CBM Unveils New Guide on Risk-Based Supervision
The Central Bank of Myanmar (CBM) has released a new guide outlining its approach to risk-based supervision, aimed at enhancing the effectiveness and efficiency of banking sector regulation in Myanmar.
What is Risk-Based Supervision?
Risk-based supervision involves identifying inherent risks within banks and assessing their adequacy of risk management. This approach focuses supervisory efforts on banks that pose higher risks to financial stability, thereby allocating resources more effectively.
Key Components
- Identifying Significant Activities: Supervisors will identify significant activities and assess inherent risks in each bank.
- Inherent Risk Assessment: Default ratings for certain inherent risks could be developed, and combinations of inherent risk ratings and quality of risk management ratings can be used to derive net risk.
- Institutional Profiles: A comprehensive reference document detailing a bank’s business, organization, management, regulatory history, and other relevant information.
Supervisory Actions
Supervisors will use the risk assessment results to determine the choice of supervisory actions required to mitigate assessed risks. The standard list of actions includes:
- Reliance on banks’ control functions such as internal audit
- Coordination with home supervisors for foreign bank branches
- Scoping the examination of the bank
Supervisory Strategy and Plan
The guide suggests that supervisors record their choice of risk mitigation action in a supervisory strategy and plan, which will be developed annually for each bank. The plan will include all planned work on the bank, including:
- Meetings with auditors
- Involvement in supervisory colleges for foreign bank branches
Supervisory Risk Appetite
The approach to risk mitigation and development of the supervisory strategy and plan is expected to be informed by the CBM’s supervisory risk appetite. For now, supervisors are advised to aim to mitigate significant activities or risks rated High or Medium High (net of controls) and any Medium Low risk where the direction of risk is assessed to be increasing.
Examination
The examination remains a key supervisory activity under risk-based supervision, although it will need to be tailored to the risk assessment and impact (peer group) of each bank. The frequency and scope of examinations can be expected to vary significantly from past practices once the approach is fully implemented.
Implementation
The guide is expected to be implemented gradually over the next few months, with training programs for supervisors already underway. The CBM has also invited feedback from stakeholders on the new approach, which it hopes will contribute to further refining its risk-based supervision framework.
Conclusion
The Central Bank of Myanmar’s commitment to implementing this new guide is expected to enhance the effectiveness and efficiency of banking sector regulation in Myanmar. By focusing supervisory efforts on banks that pose higher risks to financial stability, the CBM aims to allocate resources more effectively and ensure a safer and more stable financial system.