Improving Regulatory Governance
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Improving Regulatory Governance Walter B. Kielholza and Rolf Nebelb a
Chairman of Credit Swiss Group and Vice-Chairman Swiss Re Group, CH-8022 Zurich, Switzerland. Regulatory and Government Affairs, Swiss Re Group, CH-8022 Zurich, Switzerland. E-mail: [email protected] b
In this paper the authors show the rationale behind the changes in the regulatory environment – with regulation moving toward a more risk-sensitive capital adequacy system and stronger risk governance – and their economic impact and influence on the management function. The Geneva Papers (2005) 30, 34–42. doi:10.1057/palgrave.gpp.2510020 Keywords: supervision and regulation; insurance
Introduction Over the past few years, the regulatory framework for supervision of the financial services industry has been undergoing profound reform. Regulation is moving towards a more risk-sensitive capital adequacy system and stronger risk governance. These changes in the regulatory environment have far-reaching implications for the industry, and even now, regulatory developments have become a top strategic challenge for the executive management of almost every major financial institution. Senior managers need to prepare their firms to cope with the new prudential requirements, which will absorb significant resources over the next few years. International standards on prudential supervision and financial disclosure are continuing their rapid expansion, compounding further the industry’s compliance burden. In an attempt to address this issue from a broad perspective, this paper will highlight four aspects, all of which relate to regulatory governance and economics:
the international standard-setters, the economic rationale behind the regulations, the economic impact of regulations, and their impact on the management function.
International standard-setters International institutions are a major driving force behind the current reform of financial services regulation. These include institutions such as the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors (IAIS), or the International Accounting Standards Board (IASB). Their international standards on disclosure, prudential supervision, and corporate governance are seen by lawmakers in most countries as minimum requirements for good regulatory governance that cannot be ignored. Most prominent among these standards are the new Basel Capital Accord, or ‘‘Basel II’’, and the International
Walter B. Kielholz and Rolf Nebel Improving Regulatory Governance
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Financial Reporting Standards (IFRS). Also, we see the principles and standards adopted by the IAIS being taken as a benchmark for regulatory reform in the insurance sector. The increasing influence of international standards in the financial services sector can be explained by the industry’s globalization as well as by a related factor: the greater interdependency of financial risks. Internationally harmonized rules are deemed necessary to create a ‘‘level playing field’’ aimed at facilitating mutual re
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