Beyond the Financial Crisis: Addressing risk challenges in a changing financial environment

Ojo, Marianne (2009): Beyond the Financial Crisis: Addressing risk challenges in a changing financial environment. Published in: Göttingen Journal of International Law (March 2010)

Abstract

Paper presented at "Strategies For Solving Global Crises Conference: The Financial Crisis and Beyond" (October 2009).

Also published in "Corporate Finance: Governance, Corporate Control & Organization Journals" (July 2010)

The Financial Crisis has not only highlighted the importance of addressing issues such as liquidity risk – it has also brought to the fore the need to focus on unregulated instruments such as hedge funds, which are of systemic importance to the financial industry. Risk is an area which, owing to its increasing significance, requires greater focus. A move to risk based strategies is evidenced by the growing popularity of risk based regulation and meta regulatory strategies. Given the presence of an unregulated hedge fund industry however, such attempts do not suffice on their own. Further, the systemic nature of risk exacerbates the problem of such unregulated institutions.

This paper aims to address complexities and challenges faced by regulators in identifying and assessing risk, problems arising from different perceptions of risk, and solutions aimed at countering problems of risk regulation. It will approach these issues through an assessment of explanations put forward to justify the growing importance of risks, well known risk theories such as cultural theory, risk society theory and governmentality theory. These theories will be considered against a background of themes such as dynamism, evolutionism, developments in science and industry, cultural attitudes to risk, and the need to be responsive and reflexive to changes which have arisen in modern society.

Theoretical models and hybrids of a responsive model of regulation such as Enforced self regulation and meta regulation, which have the potential to address the problems relating to risk will be addressed. By virtue of the pro cyclical nature of risk, the inability of Basel 2 to address risk cycles were revealed during the Northern Rock Crisis. Other flaws and deficiencies inherent in Basel 2, a form of meta regulation, will be highlighted. The relevance of internal control systems to an efficient system of regulation, the reasons for which meta regulation is not only considered to be the most responsive form of regulation, but also one which assigns central role to internal control systems will be discussed. The contested nature of risk and the difficulties attributed to its quantification, raise questions about its ability to function effectively as a regulatory tool. If risks could be eliminated in their entirety however, then regulation would serve no purpose. This paper aims generally therefore to direct attention to those areas which could be addressed, namely institutional risks, and measures whereby such risks, even though impossible to eliminate, could be minimized.

• Item Type: MPRA Paper
• Language: English
• Keywords: risk; theories; financial; regulation; Financial; Crisis
• Subjects: K - Law and Economics > K2 - Regulation and Business Law; K - Law and Economics > K0 - General; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M42 - Auditing

References

R Baldwin and M Cave, Understanding Regulation: Theory, Strategy and Practice (1999) Oxford University Press

U Beck, Risk Society: Towards a New Modernity (1992) London: Sage Publications

C Ciborra, ‘Digital Technologies and the Duality of Risk’(2004) CARR Discussion Paper No 27, CARR, LSE London

W Bonss, Vom Risiko: Unsicherheit und Ungewissheit in der Moderne (1995) Hamburg: hamburger Edition

S Breyer, Breaking the Vicious Circle: Towards Effective Risk Regulation (1993) Cambridge Mass

M Douglas, Risk and Blame: Essays in Cultural Theory (1992) Routledge

M Foucault, ‘Governmentality’ in G Burchell et al (eds), The Foucault Effect (1991) Hemel Hempstead: Harvester Wheatsheaf

J Gray and J Hamilton Implementing Financial Regulation : Theory and Practice( 2006) Wiley 2nd Edition

http://www.accaglobal.com/publications/studentaccountant/49870

http://www.aicpa.org/download/members/div/auditstd/SAS107.PDF

http://www.bis.org/publ/bcbs122.pdf?noframes=1 http://eur-lex.europa.eu/LexUriServ/site/en/com/2001/com2001_0428en01.pdf

http://ec.europa.eu/internal_market/investment/alternative_investments_en.htm

http://ec.europa.eu/internal_market/consultations/docs/hedgefunds/feedback_statement_en.pdf

http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/08/518&format=HTML&aged=0&language=EN&guiLanguage=en.

http://www.pobauditpanel.org/downloads/appendixa.pdf>

F Haines,‘Regulatory Failures and Regulatory Solutions: A Characteristic Analysis of the Aftermath of Disaster’, Law and Social Inquiry ( 2009) 39 (forthcoming)

B Hutter and M Power “Risk Management and Business Regulation”

J Morris, Rethinking Risk and the Precautionary Principle 2000 Oxford: Butterworth-Heinemann

S Ottedal, B Moen, H Klempe and T Rundow ‘Explaining Risk Perception: An evaluation of Cultural Theory’ < http://www.svt.ntnu.no/psy/Torbjorn.Rundmo/Psychometric_paradigm.pdf>

J Packer and C McCarthy Foucault, Cultural Studies and Governmentality (2003) State University of New York Press

M Power, The Risk Management of Everything: Rethinking the Politics of Uncertainty2004 Demos

M Power Organized Uncertainty: Designing A World of Risk Management 2007 Oxford University Press

H Rothstein, M Huber and G Gaskell “A Theory of Risk Colonization: The Spiralling Regulatory Logics of Societal and Institutional Risk” (2006) Economy and Society (35) 1

K S Schrader-Frechette Risk and Rationality 1991(Berkeley, California)

G van Calster ‘Risk Regulation, EU Law and Emerging Technologies: Smother or Smooth?’ <http://www.springerlink.com/content/q14jn1284r4585gg/fulltext.pdf>

F Warner, ‘Calculated Risks’ (1993) Science and Public Affairs

J Zinn, ‘Recent Developments in Sociology of Risk and Uncertainty’ (2005)