The road to risk-based supervision: Lessons from Chile

Abstract

The last two decades have been a period of unprecedented development, but also turmoil, in the financial sector. Advances in technology, the advent of new types of market participants and products, the growth in scale and interconnectedness of markets, and rapid economic development in many countries have all presented significant oversight challenges to regulators. The impact of the recent financial crisis has added to those challenges — and in some jurisdictions, made it very clear that supervisory approaches currently in place are insufficient.In light of these events, most securities (and other) regulators have embraced the need for a significant reassessment of their approach to supervision of securities firms. In particular, securities regulators must evaluate how they identify and respond to risks in the securities firms they oversee. One approach that has garnered considerable interest is risk-based supervision, which is not simply a short-lived reaction to the financial crisis, but an approach securities regulators, in both emerging and developed markets, have been seriously examining for the last decade. Many consider it to be a ‘best practice’ in securities regulation.This paper examines key elements of the risk-based methodology adopted by the Chilean Securities and Insurance Regulator (SVS) as it transitioned from a more traditional, compliance-based supervisory programme. It also assesses the challenges and benefits that other regulators may encounter when implementing a similar programme.