Actuaries propose risk-rated remuneration

Risk rating of remuneration policies, independent sign-off on the liability position of financial institutions and the appointment of a country chief risk supervisor are among the proposals for regulatory reform of the financial services industry being put forward by the actuarial community.

The chair of the International Actuarial Association's enterprise and financial risk committee, Tony Coleman, was in Sydney yesterday to give a briefing on a set of proposals presented by his association at a meeting of the Financial Stability Forum in London last month.

Coleman said the IAA was pushing for a counter-cyclical approach to prudential arrangements.

He said: "Some of the things we do now make things worse. When things go bad and banks are deemed not to have enough capital they restrict their lending.

"If instead we increased the capital requirement in rising markets we would have a shock absorber that could be used to deflate market bubbles before they burst."

The role of the country chief risk supervisor (a role that would reside in the Reserve Bank or APRA) would be to give the financial system a risk rating based on an assessment of indicators such as leverage in the economy, money supply, credit spreads, changes in derivative and commodity markets and changes in property markets.

Coleman said more dynamic prudential rules, based on the supervisor's risk ratings, would give the regulators another lever to work with besides monetary policy.

To ensure that remuneration policies and other incentive structures do not distort a proper evaluation of risks the IAA supports the idea of increasing the capital requirement for any market participant with short-term incentive schemes.

Coleman said a discussion of independent sign-off on liabilities and loan loss provisions should include consideration of how groups that fall outside the oversight of APRA (such as Allco and Babcock & Brown) could be covered by such a rule.