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Risk Management

Risk Management

Within Financial Supervisory Authority (ASF), as an integrated supervisory authority, risk management activities encompass both micro- and macroprudential tools. This differentiation is necessary, as microprudential and macroprudential supervision may, in certain situations, provide different perspectives and solutions, even contradictory. Therefore, the methods and tools for the identification and management of specific risks should be developed/implemented interdependently.

Risk management activities are positioned within ASF on two parallel organizational levels, but which are functionally related, as follows:

  • microprudential instruments are developed and managed by specialized departments within each sector of ASF;
  • macroprudential instruments are developed and managed under the integrated approach to risk management, by the services within Integrated Supervision Directorate;
  • the risk management framework at the level of each sector is properly harmonized with that of other sectors of FSA and integrates with the macroprudential one underlying the integrated approach to risk management.

The primary objective of the activities corresponding to integrated risks management is to develop and manage the general framework in the field of risk management through which the Financial Supervisory Authority acts to provide prudential supervision in the insurance, private pensions, and financial instruments and investments sectors. The main activities in the field of integrated risk management are achieved by:

  • developing and updating risk management strategies and policies;
  • preparing and updating of stress tests scenarios;
  • identifying and evaluating newly emerging risks in the context of developing the activity and/or amending the regulations or legislation in force;
  • collaborating with specialized compartments within the ASF’s sectors for the development and implementation of risk management strategies and policies, and of the stress tests scenarios;
  • coordinating the project on the implementation of supervision based on a forward-looking approach based on risks in all sectors of ASF.

From the microprudential standpoint, risk management is aimed at monitoring the risks that may affect the soundness of the supervised entities. Since these entities operate in a competitive environment, they may legitimately assume risks. ASF does not aim at completely eliminating the risks in the system due to the prohibitive costs of such an approach, and the supervised entities may encounter financial difficulties that may even lead to bankruptcy or exiting the market. In such cases, it is particularly important to ensure an orderly market exit of such entities and to protect the interests of the affected financial consumers (investors, policyholders and participants in the private pension funds).

From a macroprudential standpoint, risk management aims at monitoring the risks that may affect the stability of nonbanking financial markets and limiting the costs arising from difficulties encountered at the level of the entire financial system. However, macroprudential risks may be monitored accordingly only in an integrated manner because risks may accumulate at the level of the entire system while the individual entities may still appear solid. Macroprudential risk monitoring should also take into account the collective behaviour of the supervised entities and the unforeseen side effects of the legislative framework changes and of how the entities from non-bank financial sector are supervised.

Microprudential and macroprudential supervision, at the level of the financial markets as a whole, are complementary: a stable financial system needs financially solid entities, and vice-versa.