4. 4eni Oduwole, 6 July 2015
WHAT IS A RISK?
It is the possibility that a
decision or action could
lead to a positive or
negative event in future
It implies future uncertainty
5. 5eni Oduwole, 6 July 2015
WHAT IS RISK MANAGEMENT?
It is a discipline that deals with the possibility that
decisions and actions taken by the organization
may cause unexpected results
It trains us to deal with uncertainties and ensure
that suitable controls are implemented to mitigate
likely exposures for losses
It raises the awareness that all decisions made
and business activities engaged in may result in
consequences that are positive, negative or both
It makes organizations ascertain and agree on the
level of risk to take in achieving its goals
6. 6eni Oduwole, 6 July 2015
WHAT IS RISK GOVERNANCE?
It refers to the institutions, rules conventions, processes and
mechanisms by which decisions about risks are taken and
implemented
It analyses and formulates risk management strategies to avoid
and/or reduce the human and economic costs caused by disasters
(Wikipedia)
It is implemented through defined structures
It enables institutions minimize the negative consequences of
inherent risk exposures
13. 13eni Oduwole, 6 July 2015
FINANCIAL SYSTEM STABILITY
Approach 1:
i. Takes a systematic view of the entire financial system and
emphasizes its resilience as a key component of its stability
ii. With this approach, it is assumed that financial stability stems
from a financial system that is durable, that does not experience
major disruptions and offers an efficient basis for allocation of
savings to investment opportunities, Mishkin (1991 and 1997)
iii. The ability of the system to act as a shock absorber when an entity
within the system fails attests to how stable the system is
14. 14eni Oduwole, 6 July 2015
FINANCIAL SYSTEM STABILITY
(CONT’D)
Approach 2:
i. Financial stability is likened to situations without banking crises
and with asset price stability
ii. With this approach, rates and product offerings are relatively
predictable and consistent
iii. It is however weaker than Approach 1 because the strength of its
resilience is hardly tested; this approach does not provide
confidence on the relative strength of the financial system
15. 15eni Oduwole, 6 July 2015
FINANCIAL SYSTEM STABILITY
(CONT’D)
Approach 3:
i. A hybrid of Approaches 1 and 2 that was promoted by Crockett (1997)
ii. Stability requires that key institutions (too big to fail) are stable, are able
to meet their obligations consistently without interruption or external
support
iii. This approach requires that key markets are also stable to allow players
confidently consummate transactions at prices driven by demand and
supply consistently where there are no changes in the macro-economic
fundamentals; Financial stability is therefore likened to situations without
banking crises and with asset price stability
iv. With this approach, rates and product offerings are relatively predictable
and consistent
v. It is however weaker than Approach 1 because the strength of its
resilience is hardly tested; this approach does not provide confidence on
16. 16eni Oduwole, 6 July 2015
STABILITY → SOUNDNESS
Stability
• Based on state of financial
system components
• Not easily measurable
• Test of resilience is usually
known after the fact
• May be wishful thinking
Soundness
• Constitutes a major component
of overall stability
• Is measurable
• Reflects the element(s) of
resilience
• Is more robust
17. 17eni Oduwole, 6 July 2015
Capability of
regulators to
build and sustain
an efficient
system
Sustainabl
e
macroeco
nomic
policies
Effective
manageme
nt of
counterpar
ty risks
DRIVERS OF STABILITY IN
FINANCIAL SYSTEMS
Robustness of
payment systems
(esp. in major
financial centers)
Credible
exchange
rate regime
Trustworthy
payment
systems
18. 18eni Oduwole, 6 July 2015
RECOMMENDED RISK
GOVERNANCE STRUCTURE Layered Governance Practices
Subsequent layers are modeled by the output of the previous layer
Previous layers are defined to demonstrate the required practice of the
next
This structure should govern the activities and practices of all
components in the system
This layered practice of Risk Governance in Financial Systems is
commonly known as “The Governance Nexus”
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FOCUS
Managing the rise in competitive pressures within the system
Increase in liquidity crisis and leverage
Financial soundness of institutions
Efficiency of the market infrastructure
Managing the spread of cross-market and cross-sector financial
distress
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BASIS FOR GOOD GOVERNANCE
Independence: Regulatory agencies should be insulated from improper
influence from the political sphere and other supervised entities
Accountability: It is crucial that regulatory agencies are able to willfully
justify their actions against the context of the mandate given to it by the
Government or Legislature
Transparency: Regulatory Agencies should create an environment in which
their objectives, frameworks, decisions and modus operandi are made
available to the public in a comprehensive, accessible and timely manner
Integrity: Regulators as enforcers must pursue institutional goals without
compromises or unethical behaviours
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RESPONSIBILITIES
Government
Promote good public sector governance
Demonstrate transparency and anti-corruption across all levels of
government
Maintain an effective legal and judicial system
Does not promote government ownership
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RESPONSIBILITIES (CONT’D)
Regulatory Agencies
Promote and oversee the implementation of sound practices in
financial intermediaries
Maintain sound governance practices internally
Establish credibility amongst players in the financial system
Promulgate good practices in the institutions being monitored
27. 27eni Oduwole, 6 July 2015
RESPONSIBILITIES (CONT’D)
Financial Institutions
Responsible for establishing good governance practices that would
gain and keep the confidence of customers and the markets
Ensure that their customers in turn implement good corporate
governance practices in their organizations (Caprio and Levine,
2002)
Stimulate the efficient allocation of resources in the economy which
in turn assures the soundness of the financial system.