5. Mandatory risk frameworks II Flashcards
1
Q
Give examples of risk management frameworks
A
- Basel Accords
- Solvency II
- Sarbanes-Oxley Act
- COSO ERM Integrated Framework
- Swiss Solvency Test
2
Q
What are the aims of the 3 Basel pillars
A
I - set MCR
II - supersede Basel I rules
III - respond to 2008 GFC; work alongside earlier accords; focus on specific liquidity, systematic and counterparty risks
3
Q
What is the capital requirement set out in Basel I
A
- MCR imposed based on exposed amount to credit, market and operational risk
4
Q
What is the capital requirement set out in Basel II
A
- Supervisory review relating to bank’s internal RM processes
- Supervisors asses systems, processes and risk limits to check if capital is enough
- May require additional capital – rare
- Pay attention to liquidity and concentration risks
5
Q
What is the capital requirement set out in Basel III
A
- Deals with level of disclosure bank must make to public and market
- Purpose- facilitate market discipline through appropriate capital pricing
6
Q
What are the aims of Solvency II
A
- Economic risk-based solvency requirements
- More comprehensive requirements than before about taking account of asses and liability risks
- Req to hold capital against market, credit, operation and underwriting risk
- Emphasis that capital is not only way to mitilate against failures
- More prospective focus
- Streamlined approached aimed at recognising how groups operate.
7
Q
What are the requirements of Solvency I
A
- Quantitative requirements
- To tier approac
- Req to capture uw, credit, market and operational risks
2 tiers:
I - SCR
* Use own internal model or standardised approach
* Set at 99.5% confidence ove 1 year
* Being below = reg will take action
II- MCR- below which company has no authorisation
Regulator looks at capital requirements
8
Q
What are the requirements of Solvency II
A
- Qualitative
- Focuses on risk management and supervisory activities
- ORSA to quantify if able to meet SCR and MCR in near future given risks, processes and controls
9
Q
What are the requirements of Solvency III
A
- Supervisory reporting and disclosure
- Reporting of risks
- encourages identifying, measuring and managing +monitoring risks
Keeps risk profile aligned to stated risk appetite and limits
10
Q
What are the similarities between Solvency II and Basel Accords
A
- Both requirements are in similar pillars (MCR, supervisory review and disclosure)
- Pillar 1:
o Both use risk-based approach to MCR calc and consider credit, market and operational risk
o Can use standard model from regulator (formulae) or use internal model if approved by regulator to calc MCR.
o Available capital is tiered based on quality- only higher quality tiers are recognised in MCR calc - Pillar 2:
o Require orgs to assess own processes for identifying and managing risks and monitoring if capital is adequate
o Diff levels of supervisory intervention by regulator depending on risk of capital falling below MCR - Pillar 3:
o Require orgs to publish risks, risk management and capital adequacy
o Capital providers can assess info and determine appropriate cost of capital»_space; imposes market discipline on orgs - Designs are suitable for multi-nationals.
- Mandatory (Basel II mandatory if recommended by regulator)
11
Q
What are the differences between Solvency II and Basel Accords
A
- Basel II based on concept of banks being dependent on each other»_space; large contagion risk.
o Solvency II not designed with systemic risk in mind- considered unlikely fall of one insurer will affect others - Basel takes more prescriptive approach
o Solvency II is principles based and details left to regulators - Pillar 1 of Solvency II requires MCR and SCR to be assessed. SCR: enough capital to cover adverse events, calibrated with 99.5% probability pver on-year time horizon.
- Solvency II covers underwriting risk.
12
Q
What s the aim of the Sarbanes-Oxley Act
A
- Aim- improve reliability of corporate disclosures to protect shareholders
- Primary legislation in US, voluntary code in UK
13
Q
What are the principles of the Srbanes-Oxley Act
A
- Form Public Company Accounting Oversight Board (PCAOB) to inspect published accounts of quoted firms and take action against breaches of regulation
- Increased accountability of CEOs and CFOs- must certify financial reports that they don’t have untrue statements of material facts, and are personally responsible for financial disclosures.
- Public reports must have an internal control report (ICR), committing management to maintain proper internal controls and review effectiveness.
- CEO and CFO personally responsible for setting up, maintaining and evaluating internal controls and reporting issues to external auditors
- Req for audit committee with independent directors and >=1 “financial expert”
- Ban audit and non-audit services by same company»_space; independence
- Limit length of external auditor appointment to 5 years
- Illegal for directors to interfere with audit process
- Illegal for employees to alter, conceal, falsify or destroy docs to impede or influence investigation
14
Q
Describe the COSO ERM Integrated Framework
A
- Set up by Committee of Sponsoring Organisations of the Tradeway Commission (COSO)
- Sets our definitions and standards that can be used to assess internal risk management control systems
- Advisory and not mandatory
15
Q
Principles of COSO ERM Integrated Framework
A
- ERM must be integrated in an org’s strat
- Risk represents opportunity and potential downside
- ERM is multi-dimensional and iterative ongoing process, not an event
- Must be integrated into everyday processes
- Everyone has role in RM but ultimately responsibility of CEO
- Any RM process is imperfect
- Implementation of RM must balance cost with potential benefit
- 3 dimensions of COSO cube:
o Activities to demonstrate internal controls, ie risk management processes (e.g. event identification, assessment and monitoring)
o … in each business area covered by framework (e.g. operation, strategic)
o … and at each level of application (eg subsidiary, unit)
