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Financial Risks and the Role of Banking Regulation

In: The Bank-Business Relationship

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  • Paola Brighi

    (University of Milan)

  • Maurizio Mussoni

    (University of Bologna)

Abstract

Banking regulation helps mitigate the adverse effects of asymmetric information in several key ways, starting with credit-related topics. According to the recent guidelines on Loan Origination and Monitoring (LOM), credit policies should be oriented towards a forward-looking approach to credit management, with a recommendation to assess, as part of credit risk analysis, the current and future ability of the client to fulfil obligations arising from the loan contract. In this view, banks, in their credit assessments, should prioritize a realistic and sustainable estimate of the client’s income and future cash flow rather than history and collateral availability. The regulator’s focus is thus on preventing risks rather than intervening with corrective tools once an anomaly has already developed. The risks are categorized into two major types: traditional risks and new risks. Among the key regulatory measures are the Basel Accords, which standardize processes through Regulatory Pillars. The chapter concludes by focusing on risk prevention methods introduced within this framework.

Suggested Citation

  • Paola Brighi & Maurizio Mussoni, 2025. "Financial Risks and the Role of Banking Regulation," Springer Books, in: The Bank-Business Relationship, chapter 0, pages 117-183, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-91068-5_5
    DOI: 10.1007/978-3-031-91068-5_5
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