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Risks Under Control

12.02.2013 00:45 / Vedomosti

Creating a Central Bank-based financial market megaregulator could drive risk management in banks. Insurance companies, pension funds and the asset management market will take their risk management cues from banks. This is the key takeaway from the 9th Annual Russian Risk Management Conference.

“The banking market is advanced in risk management due to the widespread practice of stress tests in liquidity risk assessment – and also close cooperation with the credit reference bureau”, said Pavel Mitrofanov, Head of Corporate and Investment Ratings at Expert RA. “This market is the largest and most dynamic, it draws more attention from regulators, therefore all the best risk management practices are concentrated there, spreading to other financial markets”.

Apart from pressure “from the top” (the arrival of the megaregulator), banks also feel pressure “from the bottom”, due to developing industry standards. Last year, private pension funds became standardized. Despite the ‘recommended’ nature of the standard, many private pension funds adhere to it. National Asset Managers League President Dmitry Alexandrov states that the private pension funds must perform internal risk assessment. “Today it’s not about how many years you have left before retirement, the investment plan is the same for everyone. Private pension funds must perform internal audit prior to mass age group payouts, and base their investment strategy on that”, says the expert.

This year will see the new industry standard for leasing companies. State regulation in this market effectively ended in 2000, when leasing licenses were cancelled, said Deputy General Director at Gazprombank Leasing Maxim Kalinkin. Today, leasing companies identify ‘gray market areas’ themselves, and there have been cases of companies engaging in outlawed practices. “The crisis demonstrated very clearly that risk management is crucial. The leasing market industry standard is 80% ready at the moment, and I hope it will be in place by summer", said Kalinkin.

As for trust management, there is no consolidated opinion on the industry standard yet. The megaregulator is expected to tighten regulation and the market fears that the approach to trust managers will be similar to banking. Trust managers expect the introduction of capital adequacy requirements that they consider irrelevant.

“Financial markets differ, but asset management companies are particularly special”, says Head of AM at Gazprombank Anatoly Milyukov. “Banks should return cash deposits, insurance companies must cover the risks that they insure against, while asset managers are free from obligations apart from quality asset management. The megaregulator must act in accordance with the specifics, other market practices don’t apply, and capital adequacy ratios should not be introduced. The more free capital the AM company has accumulated, the better it manages assets. But apparently we will be treated as banks, because the Central Bank is not motivated to change regulatory approaches”.

The insurance market is the most backward in terms of risk management: absence of standards mean that risk management is under-developed. Weaknesses are liquidity and operational risk management, insurance and credit risks are managed slightly more effectively. Most companies support the industry standard.

“Insurers take on client risks, massive responsibilities that are in great disproportion to insurance premiums, making risk management a top priority”, said General Director at Renaissance Insurance Group Leyla Barakhnina. “We hope that the new megaregulator will boost regulation quality and we will see an end to the current fault-finding by FFMS”.

Conference participants see main risk management development obstacles in banks in top managers’ unwillingness to invest in the area, along with lack of qualified staff. 75% participants noted that the megaregulator will hardly affect banks, while control over other financial institutions will tighten. The megaregulator is expected to appear in 2014-2015 at the earliest.

Evgenia Noskova

Financial markets megaregulatorProject Group №1