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Last Friday, the Joint Forum, the Basel sponsored body on regulatory advice, released “Cross-sectoral review of group-wide identification and management of risk concentrations”. The paper is based on surveys of regulators and of selected financial conglomerates “likely to have a firm-wide approach to identifying and managing risk concentrations”.
This paper expands upon prior work conducted by the Joint Forum on risk integration and aggregation, released from 1999 through to 2003. It explores the extent to which financial conglomerates active in two or more of the banking, securities, and insurance sectors currently identify and manage risk concentrations at the firm-wide level. It also covers how current and emerging risk techniques, including stress testing and scenario analyses, are employed to identify potential concentrations, assesses progress made and the major risks to which firms are exposed. Although the surveys on which the report is based were carried out in late 2006 and early 2007, the paper makes observations and extracts lessons drawn from the sub-prime crisis turmoil that began in mid-2007.
John C Dugan, the Chairman of the Joint Forum and Comptroller of the Currency in the United States, said, "This paper highlights critical issues in firms' ability to identify risk concentrations and one of these relates to stress testing. Not only do firms need to factor liquidity risk into firm-wide, integrated stress tests but they also need to take into consideration second-order effects in the development of stress test scenarios. Looking forward, firms that employ such techniques in the identification of potential risk concentrations may find they are better prepared to deal with financial market disruptions such as those that have been experienced over the past year."
The Joint Forum was established in 1996 under the aegis of the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors to deal with issues common to the banking, securities and insurance sectors, including the supervision of financial conglomerates. The paper has also been included in the Joint Forum submissions to the Financial Stability Forum to contribute to its work related to the sub-prime crisis.
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