Risk-taking is inherently related to operations by supervised entities active in financial markets. The stability of the markets requires that risks be taken in a controlled manner, within the limits of the risk-bearing capacity of supervised entities.
Legislation provides for an obligation to maintain capital adequacy, which restricts risk-taking by supervised entities: supervised entities are not permitted to take risks that jeopardise their capital adequacy. If risks were to materialise, it would affect financial results and thereby the level of own funds and capital adequacy.
Already for a number of years, we have systematically been evaluating all risk-taking by our key supervised entities and their risk-bearing capacity, for example, by means of risk assessments undertaken within the supervisory review and evaluation process. It is the aim of our supervision to ensure that capital adequacy remains at least at the level provided for in law.
Capital adequacy framework lays emphasis on supervised entities’ own responsibility
The present capital adequacy framework (known as Basel II) became effective at the end of 2006. The reform of the regulatory regime upgraded the elements of capital adequacy calculation and harmonised prudential supervision at the international level.
The aim of the rules is to encourage supervised entities to develop and improve their risk management systems, business models and capital management strategies, while also seeking to safeguard the adequacy of capital positions. The basic requirement is that supervised entities’ own funds must cover all essential risks related to their operations. The Basel II capital adequacy rules expanded the range of risks that need to be taken into account for the calculation of the minimum level of own funds.
The capital adequacy framework lays emphasis on supervised entities’ own responsibility. Supervised entities are required to assess their own risks themselves and the level of own funds needed to cover such risks. The supervisor, in turn, must ensure that supervised entities assess their risks and the capital needed to cover such risks in a reliable manner. Here our risk assessments in the supervisory review and evaluation process play an important role.