## 1laoea2019003

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---

### Mission overview and context
- Mission: IMF’s Monetary and Capital Markets Department (MCM) technical assistance mission visited Vientiane, Lao People's Democratic Republic (P.D.R.) during March 4–15, 2019 to assist the Bank of Lao (BoL) in enhancing its risk-based supervision (RBS).
- Mission team: Hee Kyong Chon (MCM mission chief), Joel Hefty and Richard Nun (external experts).
- Financing: The mission was financed by the Financial Reform and Strengthening Initiative (FIRST).
- Engagement: Discussions with senior officials of the BoL and staff from the Banking Supervision Department (BSD).

### Key facts about the Lao P.D.R. banking system (as reported)
- Gross assets of banking sectors: LAK 130,387 billion, representing approximately 86 percent of GDP.
- Banking sector composition and shares of banking assets:
  - 42 commercial banks and 1 specialized bank.
  - Three state-owned commercial banks (SOCBs): about 40 percent of banking assets.
  - 8 subsidiary banks: 8 percent.
  - 20 foreign bank branches: 21 percent.
  - 8 private banks: 19 percent.
  - 3 joint-venture banks: 9 percent.
  - 1 specialized bank: 3 percent.

### Main purpose and focus of the mission
- Provide advice toward implementing RBS across the full cycle of onsite and offsite supervision.
- Specific areas: applying the RBS manual; drafting and utilizing Institution Profile (IP) and Risk Assessment Summary (RAS); writing effective Report of Onsite Examination (ROX); risk-based internal systemic reporting; developing a supervisory response framework.
- Emphasis on hands-on training: small group discussions and a formal seminar for offsite and onsite BSD staff reviewing RBS concepts and elements of RBS manuals.

### Observed progress and needs
- Development of BoL’s RBS manual and tools represents significant improvement; incremental progress over the last two years in transitioning from compliance-based to RBS.
- Initial BSD application of RBS methods indicates the need for more emphasis on risk analysis and practical application.
- Special attention required on:
  - Expediting formal approval of the RBS manual and full implementation of RBS methods in practice.
  - Strengthening risk analysis and supporting comments in IP, RAS, and ROX; better identification of root causes of risks and well-reasoned supervisory action.
  - Improving some areas in the CAMELS rating framework—clarify descriptive meanings for 1-to-5 ratings and address foreign-branch supervision qualitative criteria.
  - Strengthening banking sector analysis and systemic reporting; draft quarterly summary reports exist but supporting risk analysis needs improvement.
  - Conducting targeted onsite examinations or limited-scope inspections promptly for banks with long intervals since last onsite presence, with special attention to systemically important banks.
  - Enhancing onsite examination operational efficiency by allocating enough and consistent time for each examination stage.
  - Developing an internal supervisory response policy to apply informal measures before legal sanctions.

### Training and follow-up TA
- The bulk of mission time was training; recommendation for one more TA mission in 2019 to shift to more intensive hands-on and on-the-job training. Specific timing and topics to be discussed with BoL later.

### Mission’s main recommendations (from Table 1)
- Implementation of RBS tools
  1. Officially approve RBS manual; make minor revisions/updates (if needed) at one- or two-year intervals. — Priority: High; Timeframe: Near-term/ongoing
  2. Continue to complete and update IP and RAS documents for banks, using the improved format for all new and revised versions. — Priority: High; Timeframe: Ongoing
  3. Adjust the organization of RBS documents to keep and expand business profile, corporate governance system, and log of important events in the IP while focusing CAMELS, risk analyses, and the supporting matrix in the RAS. — Priority: Medium; Timeframe: Medium-term
  4. Use the ROX format as recommended and discussed with staff, giving emphasis to content and a well-reasoned analysis of risks:
     - Improve the quality of risk assessment in the ROX to reflect a greater understanding of risks in each bank and to promote the execution of a robust supervisory action. — Priority: High; Timeframe: Ongoing
  5. Prepare a first draft for the bankers’ seminar, and feedback can be provided either before or during the next TA mission. — Priority: Low; Timeframe: Near-term

- Supervisory ratings framework (CAMELS)
  6. Amend the RBS Manual to reflect the more descriptive meanings for the 1-to-5 ratings used for CAMELS — Priority: High; Timeframe: Near-term
  7. Strengthen the qualitative assessment when assigning CAMELS rating:
     - Offsite analysts should consider the level, trend, and inter-relationships of the individual components and financial ratios.
     - Onsite examiners should discuss tentative ratings with bankers at the wrap-up meeting and then disclose the final rating in the ROX. — Priority: High; Timeframe: Ongoing
  8. Develop the qualitative criteria for foreign-branch rating considering mission’s suggested example. — Priority: High; Timeframe: Near-term

- Banking sector analysis
  9. Strengthen banking system reporting to include a table showing the banking system averages for key financial ratios over time; add peer group averages to illustrate the influence of each group on the system. — Priority: High; Timeframe: Near-term
  10. Support the banking system summary report with the most recent RAS for the largest banks and all problem banks. — Priority: Medium; Timeframe: Near-term

