Introduction

The global financial crisis of 2007-2009 had profound implications for the financial industry, prompting a significant overhaul of regulations and corporate risk governance. This chapter examines the pivotal changes that emerged as a response to this crisis, reshaping the landscape of risk management and governance practices.

Impact of the Financial Crisis

The financial crisis exposed systemic weaknesses in risk management practices, triggering a cascading effect that reverberated across global markets. Financial institutions faced severe liquidity challenges, credit defaults surged, and market turbulence reached unprecedented levels. This underscored the urgent need for regulatory interventions to prevent such vulnerabilities in the future.

Regulatory Responses and Reforms

In response to the crisis, regulatory bodies worldwide took proactive measures to enhance risk governance and restore market stability. Key reforms included:

• Dodd-Frank Wall Street Reform and Consumer Protection Act (USA): Enacted in 2010, this act aimed to increase transparency, impose higher capital requirements, and strengthen oversight of financial institutions. It established the Financial Stability Oversight Council (FSOC) to identify and mitigate systemic risks.

• Basel III Accords: The Basel Committee on Banking Supervision introduced enhanced capital and liquidity standards to ensure banks’ resilience against financial shocks. The reforms addressed shortcomings in risk measurement and management identified during the crisis.

• European Market Infrastructure Regulation (EMIR): Implemented by the European Union, EMIR aimed to regulate over-the-counter derivatives markets, enhance transparency, and reduce counterparty risk.

Evolving Corporate Risk Governance

The crisis prompted a paradigm shift in corporate risk governance practices, emphasizing the integration of risk management into strategic decision-making. Institutions recognized the need to establish risk management functions that are proactive, comprehensive, and aligned with the overall business strategy.

Financial institutions began to restructure their risk management frameworks, appointing Chief Risk Officers (CROs) and dedicated risk committees. Boards of directors played a more active role in overseeing risk management, demanding greater transparency and accountability.