Questions and Answers
What is the main purpose of the Financial Stability Board (FSB)?
Which organization has set out 29 core principles for banking supervisors?
Which core principle of the Basel Committee relates specifically to operational risk?
How often is adherence to the core principles by national authorities assessed?
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What role did the Joint Forum play before it was disbanded?
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Which of the following core principles of IAIS specifically addresses fraud?
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What is the primary concern that regulators introduced in response to events after 9/11?
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Which regulatory approach involves testing in live conditions to ensure effectiveness?
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What has influenced regulators to increase their focus on legal and documentation risks?
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What is a tool used by regulators to manage potential systemic risks?
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In addition to ensuring documentation is up to date, what else is emphasized by regulators regarding legal risk?
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What framework was introduced to guide regulatory thinking on business continuity?
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What do regulators focus on in relation to change management at financial institutions?
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Which operational risk category is particularly challenging to manage according to the content?
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What led to the establishment of the Financial Conduct Authority (FCA)?
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What approach did traditional regulators use to assess IT risk prior to changes in their methodology?
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What do regulators inquire about regarding operational changes in financial firms?
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Which of the following best describes the current trend in regulators' approach to IT risk management?
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What was a significant change introduced by the Senior Managers Regime (SMCR) in 2016?
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Which institution started jailing bankers for mis-selling as part of conduct regulation enforcement?
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What is the relationship between the Internal Loss Multiplier (ILM) and the ratio of Loss Component (LC) to the Bank's Internal Capital (BIC)?
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Which regulation specifically relates to conduct risk in financial markets in the EU?
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Under what condition can supervisors set the Internal Loss Multiplier (ILM) equal to one?
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What is emphasized by the Basel Committee regarding operational risk management?
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What does the Loss Component (LC) equal when determining the Internal Loss Multiplier (ILM)?
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What has heightened the focus on conduct risk in financial institutions globally?
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What changed in the regulatory position for insurance firms with the introduction of the Solvency II directive?
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What do regulators generally expect from banks regarding business continuity management?
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What requirement is imposed on banks even if the ILM is set to one in their jurisdiction?
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What is a potential consequence of setting the ILM to one for all banks?
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Study Notes
Financial Stability Board (FSB)
- Established by the G20 in 1999 to enhance global financial stability.
- Coordinates the development of financial sector policies and regulations.
- Oversees Basel Committee, IAIS, and IOSCO, ensuring alignment between these agencies.
Basel Committee on Banking Supervision
- Set out 29 core principles for banking supervision (revised in September 2012).
- Core principle 25 specifically addresses operational risk management frameworks.
International Association of Insurance Supervisors (IAIS)
- Established 26 international core principles for the insurance sector (published in October 2011).
- Lacks a specific operational risk principle but addresses it through corporate governance (principle 7) and fraud (principle 21).
Regulatory Assessments
- Adherence to core principles evaluated periodically by national authorities, primarily via the International Monetary Fund (IMF) through financial stability assessment programs (FSAPs).
- Regulatory focus includes outsourcing supervision, business continuity management, legal risks, change management, IT risk, and conduct risk.
Outsourcing Concerns
- Regulators actively supervise outsourced operations, including chain outsourcing.
- They send inspection teams to evaluate compliance and uphold operational standards.
Business Continuity Management
- Heightened focus post-9/11 highlights the need for effective business continuity plans.
- Regulators require periodic testing of continuity plans through live scenarios.
Legal and Documentation Risk
- Increasing litigation prompts regulators to ensure firms' legal procedures are updated.
- Emphasis on obtaining specific third-party legal opinions to mitigate legal risks.
Change Management
- Increased pace of change in financial institutions necessitates oversight.
- Regulators assess project management techniques and the impact of rapid changes on business operations.
IT Systems Risk
- Significant and complex aspect of operational risk.
- Transitioning from a traditional audit approach to collaboration with IT experts for better risk evaluation.
Conduct Risk
- Emphasized by the establishment of the Financial Conduct Authority (FCA) in 2013 in response to misconduct scandals.
- The Senior Managers Regime (SMCR) introduced in 2016 further focused on personal accountability regarding conduct risks.
Capital Adequacy and Operational Risk
- Basel Committee emphasizes the qualitative aspect of operational risk management beyond capital rules.
- Capital requirements are affected by historical losses, with Internal Loss Multiplier (ILM) influencing capital adequacy based on operational risk exposure.
Regulatory Frameworks for Insurance Firms
- Insurance firms in the European Economic Area adhered to Solvency I until the implementation of Solvency II on January 1, 2016.
- Solvency II introduced a robust regulatory framework, significantly altering how operational risks are managed in the insurance industry.
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Description
This quiz explores the role of the Financial Stability Board (FSB) and its relationship with the Basel Committee, IAIS, and IOSCO. Understand the importance of these organizations in promoting global financial stability and reforming international financial regulation.