- Onsite examination schedules and timeline
  11. Conduct targeted and/or limited scope inspections as soon as possible for banks that have not had an onsite presence for long intervals; give special attention to systemically important banks — Priority: High; Timeframe: Near-term
  12. Adopt internal BSD policy with defined criteria for onsite examination scheduling and timeline. — Priority: Medium; Timeframe: Medium-term

- Supervisory response
  13. Formalize the early intervention regime for weak banks by adopting an internal policy for applying supervisory response and corrective measures that precede formal sanctions and penalties — Priority: High; Timeframe: Near-term

Note: Near-term: < 12 months; Medium-term: 12 to 24 months.

### Progress since the last TA mission (status highlights from Table 2)
- Formally approve RBS manual and supporting tools: Planned for end-2018, but manual still in “testing” phase. Approval by BSD and BoL senior management still pending.
- Continue practical application of RBS methods to strengthen risk-focused analysis and examination skills of BSD staff: Ongoing.
- Draft an internal BoL policy for applying appropriate responses and corrective or enforcement actions: Not completed; still pending.
- Prepare and utilize IP and RAS for all banks: Partly completed:
  - Q4: 2017: 50% completed
  - Q2: 2018: 64% completed
  - Q1: 2019: 72% completed
- Incorporate peer group benchmarks in analysis and commentary in IP and RAS documents: Partly completed; included in analysis process but not in commentary.
- Include system average FSIs and supporting risk analysis in quarterly banking system analyses; use peer group averages to contrast performance of domestic versus foreign banks: Partly completed; selected system average indicators included in quarterly report; no domestic/foreign split.
- Add consolidated supervision concepts to risk analyses: Not completed.
- Develop an internal BoL policy establishing appropriate criteria for scope, frequency, timing, and other relevant criteria for onsite examinations: Partly completed.
- Review progress and update onsite examination schedule for 2018; prepare 2019 schedule during Q4:2018, using appropriate risk priority criteria: Attempted.
- Apply RBS tools to plan and conduct onsite examinations: Ongoing.

### RBS manual and IP/RAS implementation findings
- RBS manual status: in “testing” phase pending formal approval by BSD senior management. BSD staff continue to use RBS methods more broadly for offsite and onsite activities.
- Recommendation: Complete approval of the manual as soon as possible and fully implement RBS methods in practice. Track minor possible revisions and update at periodic intervals, e.g., one or two years.
- IP and RAS completion: BSD has completed IP and RAS documents for 72 percent of banks; additional effort needed to complete remaining banks.
- Observed weaknesses in IP/RAS and ROX:
  - Risk observations need stronger support with ratio levels and trends.
  - Root causes of risks should be better identified.
  - Greater attention needed to recommended supervisory responses.
- Suggested document organization: Keep more static material (business profile, corporate governance, log of events) in the IP; keep CAMELS analysis, risk-specific analysis, and the risk matrix in the RAS to make IP more static and RAS more dynamic.

### IP (Internal Profiles) and RAS (Risk Assessment Summaries) — findings and recommendations
- Suggested IP content additions:
  - Contact information: relevant contact persons or groups with the bank.
  - Corporate governance: a brief profile of each board of directors, the CEO, and general managers (for foreign branches).
  - Audit information: the latest audit information including the dates, auditor, and audit opinion.
  - Background of banking business operation, business strategy, main products, and services offered.
  - History of examinations; dates, scopes, main findings/unresolved issues.
  - Log of events: additional information about the bank, which is important.
- Observations:
  - IPs should contain supervisory ratings and show the trend of ratings over the longer period, while RAS should focus more on recent data.
  - IPs should be prepared and updated as and when major developments occur.
- Recommendations:
  - Continue to complete and update IP and RAS documents for all banks.
  - Offsite analysts should consider the level, trend, and inter-relationships of the individual components and financial indicator ratios when assigning CAELS ratings.
  - Adjust the organization of RBS documents to keep and expand business profile, corporate governance system, and a log of important events in the IP while focusing CAMELS and risk analyses and the supporting matrix in the RAS.

### FSI Benchmarks — findings and recommendations
- Findings:
  - BSD offsite team developed benchmarks and performance ranges for key FSIs based on CAELS components using bank-reported data, BoL prudential requirements, and ranges of good performance.
  - Two separate sets of benchmarks were drafted for domestic versus foreign banks (foreign branches and subsidiaries), but disparate results made these less useful.
  - New benchmark ranges for foreign banks do not appear to provide useful perspective for comparative analysis.
  - Mission and BSD agreed peer groups could be more effective if based on institution status as a full bank versus a foreign branch, rather than domestic versus foreign banks.
- Recommendations:
  - Exclude the drafted domestic versus foreign bank benchmarks from Appendix 2 of the RBS Manual (internal use only).
  - Research, develop and test the usefulness of benchmarks for banks vs. foreign branches.
  - For now, retain and reference the original set of system-wide benchmarks until revised benchmarks are redrafted, tested and approved.

