By Michael Olympios
Of all the lessons provided by financial crises, none is more profound than the loss of trust.
Financial regulators are well aware of its consequences and are keen to prevent such catastrophic events in the future.
Although a number of events can trigger a crisis, none are more severe and contagious than the erosion of capital. But as financial markets evolve, so do risks.
Economists have no better antidote than capital injection.
And ceteris paribus, the higher the risk, the higher the capital required to address it.
The Cyprus Securities and Exchange Commission (CySEC) is on constant patrol of the market; its Chairperson Demetra Kalogerou reminded everyone that a new regulation effective on July 26 calls for financial services companies to inject more capital.
According to Andreas Andreou, the former Vice Chairman of CySEC, and a lawyer by profession, “this new framework, including the need of higher initial capital, is a very positive development since it applies in practice the principle that capital resources should be a function of risk.
“All good risk management frameworks are embedding this principle as the most basic building block.
“It aligns regulatory capital with economic capital used by management, risk committees but also the board of directors, setting risk appetite, cascading down, drives the risk setting of limits for capital.”
Andreou believes that strong regulation helps and expand with new products and players, which has been the strategy for CySEC over the past decade.
It proved successful.
According to Kalogerou, CySEC continues to grow despite the pandemic.
Specifically, in 2020, the Commission continued to examine applications for the licensing of new regulated entities without any interruption.
A total of 88 entities were approved, 69 of which are active in collective investments, 14 in the provision of investment services and 5 in providing administrative services.
Currently, CySEC has 779 entities under its supervision, a number that is up by 4.42% compared to 2019, during which it supervised 746 entities.
One of the principle objectives of CySEC is to beef up capital requirements for companies exposed to risk stemming not just from operations but also from potential mismanagement.
Despite constant oversight carried out by CySEC based on risk, capital injection is a more passive and traditional measure undertaken by financial regulators worldwide, enabling market participants to minimise potential losses if such a scenario arises.
Changes to market risk rules and capital increases are part of a broader European strategy dictated by ESMA, the European Securities and Markets Authority.
A report published last year titled “A new vision for Europe’s Capital Markets” outlines in great detail this strategy and prepares everyone for the inevitable changes that financial evolution will likely bring about.
Michael S. Olympios is an economist, business advisor and Editorial Consultant to the Financial Mirror