G30 Calls For International Risk Standards

THE Group of Thirty (G30), a Washington-based financial think tank, has released a report calling for the largest global financial institutions to develop common principles for risk management, external audits and regulatory reporting.

The report also urges national legislatures to provide a sound and consistent legal framework for cross-border transactions.

Events such as the Barings collapse show that the stability of the world financial system can be threatened by lax internal controls at large investment banks, says the G30 report.

Most global institutions are heavily exposed to one or more large financial houses, it adds. The G30 wants to establish consistent risk management guidelines for what it calls "core institutions", namely large, internationally active banks.

Maarten Nederlof, director of investor risk management for New York-based Capital Market Risk Advisors, says he agrees with the principles of the G30 report that good risk management practices at core institutions are essential.

"It doesn't matter how good and how transparent your risk management is. If your counterparties have poor internal controls, you stay at risk," says Nederlof. "For any institution analyzing its risk exposures, it's likely that the dominant portion comes from these core institutions."

The G30 report also recommends that governments enact consistent cross-border laws for dealing with netting, bankruptcy and settlement.

Nederlof believes such a move is desirable but unrealistic in the foreseeable future. "The International Swaps and Derivatives Association has been calling for that for a long time," he says.

Colin Lawrence, managing director, global head of market risk for BZW, also endorses the principles of the G30 study.

But he agrees with Nederlof that it's unclear what the G30 can accomplish beyond existing efforts. "Take the Basle initiative for instance -- what is the G30 is adding to this?" he asks.

Lawrence says there is a danger of too many organizations, think tanks and regulators creating an over-regulated environment that could damage competitiveness.

He points out that even the Barings collapse, while it hurt the bank's shareholders, didn't bring down the world economy.

"BZW has committed tremendous resources to risk management," he says, adding that good risk management gives banks a competitive advantage.

Lawrence does endorse some regulatory initiatives such as CAD and encourages broad guidelines for risk management.

However, when it comes to the specifics of a bank's internal workings, he prefers a survival of the fittest approach: "Let the market take care of banks that don't have proper internal controls."

The G30 was one of the first groups to highlight the need for financial institutions to treat risk management seriously.

In 1993, the group released an influential study into the risks involved in derivatives trading (Derivatives Engineering & Technology, August 1993)

Many of the G30's recommendations for running a derivatives trading operation -- such as separating front and back offices and marking portfolios to market -- have now been accepted as best practice for financial institutions.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here