### ROX (Onsite Report Format and Risk Analysis) — findings and recommendations
- Findings:
  - RBS approach and ROX format are used in onsite inspections; annual schedules and scope are prepared using risk-profile data.
  - Initial results show analysis of risks in ROX is limited; reports were largely compliance-related rather than thorough risk analysis.
  - CAMELS component ratings and conclusions in some ROX reports were not consistent with actual examination findings.
- Suggested improvements:
  - Format: show onsite CAMELS rating at current examination and at previous examination; avoid showing both offsite and onsite ratings side-by-side if it creates conflicting conclusions.
  - Content: discuss most important risk issues supported by facts; focus on critical analysis of risks, underlying causes, and potential adverse impact if problems are not timely addressed.
  - Narrative comments for each risk area should address level and trend, not only regulatory minimums, and identify cause and probable impact to inform supervisory strategies.
- Recommendation:
  - Use the ROX format as recommended and discussed with staff, emphasizing content and a well-reasoned analysis of risks. Exclude most “General and Administrative Information” from ROX and retain in examination workpapers.

### Training and planned outreach
- Actions taken:
  - Mission provided training in the use of RBS methods and the manual through small group discussions and a formal seminar for all offsite and onsite BSD staff.
  - Training explained how to analyze and rate various risks and how to write appropriate comments in IP, RAS, and ROX documents.
- Planned activity:
  - Following formal adoption of the RBS manual, an informational seminar for bankers is planned to explain RBS concepts, methods and expectations.
- Recommendation:
  - BSD staff should prepare a first draft for the bankers’ seminar; feedback can be provided either before or during the next TA mission.

### The Supervisory Rating Framework (CAMELS / CAELS) — findings and recommendations
- Current use and issues:
  - CAMELS ratings are used in offsite and onsite processes. CAELS (excluding “M”) are assigned by offsite and included in RASs, but appear predicated on only a few FSIs.
  - Onsite examiners began assigning CAMELS ratings in 2019 internally; ratings were not yet disclosed in ROX nor to bankers in wrap-up meetings.
  - Examiners are approaching component ratings more holistically.
- Methodology and interpretation issues:
  - Methodology is unclear on how composite rating should be decided; supervisory judgement may require adjusting component weights depending on peer group or industry concerns.
  - Ratings assigned so far often incorrectly use the “3” rating; misunderstanding that “3” indicates medium or moderate rather than “Less than Satisfactory.”
  - Agreed descriptive words: Strong for “1”; Satisfactory for “2”; Less than Satisfactory for “3”; Weak for “4”; Poor for “5.”
  - Branches of foreign banks require special qualitative consideration (oversight by head office, supervision by home supervisor, overall financial condition of the foreign banking group).
- Example weighting (illustrative):
  - For SOCBs, BoL may consider following weights: C (20 percent); A (25 percent); M (15 percent); E (10 percent); L (15 percent); S (15 percent).
  - BoL may consider applying different CAMELS component weights for foreign branches and private banks.
- Recommendations:
  - Onsite examiners should assign CAMELS ratings and discuss tentative ratings with bankers at the wrap-up meeting and then disclose the final rating in the ROX.
  - Amend the RBS manual to reflect more descriptive meanings for 1- to-5 ratings used for CAMELS.
  - Develop qualitative criteria for foreign branch rating considering:
    - The level and quality of Head Office global capital and overall financial condition.
    - Access to sources of capital, including extent of parent support.
    - The level of home supervisor’s branch oversight, and the quality and adequacy of supervisory reviews.
    - The level of profit for head office repatriation (when assessing “E” component).
    - The level of head office funding support (when assessing “L” component).

### Selective issues on supervisory process
- Banking Sector Analysis
  - Findings:
    - BSD has begun strengthening systemic reporting; aggregate data summarized by offsite supervisors and new reports drafted summarizing individual institution health.
    - BSD prepared an aggregate RAS report referencing key financial indicators aiming to evaluate the banking sector using system averages and trends.
  - Recommendations:
    - Strengthen banking system reporting to include a table showing the banking system averages for key financial ratios over time; add peer group averages to illustrate the influence of each group on the system.
    - Support the banking system summary report with the most recent RAS for the largest banks and all problem banks.

