Shedding Light on Non-Financial Risks – a European Survey

Shedding Light on Non-Financial Risks – a European Survey — January 2012

3. The Need for Change in Regulation and Risk Management Practices

answers show that opinions are very mixed about basing them on a notion of rating of financial risk. More precisely, because such measures currently do not exist, many respondents are unsure about when and how these could apply. We argue that the establishment of such measures is based on similar information to that of ratings, but that it has a strong qualitative component since many events such as the immobilisation of assets at a bankrupt sub-custodian, have had very few or no occurrence in many countries. 3.4. Regulation on Distribution As mentioned earlier, distribution is fundamental in limiting non-financial risks. Part of the challenges of legal harmonisation has to do with allowing funds to be distributed across Europe,

In theory, higher capital requirements should be risked-based, so as to “ensure that the marginal incentive to manage risks is greater than the marginal rise in fees charged to investors as a consequence of the rise in the cost of capital…Capital requirements should be based not on assets under management or in custody but on risk. The models for allocating capital in financial conglomerates and investment firms should be reviewed, as should prudential regulations (capital requirements for limited operational risks should give way to a requirement for restitution risk)" (Amenc and Sender, 2010b, p. 56).. While 44% agree that risk-based capital requirements (based on ratings of non- financial risks) should be applied to asset managers (25% disagree), qualitative

Figure 3.3.2: Country group average of regulation on capital protection and financial responsibility How much do you agree with the following assertions regarding regulations on capital protection and financial responsability for non-financial risks?

“Fr” is France, “UK” is the United Kingdom, “Ge+Au+Nl” is Germany, Austria and the Netherlands, “Lux+Irl” is Luxembourg and Ireland, and “RoE” is the rest of Europe. Answers are coded in the following manner: -2 for Strongly disagree, -1 for Disagree, 0 for Unsure, 1 for Agree, 2 for Strongly agree.

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An EDHEC-Risk Institute Publication