What is the role of regulatory bodies in risk management?

The role of regulatory bodies in risk management is primarily to set and enforce standards for managing risk in financial institutions. This function is crucial because it helps ensure that these institutions operate in a safe and sound manner, which is essential for maintaining overall financial stability in the economy.

Regulatory bodies establish various risk management frameworks, guidelines, and regulations that financial firms must adhere to. These frameworks often include guidelines on capital adequacy, liquidity, and operational risk management, among others. By enforcing compliance with these standards, regulatory bodies help protect depositors, investors, and the broader financial system from the adverse effects of financial instability or mismanagement.

Other choices may seem appealing but do not correctly represent the primary function of regulatory bodies in the context of risk management. For instance, providing financial support is not a core mandate of regulatory bodies; rather, it may fall under the realm of central banks or government intervention programs. Approving merger and acquisition agreements is typically part of antitrust or competition law oversight and not directly linked to risk management. Assisting in marketing financial products does not align with the risk management objectives of regulatory bodies, which focus more on safeguarding the financial system than on promoting financial products.