2. Background
Basel I accord : RBI mandated 9% CRAR instead of 8%
S. Padmanabhan Committee recommends six rating factors “CAMELS”
Liquidity included in CACS : Rating factor for foreign banks
Basel II (Minimum Capital Charge, Supervisory Review, Market Discipline)
HLSC led by Dr Chakrabarty recommends Risk Based Supervision for Pillar 2
Implementation for Basel III begins, to be fully implemented by 2019
1993
1996
2002
2007
2012
2013
3. What is Risk Based Supervision (RBS)?
RBS is a supervisory mechanism by the regulator
to differentiate the banks on the basis of their risks
and apply its scarce regulatory resources,
to monitor and control the banks where the risks are high
Identify those banks in which risks are greatest
Identify, within such banks, those areas in which risks are greatest
Apply scarce supervisory resources so as to minimize the overall “regulatory” risk
4. Bank Profiling Risk Assessment
Probability of
Failure
Impact of Failure
Planned
Supervisory
Activities
Baseline & Plan
Corrective Actions
On-Site Inspection
& SREP
Inspection Report
& MAP
Stress Testing &
Reverse Stress Test
Thematic Review Supervisory Rating
Continuing Off-Site
Supervision
What is Risk Based Supervision (INROADS)?
5. What is Risk Based Supervision (INROADS)?
Rule Based Supervision
(CAMELS)
• Backward-Looking
• One-Size fits it all
• Insensitive to limited Supervisory
resources
• Transaction Oriented
• Static, Point-In-Time Assessments
• Reactive
• Based on compliance
• Avoids risks by forcing hard rules
Risk Based Supervision
(INROADS)
• Forward-Looking
• Proportionate
• Maximizes the usage of limited
supervisory resources
• Process and outcome oriented
• Dynamic, continuous assessments
• Pro-active, preventive
• Principles based
• Focus on risk control and alleviation
6. Key Changes due to RBS Regime
• Continuous collection of financial and non-financial data
• Assess risks and determine the probability and impact of failure
• Onsite supervision based on the risk profile
• Onsite inspection : once every 3 years for less risky banks whereas yearly review
for vulnerable banks
• Increased responsibility with penal actions on audit and compliance functions
• Enforcement of additional capital infusion based on assessments
• Ensure good corporate governance, transparency and accuracy of information
7. Key Challenges for the Banks
• To revamp the risk measurement process for present and future risks
• To strengthen Early Warning System for detection of key risks
• To manage and support on-site reviews conducted by RBI
• To support the regular dialogue between the top management of the bank and
supervisor with updates data and controls for high risk areas
• To strengthen
Quality and availability of data,
Scalability of regulatory reporting processes,
Efficacy of risk management systems
Cost of compliance
8. Proposed Roadmap to Banks
Data
• Establish consistency in
data definitions
• Map data fields to
Source System
• Validate data to be
provided to RBI
• Reconciliation of RBS
data with financial
reporting and other
regulatory reporting
data
• Automation of data
flows from source
system to supervisor
and integration with
ADF
Controls
• Establish compliance
framework & testing
unit
• Develop specialist to
conduct reviews for
high-risk areas
• Monitor regulatory
action plan
• Re-engineer the internal
and concurrent audit
plans and expectations
• Embed operational
controls in IT systems
and as a part of audit
testing
Risk Management
• Align ICAAP document
with SREP expectations
• Enterprise wide risk
quantification and
aggregation
• Capital and liquidity
planning and allocation
incl. contingency
planning
• Ongoing validation of
risk models to derive
assurance over risk
quantification
• Integrated stress testing
and impact assessment
Governance
• Multi-level management
dashboards
• Demonstrable use of risk
models in the decision
making process
• Quality of governance
and oversight incl.
managing conflicts of
interest
• Continuous monitoring of
qualitative factors and
demonstrable risk culture
• Demonstrating that
capital after projected
growth and earnings
covers enterprise wide
risk
