The growing importance of risk in financial regulation

Purpose - The purpose of this paper is not only seek to trace developments that have contributed to the importance of risk in regulation, but also to justify why risk has become so significant within regulatory and governmental circles. Design/methodology/approach - This task will be facilitated through a consideration of theories associated with risk, and by reference to two forms of risk regulation, namely risk‐based regulation and meta regulation. As well as a consideration of the application of both in jurisdictions such as the UK, the paper adopts a comparative approach through references to the their application in jurisdictions such as Germany, Italy, and the USA, and also through a comparison between meta‐regulatory strategies and risk‐based regulation. Findings - This paper concludes that all regulatory strategies should take into consideration the importance of management responsibilities – both on individual and corporate levels. Meta‐risk regulation has not only assumed such a prominent position in regulation through its application in Basel II, but also is preferred to risk‐based regulation – not only because of the element of ambiguity which risk‐based regulation introduces into its assessment (through a consideration of the external environment of the firm), but also because of its impact of the use of external auditors in regulation and supervision. Practical implications - The practical implications of a move towards risk‐based regulatory strategies, and meta‐regulatory strategies in particular, is that courts are simply not adequately equipped to deal with the pace with which some financial instruments, such as derivatives, operate. Originality/value - This paper not only introduces originality through its comparative approach and the choice of jurisdictions involved, but also through the attention it draws to the need for more innovative techniques such as meta regulation. Meta regulation can be considered to be the most evolved and collaborative form of regulation, which is best suited for such an ever‐evolving and changing regulatory environment that currently exists.