It refers to a process that identifies critical risks that individual banks face as well as systemic risks in the financial system.

The risk-based supervision process consists of two main components: identifying and understanding risks and mitigating those risks. A risk-based approach involves tailoring the supervisory response to fit the assessed risks.  

According to the Financial Services Commission of Barbadosthis is a “comprehensive, formally structured system that assesses risks within the financial system, giving priority to the resolution of those risks.”  

A risk-based approach is considered more responsive, less burdensome, and delegates more decisions to the people best-placed to make them. This has led to a move from a compliance-based approach to risk-based supervision being the dominant choice globally. 

Risk-based can be a judgement-based approach or a data-based 

Risk-based supervision must be both proactive and reactive. You need a timely collection of data, with the ability to collect it as quickly as you need it and to check it in real-time. This differs from a compliance-led approach which might involve annual reporting. In general, organisations might have a full risk inspection every quarter but also need the ability to collect data when a significant event happens, like a global pandemic. 

The goal of risk-based supervision is to be able to predict failure and foresee the impact of failure in order to make the right judgement calls. 

Shared challenges for many central banks 

The challenges are similar for many central banks, namely a lack of reliable, transparent data. Manual uploads give rise to errors and are time-consuming. The use of manual or out-of-date information means that central banks – or any supervisor – cannot function. When dealing with risk, they need to be proactive. Without that proactivity and ability to see what is on the road ahead, they cannot become efficient. Risk-based supervision drives financial stability and with it, economic growth.  

Pensions and Insurance Authority, Zambia 

With more than 600 entities reporting into it, the Pensions and Insurance Authority, (PIA) Zambia moved to implement a long-term financial sector development plan. To support its vision of strengthening its autonomy and its risk-based supervision capabilities it needed an integrated data collection and supervision solution.  

The requirements included a true risk-based approach to supervision, a structured support process for inspections and a detailed risk-based view of each regulated entity.  

Working with PIA Zambia, we deployed three core solutions, covering areas of regulatory returns and licensing, and risk-based supervision, to enable the regulator to consolidate and improve the efficiency and effectiveness of the data it collects, including licensing for new market applicants. The authority now has a holistic risk-based supervision system with a comprehensive overview of the risk profile for each regulated entity.  

Kenya Insurance Regulatory Authority 

Kenya’s Insurance Regulatory Authority required a new integrated system to automate collection, review and analysis processes. Data was stored in a variety of disparate systems, which delayed supervisors in accessing the information they needed.  

The Authority was moving towards a risk-based approach to supervision which required consistent and reliable data. However, the data supplied by regulated entities took a lot of time to validate. With so many entities and peaks of extreme workload, the lack of an integrated system was causing data quality issues.  

IRA Kenya chose our software to implement a system, known internally as the Electronic Reporting System (ERS). The system is used to build a risk profile for regulated entities and give each entity a ranking within the industry in terms of risk. Risk-based supervision regimes are very dynamic, and the Authority now has a system that can be confidently used to fulfil new requirements.  

Bank of Ghana 

Reform is a key theme for many of the central banks in Africa. Through policy and banking sector reforms, many countries such as the Bank of Ghana are bringing in change and helping their economies to grow. 

A fully integrated financial surveillance system was key to strengthening the Bank of Ghana’s regulatory framework and increasing efficiencies. Our solution, called ORASS (Online Regulatory and Analytical Surveillance Software) by the bank, enables the regulator to consolidate and improve the efficiency and effectiveness of the data it collects and ensure consistency across departments.   

The Central Bank now has a single portal to collect prudential data from banks and deposit-taking institutions. Enhanced monitoring and supervision on both a standalone and consolidated basis to quickly identify inherent risks within the financial system and proactively determine supervisory, regulatory and policy decisions/actions.  

Cleaning up the data and looking to the future

With the pandemic and globalisation, digitalisation, risk-based approach is becoming more and more important for regulators.  

Our risk-based supervision solution helps central banks to assess and supervise with confidence using perfect data to inform the best decisions. With the right technology, they can spend less time worrying about data and free resources to focus on risk-based supervision. 

Find out how we can help you with your risk-based supervision by talking to our team. 

banner background image banner shape image

Software trusted by 30 financial regulators, 19 tax authorities and 30 financial institutions.