Supervisors, for our part, must ensure that the regulatory system encourages banks, securities firms, and insurance companies to be capable of managing their risks today and ready to respond to new challenges tomorrow. Risk management and the supervisory system cannot and should not evolve independently of each other. On the contrary, supervisory agencies and financial services providers are currently working in tandem to develop a “virtuous circle” in risk management and supervision. Together, we want to ensure that supervision reflects the best practices being developed by the industry, while at the same encouraging institutions to improve those practices constantly. This morning, I would like to share a financial supervisor’s perspective with you on the “virtuous circle” that is emerging to encompass risk management and supervision. I’ll begin my remarks with the results of a study that outlines the great advances achieved by leading financial institutions around the world in developing more rigorous and comprehensive risk management approaches. At the same time that commercial organisations made improvements to their internal processes, supervisors have sought to incorporate those improvements into the supervisory structure, which is my second topic. We are moving toward a more flexible and forward-looking approach to financial supervision that seeks to motivate prudent management - and thereby complete the “virtuous circle” by encouraging further advances in risk management. The reforms underway are especially evident in the banking world under the Basel Committee’s “Basel II” framework.

One of the most notable advances in risk management across all three financial services sectors is the growing emphasis on developing a firm-wide assessment of risk. This constitutes the first trend in the Joint Forum’s report. Improvements in technology and telecommunications have made it easier for firms to gather, collect, and analyse large amounts of data on their exposures and business activities efficiently and increasingly in near “real time.” To make the best use of firm-wide data, some organisations have established a dedicated risk management function to foster more highly integrated and systematic approaches to risk measurement and management. The risk management function typically promotes the use of common risk measures across business lines. It can then report the firm-wide risk data to senior management. Reports may range from daily updates on “value-at-risk” trading positions to regular, if less frequent, compilations of the results of stress testing. The broader use of shared definitions to guide the comprehensive reporting of risk across the firm enables the integrated risk management function to identify concentrations of risk. Concentrations matter particularly when various business lines within the firm have different kinds of exposures to the same counterparty. Comprehensive and consistent reporting helps, moreover, to ensure that the firm is aware of the wide range of risks to which it is exposed; that it understands the relative importance of various risks and how they may interact; and that the firm is less likely to ignore material sources of risk.