Risk Based Supervision (RBS)

Importance of Financial Market Regulation and Supervision Advances in Technology Innovations in F Products Progressive Liberalisation Opening of world Economies Need for Financial Stability

Supervisory Initiatives by RBI

Along with Deregulation Change of Supervisory techs Best International Practices CAMELS/CACS Risk Assessment & Rating

RBI Adopted
Continuous Supervision Based on Off-site Returns OSMOS(Offsite Surveillance and Monitoring System1995) On site Inspection Market Intelligence

Change of Times/Supervisory Techniques Supervision Based on Risk Profiles of Banks Instead of Transaction Based Risk Management System

RISKS
Credit Risk Market Risk Interest Rate Risk Liquidity Risk Forex Risk Transaction/Operational Risk

Risk Based Supervision (RBS)

In the Monetary and Credit Policy of April 2000, Reserve Bank of India (RBI) announced its intention to move towards a risk-based approach to supervision of banks with the assistance of international consultants.

RBS - RATIONALE
The switchover to Risk-Based Supervision (RBS) from the current CAMELS based approach will enhance supervisory standards and practices to in alignment with the international best practices.

RBS
M/s Pricewaterhouse Coopers (PWC), UK - consultants to facilitate the transition to RBS under Implementation - formation of a dedicated Project Implementation Group (DBS).

The RBS Model

The RBS model suggested by them consists of A formal risk assessment of a bank by producing a detailed risk profile ;

The RBS
Developing a supervisory action plan for each bank based on the risk profile Defining the scope and extent of supervision and

The RBS Model

Setting up quality assurance and enforcement functions to maintain objectivity and neutrality in application of supervisory standards.

The RBS Model

Developing a supervisory action plan for each bank based on the risk profile Defining the scope and extent of supervision and

RBS Approach
The RBS approach will involve allocation of supervisory resources in accordance with the risk profile of a supervised bank. Accordingly a high-risk bank will be subjected to enhanced supervisory focus through a shorter supervisory cycle and greater use of various supervisory tools like

Targeted Inspections Intensive Off-site Surveillance Structured meetings with the bank managements etc.

RBS Approach
On the other hand, a low risk bank will be subjected to a longer supervisory cycle and use of few supervisory tools. Thus the RBS approach will lead to an optimum use of supervisory resources by

RBS Approach
focusing them on the targeted banks and the specific areas within the banks that pose the gravest risk to the banking and financial system and to the supervisory objectives.

The Process of RBS

Identification of Risks Measurement of Risks Controlling of Risks Monitoring changes in Risks

RISK PROFILE - COMPILATION RISK PROFILE

BUSINESS RISK RISK
Capital risk Credit risk Market risk Earnings Liquidity risk Business strategy Operational risk Group risk

CONTROL
Internal controls Organisation risk Management risk Compliance risk

BUSINESS RISK
1.CAPITAL risk of insolvency from capital inadequacy, poor quality or composition of capital, restricted access to new capital credit risk banking book, trading book, off balance sheet,country and transfer risk interest rate risk, forex risk, equity price, commodity price risk

2. CREDIT RISK 3. MARKET RISK

BUSINESS RISK
4. EARNINGS earnings quality and threat to earnings liquidity profile and quality of liabilities

5. LIQUIDITY RISK

6. BUSINESS Non viability of/poor business STRATEGY AND strategy, risks from business ENVIRONMENT environment

BUSINESS RISK
7. OPERATIONAL RISK Risks arising from operations - people and process risk, legal risk, reputation risk, IT risk Risks arising from parent/group companies

8. GROUP RISK

CONTROL RISK
INTERNAL CONTROLS RISK ORGANISATION RISK MANAGEMENT RISK Risk of breakdown in, inadequacy/absence of internal controls Weaknesses in organisational structure and relationships Inadequacies in management and corporate governance

COMPLIANCE RISK risks from non compliance

Risk Profiling of Banks

Directional Propensities Increase Decreasing Based on CAMELS OSMOS Returns Market Intelligence Data from External Internal Auditors On-site findings Data from Other Supervisors External SWOT Analysis

Supervisory Cycle
Higher the Risk perception Lower Cycle Lower the Risk Higher Cycle Based on Profiles Perceptions

Supervisory Programme
Bank Specific Greater Off-site surveillance Targeted on site Inspection Structured Meetings with banks Commissioned External Audits Specific Supervisory Directions Variable supervisory cycles

Inspection Process
Focused Systems Based Inspection High Risk Areas Sample Transaction Testing

Review Evaluation Follow-up

Additional Inspection Improving the Risk Profiling Templates

Monitorable Action Plan (MAP) Integration of PCA into MAP High Risk Areas Identified

Supervisory Organisation
Central Office Level BMDs Regional Office Levels IPOC

RBS Approach
The implementation of RBS approach calls for certain preparedness on the part of commercial banks like

RBS Approach at Banks Level

Setting up of comprehensive risk management systems Switching to risk-based audit system Upgrading the Management Information System (MIS) and Information Technology (IT) System ;

RBS at Banks Level

Setting up of dedicated compliance units and
Addressing issues related to HRD and Skill development

RBI Level Preparedness

Preperation of RBS Manual - Drafted and Ready for field testing Preperation of Risk Profile Templates Preapared and tested on sample Banks sent to banks for self assessment Designing Training Programmes -RBSCBTC conducted and being done IPOC at selected ROs to be extended further

Time Schedule
The RBS approach is planned to be put in operation after the pilot run in the last quarter of the financial year 2002-2003.

Current Status of RBS

Risk Profile Templates created for use by RBI Staff Similar Templates Forwarded to them for self assessment Training to Bank Staff at BTC on continuous basis

Current Status
8 Banks PSB-PVt. Banks F B Second leg 15 Banks selected for RBS Implementation on Pilot basis Compilation of Risk Profiles at Ros Customised Supervisory Prog Mix of Tools - On-site Insp.

Thank You
D.J.Babu