Moving up the agenda: new rules for risk management

These tough new rules on risk management within banking institutions are
coming in after huge advances in risk management systems and technology within
the sector. The main aim is to improve capital adequacy (and efficiency) by
making firms assess their risks, and the capital they need to allocate against
them, more accurately. Part of the process – a controversial part – is to
enforce greater transparency of institutions’ risk profiles.

For accountants and credit managers within banking institutions, a full and
active knowledge of how these new rules apply to their firms is essential in
time for the 31 December deadline. But interest is also growing in other
sectors. Gaining a better grasp of the fast evolving discipline of risk
management is becoming a priority project for senior management teams.

Accountants need to be at the heart of these developments so they are able to
guide their colleagues on best practice and opportunities. And this is where the
introduction of CPD requirements sits snugly alongside the need for accountants
to develop a new skill-set.

Basel II has been built in ‘three pillars’. They comprise detailed rules for
the quantification of risk measurement; the requirement to demonstrate sound
internal processes to assess capital adequacy relative to the risks being run;
and the need to make public key information about an institution’s risk
measurement methods, level of capitalisation and overall risk profile.

While this much may be known by some, the sheer breadth of the new
regulations will be known and appreciated by few. There are, for example,
national variations to recognise and some accountants can look forward to great
fun consolidating different sets of national accounts with slightly different
capital adequacy rules.

Overall Basel II adds up to an enormous sea change for banks and, most of
all, for their staff who will be required to implement the rules, build the
models, negotiate with banking supervisors and then relay the information in an
intelligible form to their investors.

Si Hussain is chief executive of professional development at BPP
Professional Education

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