Banking regulation is on a constant and rapid increase, especially regarding risk management (RM). While there is no common definition for regulation, the general opinion is that, the main reason for regulatory intervention is to handle market failures. That being said there is little discussion about the effect and ramifications of implementing RM regulation, on the banking system (worldwide and in Israel), keeping in mind that:
• RM regulation usually originates, from unbinding international rules (soft law), designed by nongovernmental organizations.
• While the decision, to adopt international regulation is taken by the regulator, not the legislature and the banking system is the one required to invest funds and shift working power, in order to adjust its operation.
Risk is an inherent part of banking activity mainly because banks operate based on Asymmetric information.
As the international banking operation increased, maintaining an international financial market under various local regulations raised numerous risks. Recognizing, that the scope of international business operation, ascended local regulators abilities, the need for cooperation between international regulatory agencies and, adopting uniform financial standards, seemed apparent.
Basel committee, a major international nongovernmental body, devises unbinding recommendations for banks. These recommendations, received ‘soft low’ status, due to the majority of states regulators, that decided for various reasons, as shortly described in the article, to adopt and implement them within the local rules. ‘Soft law’, as opposed to ‘hard law’, can be tailored to accommodate local legislation, and regulators do that constantly.
During the implementation of Basel II recommendations regarding RM, the Israeli banking system undergone significant changes, as ordered by the banking supervisors directives. This was, and still is, an ongoing project that changed the customary banking perception about many of its activities (business and else) shifting it to a more ‘control oriented’ organization.
In order to begin discussing the question: What did the Israeli banking system get, from RM regulation and the implementation of soft law? Certain factors highlighted in the article from a critical point of
view. Mainly: Capital Adequacy – Macro prudential v. Micro prudential approach; The chief risk officer
(CRO) role in the organization; Risk management – an oxymoron? Regulatory impact analysis – suggested adaptation and published empirical data, from 5 big banks in Israel.
Despite the fact, that the banking system invested a vast amount of money to implement RM regulation,
the data suggested that banks profitability wasn’t damaged, and that the management quality improved.
The impact of appropriate organizational culture, on compliance rate as a stimulant for effective risk
management operation, and many other questions remain open.