November 2003, participants discussed a number of Joint Forum papers on the subject of risk management and regulatory approaches in the banking, securities and insurance sectors. The roundtable discussion touched on the extent to which market practices were converging across the three sectors and whether differences in the regulatory approaches to risk across those sectors reflect actual differences in the underlying risk and risk management practices. The view was expressed that better information was needed in order to inform the international debate on this topic. Such information would be valuable in enhancing the understanding of how regulatory frameworks respond to market evolution and facilitating the spread of sound risk management practices.

Following the roundtable discussion, the Joint Forum created a working group whose mandate was to identify and explain regulatory differences in the context of convergence in market practices. Where such differences were found to exist, the working group was to consider whether and how they might affect the supervision of financial conglomerates and the merits of addressing them further.

The review concentrated on those aspects of the regulatory response to risk and risk management where:

  • convergence in market practice is, or is purported by the industry to be, taking place and,
  • any differences might pose practical challenges for both financial conglomerates and their supervisors with regard to the assessment and management of risk concentrations and intra-group risk transfers.

The main findings of this review are presented in this paper.