Global Journal of Management and Business Research, A: Administration and Management, Volume 23 Issue 2

Enterprise Risk Management in Designing Meta-Regulation under Risk-based Regulatory Strategy: An Empirical Evidence from Financial Regulation 47 Global Journal of Management and Business Research Volume XXIII Issue II Version I Year 2023 ( ) A © 2023 Global Journals Meta-regulation can take a variety forms. Sometimes it is referred to as “enforced self-regulation,” wherein firms devise their own detailed rules in light of regulatory goals (46). However, it is found that ERM has entered in the regulatory regime. The use of ERM as enforced self-regulation indicative to the use of the meta-regulatory approach under the risk-based regulatory strategy. Therefore, an archetype of meta- regulation based on ERM has evolved in financial regulation to achieve the risk-based regulatory aims. Drawing on the conceptual framework depicted in Figure 2.1, it can be stated that ERM based enforced self-regulation induced the regulated banks s to develop both system-based and performance-based architecture of the self-regulation. The structural reform under ERM compels banks to develop the system-based or management- based architecture of self-regulation. More focus is given to the board of governance and top management of banks. In one end of the architecture, the board of directors is put in place and made them responsible for oversight of bank-wide risks with the help of a sub- committee of the board (i.e. BRMC) and the RMD. Likewise, a risk committee at the executive level (i.e. ERMC) is formed at the other end of the architecture comprises of the heads of all functional departments. The RMD, as an independent department, is placed between the governance and the operations (i.e. BRMC and ERMC) with the CRO as the Head of the department through a defined communication hierarchy. In addition, a supervisory review process team is formed with the MD/CEO as the Head to monitor the risk-based internal capital adequacy and hold a dialogue with the central bank's team. Thus, the system-based or management-based architecture for regulation become effective in banks following the ERM based structural reform. Similarly, the functional reform under ERM helps to operationalize the performance-based or outcome- based regulation. The banks use a range of risk management reports such as RAS, CRMR, MRMR, ICAAP, Stress Testing Report and many more, including the meeting minutes of the risk committees as operational control tools to integrate the bank-wide risks from the bottom to the top. The RAS acts as a strategic paper of a bank, whereas the CRMR considers as a blueprint. Bank-wide risks are articulated in CRMR for a holistic focus on a half-yearly basis. This report accelerates all material risks from the operation to the board along with the course of actions. The board becomes aware of bank-wide risks and can take necessary measures to address those risks. Besides, the meeting minutes of the risk committees are required to prepare on time. Thus, the formal responsibility to prepare the risk reports, including meeting minutes of the risk committees and the board's oversight role, brings a bank into performance-based or outcome- based self-regulation. Thus, the performance-based /outcome-based regulation becomes effective in banks after the functional reform. However, in parallel to sectoral risk management reform, the central bank enrols the ERM based regulation of the regulated banks into the regulatory process as a part of a meta-regulatory approach. The approach regulator used based on ERM characterised as enforced meta-regulation under the risk-based approach. In this strategy, the regulator discharges the regulatory duties through administrating the self-regulation of the regulated banks. The enhanced institutional capacity and advanced tools and techniques help the central bank to achieve the risk- based regulatory aims relying on substantially on such ERM based enforced self-regulation of the banks. It reflects that the central bank exercises its regulatory power in administrating the self-regulation of the banks. It develops a “comprehensive risk rating” system on a half-yearly basis for each bank based on the bank’s risk reports and documents submitted to it and align certain regulatory approvals with this “risk rating” result like approval for new branch opening, authorized dealership, dividend declaration. Besides, it carries out a CAMELS rating to identify the problem bank where the “comprehensive risk rating” carries 15 per cent weight in the “Management” component of the CAMELS rating. It also carries out the physical inspection of the bank’s ERM architecture and its operation based on the CAMELS rating report. Further, it forms a supervision specialist unit to carry out the “diagnostic review report” and “quick review report” as an early signal provider, including an “observer cell” for appointment of observers in banks’ board if required. In addition, an SREP Team is formed to conduct the one- to-one review with the bank’s SRP Team to evaluate the ICAAP report and determine if any additional capital requires based on the BASEL-III framework. Moreover, the central bank establishes some other departments equipped with advanced tools and techniques to supervise the industry under risk-based regulation. A software is launched for integrated supervision as a part of comprehensive and risk-based supervisory initiatives that integrate all the regulated banks' head offices and branch offices. Thus, the enrolment of self-regulation of the regulated banks into the central bank’s regulatory process and the institutional capacity building assures the use of ERM as a meta-regulatory toolkit in achieving the risk-based regulatory aims. The entrenchment of ERM among regulated firms through enforcement, the emergence of ERM based self-regulation, enrolment of the self- regulation into the regulatory process and subsequently administer the self-regulation by the regulator with enhanced capacity warrant the use of ERM as a meta-