- Annual Onsite Examination Schedules and Timeline
  - Practices:
    - Annual examination schedules for 2018 and 2019 used four criteria: (i) level and trend of NPLs; (ii) extent of unresolved issues from previous examination; (iii) interval since last examination; and (iv) market share.
    - In practice, NPLs and unresolved issues are primary drivers for scheduling.
    - Number of examinations: 16 examinations were conducted in 2017, 18 in 2018, and 17 inspections are planned for 2019.
  - Observations:
    - Nine largest banks by market share have not had an onsite inspection in almost two years.
    - Some smaller banks also have long intervals since onsite presence.
    - Onsite examinations are nominally “full-scope” but often targeted to specific risks; typical duration is two weeks for domestic and subsidiary banks, and one week for foreign bank branches, with flexibility as circumstances require.
  - Recommendations:
    - Give greater emphasis to offsite RAS and CAELS ratings and to systemic importance when preparing and updating the annual onsite examination schedule.
    - Conduct targeted and/or limited scope inspections as soon as possible for banks that have not had an onsite presence for long intervals; give special attention to systemically important banks.
    - Develop and/or formally adopt an internal policy setting appropriate criteria for scope, frequency, timeline, etc. of onsite examinations. Refer to the “onsite examination timeframe” in Annex II.

- Supervisory Response
  - Findings:
    - A well-defined structure for responding to examination findings supports effective RBS.
    - The new banking law specifies legal remedies and sanctions; BSD can apply informal measures earlier.
  - Recommendation:
    - BSD should begin developing an internal policy for applying response and corrective measures. Refer to the “Sample Framework for Supervisory Response Policy” in Annex III.

### Next steps and planned TA for 2019
- MCM will assist BoL with one more mission in 2019.
- Shift to more intensive hands-on training emphasizing practical application of RBS methods and learning-by-doing.
- Future TA missions should focus on on-the-job training in onsite examination and offsite supervision to provide hands-on guidance when planning examinations; identifying and evaluating risks; preparing well-written, properly documented reports; drafting appropriate response measures; and following up to ensure timely resolution of problems.
- Timing, topics, and modalities regarding on-the-job training will be discussed with BoL at a later stage.

### Annex I — Detailed Observations on Systemic Reporting (summary)
- Purpose: BSD requested comments on draft systemic reports to provide BoL senior managers a clearer view of the banking system in aggregate and by individual banks using CAMELS and risk-based conclusions.
- Documents reviewed: (1) a systemic RAS presenting selected aggregate banking system ratios as though they were one institution; (2) a regulatory assessment report listing each of the 42 banks or foreign branches with CAMELS and risk assessments.

- Aggregate/systemic reporting (systemic RAS) — findings and recommendations:
  - Ratios should be derived from aggregate data: sum all raw data for the numerator and divide by the sum of all raw data for the denominator so the result is the system average and gives greater weight to larger institutions.
  - The first page should contain an executive summary analyzing financial data and discussing the overall trend of banking sector soundness, financial deterioration, or supervisory concern.
  - Systemic average ratios could be expanded to show banks (including joint ventures and foreign subsidiary) and foreign branches as separate peer groups to show each group's influence on the system average.
  - Analyze performance by subgroups (e.g., SOCB’s, foreign branches, private banks including foreign subsidiaries, and joint ventures).
  - For internal BoL use, the preparer could cite specific banks where underperformance may threaten viability (example language in source: "Bank X, Y, and Z’s Capital Adequacy Ratio declined by 1.0 percent, 2.0 percent, and 3.0 percent, respectively and they are below the supervisory minimum threshold").
  - Omit or de-emphasize composite “ratings” and emphasize data points.
  - Provide a table of selected key ratios showing the system average over time with supporting commentary.
  - Add graphs and tables to illustrate important trends.
  - Keep report formats flexible and strive to summarize the most important data; allow variation from the standard when appropriate.

- Individual bank regulatory assessments (microprudential RAS) — findings and recommendations:
  - RAS for each of the five largest banks should be available for user review; RAS for banks rated “four” or “five” should be attached as well.
  - If a composite “CAMELS + Risks score” is used, describe the methodology; if based on “reviewer judgment,” disclose that.
  - To be effective, RAS reports must be completed for every bank in the system.
  - Suggested analytical summaries to include:
    - Number of banks or percentage of system assets rated one, two, three, four, or five.
    - Number of banks or percentage of system assets evaluated as “high” risk.
    - Number of banks with significant credit/market/liquidity/operational risk.
    - List of banks for which no CAMELS rating or no RAS is available.

*From: 1laoea2019003 (IMF TA mission report excerpt).*

### Preface.................................................................................................................

### Preface

### Mission overview and context
- The IMF’s Monetary and Capital Markets Department (MCM) technical assistance (TA) mission visited Vientiane, Lao People's Democratic Republic (P.D.R.) during the period March 4–15, 2019, to assist the Bank of Lao (BoL) in enhancing its risk-based supervision (RBS).
- Mission team: Hee Kyong Chon (MCM mission chief), Joel Hefty and Richard Nun (external experts).
- The mission was conducted within the framework of the TA program to enhance RBS and strengthen capacity of the staff. The mission was financed by the Financial Reform and Strengthening Initiative (FIRST).
- The mission held discussions with senior officials of the BoL and staff from the Banking Supervision Department (BSD).

