The Responsive Approach by the Basel Committee (on Banking Supervision) to Regulation: Meta Risk Regulation, the Internal Ratings Based Approaches and the Advanced Measurement Approaches

Abstract

The use of complex and sophisticated financial instruments, such as derivatives, in the modern financial environment, has triggered the emergence of new forms of risks. As well as the need to manage such types of risks, this paper investigates developments which have instigated the Basel Committee in developing advanced risk management techniques such as the Internal Ratings Based (IRB) approaches and the Advanced Measurement Approaches (AMA). Developments since the inception of the 1988 Basel Capital Accord have not only led to growing realisation that new forms of risks have emerged, but that previously existing and managed forms require further redress. Basel II has evolved to a form of meta regulation – a type of regulation which involves the risk management of internal risk within firms. This paper attempts to illustrate the extent to which the Basel II Capital Accord has responded to global and financial developments and concludes on the basis of available research evidence, that given the difficulties attributed to the constantly evolving nature of risk and the need for regulators to remain one step ahead, that Basel II, to an extent, has been responsive in meeting with regulatory demands. However, the existence of unregulated instruments such as hedge funds still implies that, despite its advancements and achievements, the Basel Committee still faces uphill challenges in its efforts to address and regulate risks.