Evaluation of the Effectiveness of Financial Risk Management Tools Under the New Regulatory Environment
Year: 2026
Type: article
Abstract: The Regulatory Environment in the Post-2023 Period has Changed the Standards for Assessing Financial Risk Management Tools.Capital and liquidity ratios are no longer sufficient on their own because the revised credit, market, operational, credit valuation adjustment and governance rules now require institutions to demonstrate resilience under combined risks, model limitations and severe but plausible scenarios.Evaluate the effectiveness of capital buffers, value-at-risk and expected shortfall, supervisory stress testing, liquidity coverage tools, hedging and risk-transfer instruments, and model-risk governance in this study.Based on the requirements of CRR3/CRD6 and recent empirical studies, descriptive data from the European Banking Authority's risk dashboards, and the 2023 and 2025 EU-wide stress tests are integrated for this analysis.The five indices of performance are: loss absorption capacity, tail-risk sensitivity, liquidity survival, operational usability and governance strength.The results show that regulatory capital and liquidity tools are still effective first-line defences: EU/EEA liquidity coverage and net stable funding ratios remain significantly above the 100% minimum, and the adverse endpoint aggregate CET1 ratio has risen from 10.4% in the 2023 exercise to 12.1% in the 2025 exercise.It is not effective in all circumstances.Static balance-sheet assumptions, model risk, foreign-currency liquidity gaps, regulatory arbitrage, episodic investment in riskmanagement capacity and weak integration of cyber, climate and counterparty channels reduce the reliability of individual tools.Therefore, the paper puts forward an allencompassing, evidence-based system that integrates dynamic multi-scenario stress testing, model-risk controls, granular liquidity analysis, transparent hedging limits and board-level accountability.Therefore, under good coordination among all the tools, the new regulatory environment will be relatively stable; otherwise, these individual compliance indicators might be mistaken for real safety indicators.
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W7213401729