### Key facts about the Lao P.D.R. banking system (as reported)
- Gross assets of banking sectors: LAK 130,387 billion, representing approximately 86 percent of GDP.
- Banking sector composition and shares of banking assets:
  - 42 commercial banks and 1 specialized bank.
  - Three state-owned commercial banks (SOCBs): about 40 percent of banking assets.
  - 8 subsidiary banks: 8 percent.
  - 20 foreign bank branches: 21 percent.
  - 8 private banks: 19 percent.
  - 3 joint-venture banks: 9 percent.
  - 1 specialized bank: 3 percent.

### Main purpose and focus of the mission
- Provide advice toward implementing RBS across the full cycle of onsite and offsite supervision.
- Specific areas: applying the RBS manual; drafting and utilizing Institution Profile (IP) and Risk Assessment Summary (RAS); writing effective Report of Onsite Examination (ROX); risk-based internal systemic reporting; developing a supervisory response framework.
- Emphasis on hands-on training: small group discussions and a formal seminar for offsite and onsite BSD staff reviewing RBS concepts and elements of RBS manuals.

### Observed progress and needs
- Development of BoL’s RBS manual and tools represents significant improvement; incremental progress over the last two years in transitioning from compliance-based to RBS.
- Initial BSD application of RBS methods indicates the need for more emphasis on risk analysis and practical application.
- Special attention required on:
  - Expediting formal approval of the RBS manual and full implementation of RBS methods in practice.
  - Strengthening risk analysis and supporting comments in IP, RAS, and ROX; better identification of root causes of risks and well-reasoned supervisory action.
  - Improving some areas in the CAMELS rating framework—clarify descriptive meanings for 1-to-5 ratings and address foreign-branch supervision qualitative criteria.
  - Strengthening banking sector analysis and systemic reporting; draft quarterly summary reports exist but supporting risk analysis needs improvement (see Annex I).
  - Conduct targeted onsite examinations or limited-scope inspections promptly for banks with long intervals since last onsite presence, with special attention to systemically important banks.
  - Enhancing onsite examination operational efficiency by allocating enough and consistent time for each examination stage (see Annex II for suggested timeframe).
  - Developing an internal supervisory response policy to apply informal measures before legal sanctions; Annex III provides a basic outline.

### Training and follow-up TA
- The bulk of mission time was training; recommendation for one more TA mission in 2019 to shift to more intensive hands-on and on-the-job training. Specific timing and topics to be discussed with BoL later.

### Mission’s Main Recommendations (from Table 1)
Implementation of RBS tools
- 1. Officially approve RBS manual; make minor revisions/updates (if needed) at one- or two-year intervals. — Priority: High; Timeframe: Near-term/ongoing
- 2. Continue to complete and update IP and RAS documents for banks, using the improved format for all new and revised versions. — Priority: High; Timeframe: Ongoing
- 3. Adjust the organization of RBS documents to keep and expand business profile, corporate governance system, and log of important events in the IP while focusing CAMELS, risk analyses, and the supporting matrix in the RAS. — Priority: Medium; Timeframe: Medium-term
- 4. Use the ROX format as recommended and discussed with staff, giving emphasis to content and a well-reasoned analysis of risks:
  - Improve the quality of risk assessment in the ROX to reflect a greater understanding of risks in each bank and to promote the execution of a robust supervisory action. — Priority: High; Timeframe: Ongoing
- 5. Prepare a first draft for the bankers’ seminar, and feedback can be provided either before or during the next TA mission. — Priority: Low; Timeframe: Near-term

Supervisory ratings framework (CAMELS)
- 6. Amend the RBS Manual to reflect the more descriptive meanings for the 1-to-5 ratings used for CAMELS — Priority: High; Timeframe: Near-term
- 7. Strengthen the qualitative assessment when assigning CAMELS rating:
  - Offsite analysts should consider the level, trend, and inter-relationships of the individual components and financial ratios.
  - Onsite examiners should discuss tentative ratings with bankers at the wrap-up meeting and then disclose the final rating in the ROX. — Priority: High; Timeframe: Ongoing
- 8. Develop the qualitative criteria for foreign-branch rating considering mission’s suggested example. — Priority: High; Timeframe: Near-term

Banking sector analysis
- 9. Strengthen banking system reporting to include a table showing the banking system averages for key financial ratios over time; add peer group averages to illustrate the influence of each group on the system (see Annex I). — Priority: High; Timeframe: Near-term
- 10. Support the banking system summary report with the most recent RAS for the largest banks and all problem banks. — Priority: Medium; Timeframe: Near-term

Onsite examination schedules and timeline
- 11. Conduct targeted and/or limited scope inspections as soon as possible for banks that have not had an onsite presence for long intervals; give special attention to systemically important banks — Priority: High; Timeframe: Near-term
- 12. Adopt internal BSD policy with defined criteria for onsite examination scheduling and timeline (see Annex II). — Priority: Medium; Timeframe: Medium-term

Supervisory response
- 13. Formalize the early intervention regime for weak banks by adopting an internal policy for applying supervisory response and corrective measures that precede formal sanctions and penalties — Priority: High; Timeframe: Near-term

Note: Near-term: < 12 months; Medium-term: 12 to 24 months.

