On December 23, the Senior Supervisors Group (SSG) issued a report on risk appetite and related issues. FedFin notified clients of the report on that day. In this Client Report, we assess the SSG’s findings and its impact on subsequent action by the Financial Stability Board and U.S. regulators. The report follows a 2009 one (see Client Report RISKMANAGEMENT3), and recommendations earlier this year from the FSB on systemic regulation (see Client Report SYSTEMIC35) focusing on “risk appetite” and related information-technology infrastructure. FedFin expects much in this document to be reflected shortly in Basel guidance and home-country supervisory standards. Indeed, the U.S. is already beginning action on some aspects of the SSG recommendations, for example considering new legal-entity identifiers (see FSM Report LEI). Much in the recommendations will force continued changes in the role of the board and senior management in setting risk parameters and holding line management responsible for them. The SSG paper on risk appetite frameworks and related infrastructure focuses on a complex organization as a whole, implicitly refuting suggestions that subsidiarization is required to ensure risk management and crisis resolution. However, the SSG’s discussion also suggests that, absent significant improvements, subsidiarization or other sanctions might be warranted due to the lack of progress throughout the banking industry in this area. U.S. participants in the SSG included senior regulators at the FRB, FRB-NY and OCC, as well as the SEC (with the unusual participation of the SEC suggesting that aspects of the corporate-governance and/or risk-management requirements could be required for all publicly-traded firms or non-bank financial organizations under SEC jurisdiction).
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