Central Bank Enhances Supervision with Improved Risk-Based Approach

The Bank of Laos (BoL) has taken significant steps to strengthen its risk-based supervision (RBS) framework, aimed at ensuring the stability and safety of the financial system.

Key Changes

• The RBS manual has been revised to include supervisory ratings for individual banks, providing a comprehensive view of their performance over time.
• Offsite analysts will consider the level, trend, and inter-relationships of individual components and financial indicator ratios when assigning CAMELS (Credit Standing, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk) ratings.
• The organization of RBS documents has been adjusted to keep and expand business profiles, corporate governance systems, and a log of important events in the IP while focusing on CAMELS and risk analyses.

Benchmarking

The BoL’s BSD offsite team has developed benchmarks for key financial system indicators (FSIs) based on CAELS components. However, separate sets of benchmarks for domestic versus foreign banks have been found to be more confusing than helpful.

• Recommendation: The mission encourages the retention of the original set of benchmarks and the development of new benchmark ranges for full banks versus foreign branches.

ROX Format

The ROX format is used in conducting onsite inspections. While initial results show that analysis of risks is improving, there is still room for improvement.

• Recommendations:
  • Use the ROX format as recommended, giving emphasis to content and a well-reasoned analysis of risks.
  • Excluding general and administrative information from the ROX and retaining it in examination workpapers.

Training

The mission provided training on RBS methods and the manual to BSD staff. An informational seminar for bankers is planned to explain RBS concepts, methods, and expectations.

• Recommendation: BSD staff should prepare a first draft for the seminar, and feedback can be provided either before or during the next TA mission.

Supervisory Rating Framework (CAMELS)

The CAMELS rating framework is used in both offsite and onsite supervisory processes. While CAELS ratings are being assigned by offsite examiners, there is still room for improvement in the current CAMELS rating framework.

• Recommendations:
  • Clarify methodology on how the composite rating should be decided.
  • Consider using more weights for certain components depending on the extent of supervisory concerns in the peer group or banking industry.

Conclusion

Overall, the BoL’s efforts to strengthen its RBS framework demonstrate a commitment to ensuring the stability and safety of the financial system. The recommendations outlined above aim to further improve the effectiveness of the framework.