### Progress since the last TA mission (status highlights from Table 2)
- Formally approve RBS manual and supporting tools: Planned for end-2018, but manual still in “testing” phase. Approval by BSD and BoL senior management still pending.
- Continue practical application of RBS methods to strengthen risk-focused analysis and examination skills of BSD staff: Ongoing.
- Draft an internal BoL policy for applying appropriate responses and corrective or enforcement actions: Not completed; still pending.
- Prepare and utilize IP and RAS for all banks: Partly completed:
  - Q4: 2017: 50% completed
  - Q2: 2018: 64% completed
  - Q1: 2019: 72% completed
- Incorporate peer group benchmarks in analysis and commentary in IP and RAS documents: Partly completed; included in analysis process but not in commentary.
- Include system average FSIs and supporting risk analysis in quarterly banking system analyses; use peer group averages to contrast performance of domestic versus foreign banks: Partly completed; selected system average indicators included in quarterly report; no domestic/foreign split.
- Add consolidated supervision concepts to risk analyses: Not completed.
- Develop an internal BoL policy establishing appropriate criteria for scope, frequency, timing, and other relevant criteria for onsite examinations: Partly completed.
- Review progress and update onsite examination schedule for 2018; prepare 2019 schedule during Q4:2018, using appropriate risk priority criteria: Attempted.
- Apply RBS tools to plan and conduct onsite examinations: Ongoing.

### RBS manual and IP/RAS implementation findings
- The RBS manual is in a “testing” phase pending formal approval by BSD senior management. BSD staff continue to use RBS methods more broadly for offsite and onsite activities.
- Recommendation: Complete approval of the manual as soon as possible and fully implement RBS methods in practice. Track minor possible revisions and update at periodic intervals, e.g., one or two years.
- IP and RAS completion: BSD has completed IP and RAS documents for 72 percent of banks; additional effort needed to complete remaining banks.
- Observed weaknesses in IP/RAS and ROX:
  - Risk observations need stronger support with ratio levels and trends.
  - Root causes of risks should be better identified.
  - Greater attention needed to recommended supervisory responses.
- Suggested document organization: Keep more static material (business profile, corporate governance, log of events) in the IP; keep CAMELS analysis, risk-specific analysis, and the risk matrix in the RAS to make IP more static and RAS more dynamic.

_This summary is based solely on the content of the Preface and Executive Summary of the TA mission report contained in the supplied PDF._

### 13. IP should focus more deeply on the bank’s capital and group structure, corporate

### 1laoea2019003 - 13. IP should focus more deeply on the bank’s capital and group structure, corporate

### A. Internal Profiles (IP) and Risk Assessment Summaries (RAS)
- Findings and suggested content additions for IPs:
  - Contact information: relevant contact persons or groups with the bank.
  - Corporate governance: a brief profile of each board of directors, the CEO, and general managers (for foreign branches).
  - Audit information: the latest audit information including the dates, auditor, and audit opinion.
  - Background of banking business operation, business strategy, main products, and services offered.
  - History of examinations; dates, scopes, main findings/unresolved issues.
  - Log of events: additional information about the bank, which is important.
- Observations:
  - IPs should contain supervisory ratings and show the trend of ratings over the longer period, while RAS should focus more on recent data.
  - IPs should be prepared and updated as and when major developments occur.
  - Suggested changes would not affect the RBS framework provided in the manual, and could help to improve the pace of implementation.
- Recommendations:
  - Continue to complete and update IP and RAS documents for all banks.
  - Offsite analysts should consider the level, trend, and inter-relationships of the individual components and financial indicator ratios when assigning CAELS ratings.
  - Adjust the organization of RBS documents to keep and expand business profile, corporate governance system, and a log of important events in the IP while focusing CAMELS and risk analyses and the supporting matrix in the RAS.

### B. FSI Benchmarks
- Findings:
  - BSD offsite team developed benchmarks and performance ranges for key FSIs based on CAELS components using bank-reported data, BoL prudential requirements, and ranges of good performance.
  - Two separate sets of benchmarks were drafted for domestic versus foreign banks (foreign branches and subsidiaries), but disparate results made these less useful.
  - New benchmark ranges for foreign banks do not appear to provide useful perspective for comparative analysis.
  - Mission and BSD agreed peer groups could be more effective if based on institution status as a full bank versus a foreign branch, rather than domestic versus foreign banks.
- Recommendations:
  - Exclude the drafted domestic versus foreign bank benchmarks from Appendix 2 of the RBS Manual (internal use only).
  - Research, develop and test the usefulness of benchmarks for banks vs. foreign branches.
  - For now, retain and reference the original set of system-wide benchmarks until revised benchmarks are redrafted, tested and approved.

