A paper on regulatory and market differences issued by the Joint Forum, an umbrella group of financial regulators, finds that convergence in both market practice and regulatory approaches is occurring naturally across different sectors and can be expected to continue.

At the same time, however, the Joint Forum recognizes that cross-sectoral convergence in regulatory approaches is not desirable in every instance. There may be good reasons for sectoral differences in regulatory approaches to the same risk, it notes.

The paper presents the findings of a review that was prompted by discussions at an industry roundtable in 2003 on differences in the regulatory approaches to risk across banking, securities and insurance sectors.

The working group noted that many of the existing cross-sectoral differences in regulatory approach are rooted in what some have described as differences in the ‘culture’ of supervision. It also found that there are no appreciable differences in the purpose of capital across the three sectors. It notes that additional work would be necessary to determine whether any material differences exist in the regulatory approach to operational risk management and, if so, whether they are based on fundamental differences in the underlying business models across sectors.

It also notes that there is currently there is no common cross-sectoral framework of definitions or metrics for dealing with risk concentrations, nor is there a common approach for aggregating risk concentrations across risk types. “Since there is little evidence to suggest that cross-sectoral differences are of a fundamental nature, all sectors, and financial conglomerates in particular, might benefit from further work aimed at gathering current information about the management and supervision of risk concentrations,” it suggests.

The Joint Forum considered a number of potential new initiatives that might follow on from this report, and is proposing to undertake a cross-sectoral review of firms’ management of risk concentrations.

“It is clear from this exercise that the discussion has evolved into one that starts with the commonalities in regulatory approach across sectors, as opposed to differences,” said Dirk Witteveen, chairman of the Joint Forum and an executive director of the Netherlands Bank. “The initiative also underscores the value of an organization like the Joint Forum, which provides an opportunity for supervisors to exchange views on risk management practices and supervisory approaches and in that fashion helps to minimize differences in approach. The paper makes a valuable contribution to the topic and will prompt useful discussions within and between industry and the supervisory community.”

The Joint Forum also issued a paper on liquidity risk management practices in use by conglomerates engaged in banking, securities and insurance activities is the result of a comprehensive study of liquidity risk management practices among 40 of the largest firms in the financial services industry.

The working group found that given differences in business lines and funding mix, liquidity risk management is mostly separated in financial groups that contain firms operating in multiple sectors. “With few exceptions, liquidity risk management is not well integrated in groups conducting an insurance business as well as banking and/or securities businesses,” it found. “Groups generally have integrated to some extent liquidity risk management across the banking and securities business lines, although the degree of integration varies considerably among firms.”

It also found that factors that appear to have a significant influence on a firm’s approach to liquidity risk management include: scope of international operations, level of complexity of activities undertaken in different jurisdictions, types of foreign currency exposure, supervisory requirements, legal environment and restrictions, commercial market environment, and national markets.

The working group also found a greater range of practice within the banking sector than within the securities and insurance sectors in areas such as liquidity risk measures and limits, types of scenarios, time considerations, and underlying assumptions.

Some of the surveyed firms indicate that regulations may have an impact on the design of their structures for managing liquidity risk. Some regulatory restrictions impede the movement of liquidity across jurisdictions; for example, regulatory restrictions may give rise to the need to maintain liquid assets in separate jurisdictions and currencies, rather than in a single pool.

Witteveen said, “I believe the result is a paper that provides a useful perspective on the broad range of practices employed by firms and one that could serve as a foundation for additional work by others in this challenging risk management area.”

@page_break@The papers are available on the Web sites of the Bank for International Settlements, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors.