A Regulatory Perspective on Prudent Valuation and Best Practice in Product Control

Ragveer Brar

This article was first published as a chapter in Managing Illiquid Assets: Perspectives and Challenges, by Risk Books.

As alluded to in the title of this chapter, there are two broad topics that will be addressed:

1. the issue of valuation uncertainty risk, and hence regulatory prudent valuation, which focuses largely on the quantification of valuation risk and the factors to be taken into account; and

2. the controls that support both the valuation process and the wider understanding of the business from a product control and finance perspective.

Following Section 8.1, we will address these issues distinctly in separate sections, although there is a strong link between the two in that a strong control environment should yield more robust and reliable valuation estimates, although valuation uncertainty cannot be eliminated.

8.1 Introduction

8.1.1 Why regulators care about valuation

A fundamental question to answer at the start of this chapter is why the area of valuation is so important for regulation, and hence for regulators.

The obvious answer is that the valuations used for formal financial accounts are critical for market perceptions of firms’