### C. ROX (Onsite Report Format and Risk Analysis)
- Findings:
  - RBS approach and ROX format are used in onsite inspections; annual schedules and scope are prepared using risk-profile data.
  - Initial results show analysis of risks in ROX is limited; reports were largely compliance-related rather than thorough risk analysis.
  - CAMELS component ratings and conclusions in some ROX reports were not consistent with actual examination findings.
- Suggested improvements:
  - Format: show onsite CAMELS rating at current examination and at previous examination; avoid showing both offsite and onsite ratings side-by-side if it creates conflicting conclusions.
  - Content: discuss most important risk issues supported by facts; focus on critical analysis of risks, underlying causes, and potential adverse impact if problems are not timely addressed.
  - Narrative comments for each risk area should address level and trend, not only regulatory minimums, and identify cause and probable impact to inform supervisory strategies.
- Recommendation:
  - Use the ROX format as recommended and discussed with staff, emphasizing content and a well-reasoned analysis of risks. Exclude most “General and Administrative Information” from ROX and retain in examination workpapers.

### D. Training
- Actions taken:
  - Mission provided training in the use of RBS methods and the manual through small group discussions and a formal seminar for all offsite and onsite BSD staff.
  - Training explained how to analyze and rate various risks and how to write appropriate comments in IP, RAS, and ROX documents.
- Planned activity:
  - Following formal adoption of the RBS manual, an informational seminar for bankers is planned to explain RBS concepts, methods and expectations.
- Recommendation:
  - BSD staff should prepare a first draft for the bankers’ seminar; feedback can be provided either before or during the next TA mission.

### E. The Supervisory Rating Framework (CAMELS / CAELS)
- Current use and issues:
  - CAMELS ratings are used in offsite and onsite processes. CAELS (excluding “M”) are assigned by offsite and included in RASs, but appear predicated on only a few FSIs.
  - Onsite examiners began assigning CAMELS ratings in 2019 internally; ratings were not yet disclosed in ROX nor to bankers in wrap-up meetings.
  - Examiners are approaching component ratings more holistically.
- Methodology and interpretation issues:
  - Methodology is unclear on how composite rating should be decided; supervisory judgement may require adjusting component weights depending on peer group or industry concerns.
  - Ratings assigned so far often incorrectly use the “3” rating; misunderstanding that “3” indicates medium or moderate rather than “Less than Satisfactory.”
  - Agreed descriptive words: Strong for “1”; Satisfactory for “2”; Less than Satisfactory for “3”; Weak for “4”; Poor for “5.”
  - Branches of foreign banks require special qualitative consideration (oversight by head office, supervision by home supervisor, overall financial condition of the foreign banking group).
- Example weighting (illustrative):
  - For SOCBs, BoL may consider following weights: C (20 percent); A (25 percent); M (15 percent); E (10 percent); L (15 percent); S (15 percent).
  - BoL may consider applying different CAMELS component weights for foreign branches and private banks.
- Recommendations:
  - Onsite examiners should assign CAMELS ratings and discuss tentative ratings with bankers at the wrap-up meeting and then disclose the final rating in the ROX.
  - Amend the RBS manual to reflect more descriptive meanings for 1- to-5 ratings used for CAMELS.
  - Develop qualitative criteria for foreign branch rating considering:
    - The level and quality of Head Office global capital and overall financial condition.
    - Access to sources of capital, including extent of parent support.
    - The level of home supervisor’s branch oversight, and the quality and adequacy of supervisory reviews.
    - The level of profit for head office repatriation (when assessing “E” component).
    - The level of head office funding support (when assessing “L” component).

### F. Selective Issues on Supervisory Process
- Banking Sector Analysis
  - Findings:
    - BSD has begun strengthening systemic reporting; aggregate data summarized by offsite supervisors and new reports drafted summarizing individual institution health.
    - BSD prepared an aggregate RAS report referencing key financial indicators aiming to evaluate the banking sector using system averages and trends.
  - Recommendations:
    - Strengthen banking system reporting to include a table showing the banking system averages for key financial ratios over time; add peer group averages to illustrate the influence of each group on the system.
    - Support the banking system summary report with the most recent RAS for the largest banks and all problem banks.
- Annual Onsite Examination Schedules and Timeline
  - Practices:
    - Annual examination schedules for 2018 and 2019 used four criteria: (i) level and trend of NPLs; (ii) extent of unresolved issues from previous examination; (iii) interval since last examination; and (iv) market share.
    - In practice, NPLs and unresolved issues are primary drivers for scheduling.
    - Number of examinations: 16 examinations were conducted in 2017, 18 in 2018, and 17 inspections are planned for 2019.
  - Observations:
    - Nine largest banks by market share have not had an onsite inspection in almost two years.
    - Some smaller banks also have long intervals since onsite presence.
    - Onsite examinations are nominally “full-scope” but often targeted to specific risks; typical duration is two weeks for domestic and subsidiary banks, and one week for foreign bank branches, with flexibility as circumstances require.
  - Recommendations:
    - Give greater emphasis to offsite RAS and CAELS ratings and to systemic importance when preparing and updating the annual onsite examination schedule.
    - Conduct targeted and/or limited scope inspections as soon as possible for banks that have not had an onsite presence for long intervals; give special attention to systemically important banks.
    - Develop and/or formally adopt an internal policy setting appropriate criteria for scope, frequency, timeline, etc. of onsite examinations. Refer to the “onsite examination timeframe” in Annex II.
- Supervisory Response
  - Findings:
    - A well-defined structure for responding to examination findings supports effective RBS.
    - The new banking law specifies legal remedies and sanctions; BSD can apply informal measures earlier.
  - Recommendation:
    - BSD should begin developing an internal policy for applying response and corrective measures. Refer to the “Sample Framework for Supervisory Response Policy” in Annex III.

### G. Next Steps
- Planned TA approach and focus for 2019:
  - MCM will assist BoL with one more mission in 2019.
  - Shift to more intensive hands-on training emphasizing practical application of RBS methods and learning-by-doing.
  - Future TA missions should focus on on-the-job training in onsite examination and offsite supervision to provide hands-on guidance when planning examinations; identifying and evaluating risks; preparing well-written, properly documented reports; drafting appropriate response measures; and following up to ensure timely resolution of problems.
  - Timing, topics, and modalities regarding on-the-job training will be discussed with BoL at a later stage.

*From: 1laoea2019003 (IMF TA mission report excerpt).*

### Annex I . Detailed Observations on Systemic Reporting

### Annex I . Detailed Observations on Systemic Reporting

### Purpose and context
- BSD requested detailed comments and observations about its draft systemic reports intended to provide BSD and BoL senior managers with a clearer view of the banking system in aggregate and by individual banks using CAMELS and risk-based conclusions.
- Mission reviewed two draft documents: (1) a systemic RAS presenting selected aggregate banking system ratios as though they were one institution; (2) a regulatory assessment report listing each of the 42 banks or foreign branches with CAMELS and risk assessments.

### Aggregate/systemic reporting (systemic RAS)
- Systemic report ratios should be derived from aggregate data: sum all raw data for the numerator and divide by the sum of all raw data for the denominator for the individual ratio so the result is the system average and gives greater weight to larger institutions.
- The first page should contain an executive summary analyzing financial data and discussing the overall trend of banking sector soundness, financial deterioration, or supervisory concern.
- Systemic average ratios could be expanded to show banks (including joint ventures and foreign subsidiary) and foreign branches as separate peer groups to show each group's influence on the system average.
- Analyze performance by subgroups (e.g., SOCB’s, foreign branches, private banks including foreign subsidiaries, and joint ventures) because banks in each category appear to perform quite differently; senior management should be informed of banks with major prudential concerns.
- Since the report is intended for internal BoL use, the preparer could cite specific banks where underperformance may threaten viability (example language in source: "Bank X, Y, and Z’s Capital Adequacy Ratio declined by 1.0 percent, 2.0 percent, and 3.0 percent, respectively and they are below the supervisory minimum threshold").
- Supervisory actions taken or planned could also be discussed.
- Use of the RAS format with CAMELS and risk categories provided reason to discuss each component or risk type; some observations were nicely supported with system average data including level, trend, and qualitative support.
- Other aspects of the RAS format were less useful:
  - Providing an estimated “banking system CAMELS rating” and “banking system risk type ratings” is problematic because CAMELS and risk-type rating frameworks are intended for microprudential conclusions and a system average is difficult to determine across diverse institutions and business models.
  - The “M” component of the banking sector would be difficult to assess in systemic reporting.
- Recommendations to strengthen the report:
  - Omit or de-emphasize composite “ratings” and emphasize data points.
  - Provide a table of selected key ratios showing the system average over time with supporting commentary (example: "earnings performance as measured by return on assets declined due to high provision expense at most banks").
  - Add graphs and tables to illustrate important trends.
  - Keep report formats flexible and strive to summarize the most important data; allow variation from the standard when appropriate.

### Individual bank regulatory assessments (microprudential RAS)
- The second draft focused on regulatory assessments for each of the 42 banks or foreign branches, listing bank name, asset size, CAMELS rating (all components), date of last onsite examination, summary-level risk assessment, and an estimated overall risk composite score (ratings one to five).
- Mission recommendations:
  - RAS for each of the five largest banks should be available for user review; RAS for banks rated “four” or “five” should be attached as well.
  - If a composite “CAMELS + Risks score” is used, describe the methodology; if based on “reviewer judgment,” disclose that.
  - To be effective, RAS reports must be completed for every bank in the system.
- Suggested simple but meaningful analytical summaries to include:
  - Number of banks or percentage of system assets rated one, two, three, four, or five.
  - Number of banks or percentage of system assets evaluated as “high” risk.
  - Number of banks with significant credit/market/liquidity/operational risk.
  - List of banks for which no CAMELS rating or no RAS is available.

*Source: Annex I . Detailed Observations on Systemic Reporting*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1laoea2019003.pdf_