Risk, Public/Private and Financial Services Contex

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**Chapter 4**

**Abstract**

**1. Introduction**

banking regulators and policy makers.

way they are monitored and supervised by the regulators.

Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK, and the USA.

Bank Risk Management:

A Regulatory Perspective

*Nguyen Thi Thieu Quang and Christopher Gan*

The globalization of financial markets, information technology development, and increasing competition have largely affected bank business and its risk management. Together with these forces, regulatory factors play a significant role. This chapter approaches bank risk management under the regulators' perspective with an emphasis on the risk-based capital regulation. Specifically, how bank risk is regulated under the risk-based capital regulation and whether the regulation shapes bank risk are discussed in detail. In such a way, the chapter provides better understanding of the risk-based capital regulation and bank risk-taking behaviors.

**Keywords:** Basel Accords, capital regulation, bank risk, risk management, credit risk

Risk management is important for a bank to ensure its profitability and soundness. It is also a concern of regulators to maintain the safety and soundness of the financial system. Over the past decades, banking business has developed with the introduction of advanced trading technologies and sophisticated financial products. While these advancements enhance bank's intermediation role, promote profitability, and better diversify bank risk, they raise significant challenges to bank risk management. The risk management of banks has been considered to be weak compared to the rapid changes in the financial markets [1]. In the light of the recent global financial crisis, bank risk management has become the major concern of

Basel Committee for Banking Supervision (hereafter, the Basel Committee), which was established in 1974 by the central bank governors of G-10 countries1

This chapter approaches bank risk management under the regulators' perspective with an emphasis on the risk-based capital regulation. Section 2 provides a brief overview about bank risk and risk management. Since the regulation practice in most countries is pretty much based on the guidelines of the Basel Committee, this section primarily follows the Committee's documents. Section 3 introduces

The Group of Ten (G-10) is made up of 11 industrial countries, including Belgium, Canada, France,

acts as the primary global standard setter for banking prudential regulation. The Committee sets international standards and guidelines for national regulators to assess and supervise their banking system. Its landmark publication—the Basel Accord—largely affects the way banks manage their capital and risk as well as the

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## **Chapter 4**
